When Potlatch Corp. shareholders convene today for the Spokane-based forest-products companys annual meeting, all eyes will be on the future.


And theyre hoping sunglasses will be needed.


Potlatch, which employs 6,800 people and has annual sales of nearly $1.6 billion, believes its done the right things to prepare for better times. Its nearing completion of a 15-year capital-spending plan to upgrade its plants, has rolled out efficiency initiatives based on an 18-month visioning process, and, like the rest of its industry, is beginning to see stronger prices for both the products it makes and its own common stock.


It also has a new top executive. L. Pendleton Siegel, a 20-year Potlatch employee and most recently the companys president and chief operating officer, becomes Potlatchs chairman and CEO at todays annual meeting, being held in St. Paul, Minn., in a state in which the company has significant operations and timber holdings. He succeeds retiring John Richards, a North Idaho native who had been Potlatchs chairman and CEO since 1994 and an employee since 1964.


In an interview earlier this month, Siegel painted an optimistic outlook for Potlatch, which like other wood, pulp, and paper companies has been stymied by the Asian financial crisis, industry overcapacity, and resulting low product prices. Now, the Asian market is believed to have bottomed out, and prices for lumber, pulp, and paper appear to be strengthening, though it could be months before the benefits from the improving markets will be felt fully.


1999 will still be a below-average year, says Siegel. Were still experiencing trough conditions. However, he adds, with prices again heading north and with the companys own efficiency initiatives and upgraded plants, Potlatch is well-positioned for better times.


We probably have a couple of good years coming, he says.


Wall Street apparently agrees. Potlatchs stock, which is traded on the New York Stock Exchange and is a component of the Standard & Poors 500, is on the mend, trading recently at about $40 a share, pretty much in line with its five-year trading average. Last year, it had plummeted to below $32 a share. Also, despite canceling plans for launching what would have been the nations first publicly traded timber real estate investment trust (REIT), Potlatchs shares still largely are considered a buy by analysts.


Although it was a disappointment to us that the timber REIT was not accomplished after spending much time and money, we believe the prospects for Potlatch remain favorable under current market conditions, said analyst Paula Nicholls, of D.A. Davidson & Co., in a report last month. Increasing paper and pulp prices, and strong building-products demand continue to bode well for near- and long-term earnings potential.


The markets


Potlatchs four primary business segments are: wood products, including lumber as well as panel goods such as plywood and oriented strand board (OSB); bleached paperboard products for packaging, paper plates, and the like; high-end printing papers used in annual reports and fine brochures; and consumer tissue products.


The company operates sawmills in Idaho, Minnesota, and Arkansas; panel plants in Idaho and Minnesota; pulp and paperboard plants in Idaho and Arkansas; pulp and printing-paper mills in Minnesota; a tissue mill and conversion plant in Lewiston, Idaho; and a tissue conversion and distribution plant in Las Vegas. It also owns about 1.5 million acres of timberland in Idaho, Arkansas, and Minnesota, from which it gets about 75 percent of its logs, and a 22,000-acre hybrid poplar plantation in Oregon where it is growing trees to be used as pulp.


In the lumber market, Potlatch and other wood-products companies have been hit hard by oversupply caused partly by the Asian contagion, which in effect shifted supply into the U.S. market that otherwise would have been consumed in the Asia. Panel products also were in oversupply, but not because of Asias problems. Such products are consumed primarily in North America, where producers overzealously built new capacity in good times, only to see prices fall by half between 1994 and 1997, says Siegel.


We have dealt with severe overcapacity, he says. That looks like its gradually changing.


The price drops, says Siegel, had pretty much stopped the addition of any new capacity in the industry, and even killed some older mills. Meanwhile, demand continues to grow, and now is beginning to drive prices back up.


The story is similar in the paper business. Industry overcapacity forced prices down and made it unattractive to bring on new capacity. Still, demand has grown, and prices for at least some grades of paper now are rising. Meanwhile, because of the lengthy permitting and construction schedules required to build new plants, it could be a few years before significant new capacity comes on line, which is good news for the plants currently in operation.


Im optimistic about the bleached paper market, Siegel says. Im optimistic about coated paper, although that recovery might be 12 to 15 months away. Im optimistic about all lines of pulp.


The tissue markets, which remain competitive, werent affected by the Asian crisis because tissue typically is sold within the region where its produced, because its light and bulky, making it less cost effective to ship great distances.


Siegel says Potlatch already controls 90 percent of the private-label tissue market in the West, all of which is produced at its Lewiston, Idaho, mill. It also has invested heavily in its Lewiston tissue mill and Las Vegas tissue conversion facility, giving it the ability, says Siegel, to produce private-label tissue of a high enough quality to compete on grocery-store shelves with the premium brands.


Capital upgrades


Potlatch doesnt have a precise number on how much it has spent to expand and modernize its manufacturing facilities in its now concluding, 15-year push, because a portion of the roughly $2.4 billion reported as capital expenditures during that time have been spent on things other than plant upgrades. Still, company officials say the amount is much greater than what other similar U.S. companies have spent.


Weve spent the past 15 years or so as a company rebuilding, virtually, all of our facilities so that we can compete in the best quartile of companies in terms of efficiency, says Siegel. We have two projects that are still in progress, but the others are pretty much done.


One of those two projects is at Cloquet, Minn., where Potlatch is spending about $500 million to essentially build a new pulp mill on the site of its current plant there. The new mill is expected to lower the companys operating costs there substantially, which Siegel says is critical in the highly competitive paper business. That project is expected to be completed around the end of the year.


The other current project is at Potlatchs OSB plant in Cook, Minn., which is being expanded to boost its annual production to nearly 450,000 square feet of panel, from about 250,000 square feet currently. That project is expected to come on line late next year.


Potlatch has spent roughly $600 million in upgrades in Idaho alone, most of that in Lewiston, where about $400 million went to rebuild the companys pulp mill, and another $100 million was spent on new tissue-making equipment.


Though capital spending is likely to fall dramatically now that the 15-year capital-improvement push is ending, Siegel says Potlatch will continue to invest in its plants, and will look for other capital-use opportunities, such as acquisitions and share repurchases.


Potlatchs failed effort to launch a REIT with Anderson-Tully Co., an Arkansas hardwoods company, cost the Spokane company $4.6 million, which it charged against its first-quarter earnings. Siegel says Potlatch learned a lot during the process and would be able to resurrect its efforts if a similar opportunity arose.


We were very interested in Anderson-Tully because they are a hardwood company and were a softwood company, and those are two very different markets, and the transaction could have added some diversity to Potlatch, says Siegel.


He says he still is in contact with Anderson-Tullys CEO, and arrangements could be reached under which Potlatch would buy excess pulp or saw logs from that company for use at its nearby Arkansas mills.


Not counting the nonrecurring charge for the failed REIT, Potlatch posted first-quarter earnings of $5.2 million, or 18 cents a share, compared with $10.7 million, or 37 cents a share, in the year-earlier quarter. The decline was blamed on market conditions. Net sales in the quarter totaled $416.4 million, up slightly from the first quarter of 1998.


For all of 1998, Potlatch posted net earnings of $37.2 million, or $1.28 a share, which was slightly higher than the previous year. Net sales declined slightly for the year, to $1.567 billion, from $1.569 in 1997. As of Dec. 31, the company had assets of about $2.38 billion.


The visioning team


The internal efficiency initiatives being rolled out this year by Potlatch are the result of 18 months of work by a 23-member team of hourly and salaried workers. The effort involved surveying every Potlatch employee and analyzing the best practices of some of the nations most successful companies.


The process produced objectives such as setting measurable achievement goals for each facility; improving internal communications, including dissemination of information needed for making decisions; and improving worker training.


Siegel says the initiatives may already be paying dividends, and points to productivity gains at the companys Lewiston operations as an example. Were setting records there at a time when the market is very weak, which is unheard of in the industry, Siegel says.


He says that theres no way of knowing whether the initiatives are the primary reason for the gains, but adds, You can clearly see that something is different. Were excited about what is going on internally.


Siegel and Spokane


Siegel joined Potlatch in 1979, having spent the previous eight years with Drexel, Burnham, Lambert, the New York investment banking firm, where he was a senior analyst responsible for tracking the forest-products and paper industries. A native of Richmond, Va., Siegel is a graduate of Dartmouth College.


He and his family moved to Spokane, along with other Potlatch executives, in late 1997, when the company transferred its headquarters here from San Francisco.


The companys move here was intended as a cost-cutting move, but is beneficial in other ways as well, says Siegel.


Personally, Im sorry we didnt move here five years earlier, says Siegel, from his 11th floor corner office in the Seafirst Financial Center downtown.


He says that most of Potlatchs 47 headquarters staff members in San Francisco made the move north, and most of those who didnt were nearing retirement age and simply decided to call it quits.


Our people have really liked it here, he says. They kept coming up to me after the move and saying they couldnt believe how nice people are here.


The office here employs about 40 people, which is only about 25 percent of Potlatchs corporate staff. The remainder continue to be based in Lewiston, where the companys headquarters were located from 1931 to 1965.


Siegel says there are no plans for adding additional employees in Spokane, but doesnt rule out that possibility in the future. It wouldnt surprise me at all if five years from now were talking about a consolidation of corporate staff in Spokane, he says.