Crown Vantage Inc.

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Crown Vantage Inc.

300 Lakeside Drive
Oakland, California 94612-3592
U.S.A.
(510) 874-3400
(800) 421-8289
Fax: (510) 874-3531
Web site: http://www.crownvantage.com

Public Company
Incorporated: 1995
Employees: 3,550
Sales: $851 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: CYAN
NAIC: 322121 Paper (Except Newsprint) Mills

Crown Vantage Inc., a relatively new company in the U.S. paper industry, produces and markets paper products tailored to meet the special needs of niche markets for a diverse array of end uses, including specialty magazines and catalogs, books and computer manuals, financial printing and corporate communications, as well as packaging and labels for food and retail products, coffee filters, and disposable medical garments. Operating through two segments—printing and publishing papers and specialty papers—Crown Vantage has three pulp mills that produce about three-quarters of its internal pulp needs and 31 paper machines located at eight mills in the United States and two mills in Scotland. The company has the capacity to manufacture more than one million tons a year of value-added paper products.

A Mid-1990s Spin-Off

In August 1995, the James River Corporation, a Richmond-based maker of Dixie disposable dishware and Brawny paper towels, created a new spin-off company to assume its communications papers business and part of its packaging business, and to leave it free to concentrate on producing consumer tissue and paperboard. James River had grown from a one-mill specialty paper operation in 1969 to become one of the world’s largest specialty paper and paper products companies by the mid-1990s with extensive operations in both the United States and Europe. However, beginning in 1993, the market for printing papers began to loosen up, with prices heavily discounted and inventories high. As a result, James River was eager to turn its attention to consumer products as a means of paying down its heavy load of long-term debt. James River created the spin-off, Crown Vantage Inc., in order to take over its printing, writing, and specialty paper operations, thereby leveraging $580 million to reduce its debt.

At the time of the spin-off, Crown Vantage’s business operations were organized into four divisions: specialty packaging and converting papers in Michigan, New Jersey, and Louisiana; coated groundwood papers in Louisiana; business publishing papers in New Hampshire; and the Curtis Fine Papers Group in Massachusetts, Delaware, Virginia, and Scotland. James River shareholders were given all the stock in the new holding company.

The Crown Vantage name recalled the Crown Zellerbach Corporation of San Francisco, from whom James River had purchased its paper-related assets in 1986. Spun off from James River, the new operation known as Crown Vantage, located in Oakland, California, began business in 1995. It had a production capacity of one million tons of paper and more than 500,000 tons of pulp, 33 machines on 11 sites, about 4,100 employees, $1 billion in sales, and $625 million in debt. Approximately 120,000 acres of managed forest were also included in the transfer to the new company.

The new company’s declared business strategy was to shift a major portion of its production away from commodity grade papers to higher value-added products. Toward that end, it immediately began to implement a capital spending program to support to upgrade its value-added mix of products, reduce costs, improve productivity and invest in customer service. Under the direction of chairman and chief executive officer Ernest S. Leopold, who had been James River’s executive vice-president for communications papers, Crown Vantage set up a capital expenditure budget of $485 million for 1995 through 1999, with $350 million targeted for maintenance and environmental projects and $135 million earmarked for profit-enhancement projects. In 1996, the company spent approximately $40 million to rebuild one of the machines at its Louisiana coated groundwood mill. This modernization effort gave the mill ten percent more capacity in the production of catalog and magazine grade papers at the lower end of the 45- to 70-lb. range. It also reduced its per-ton costs and improved manufacturing quality. As a result of both of these advantages, Crown Vantage was able in 1996 to corner about five percent of the North American coated groundwood market. Recognizing these accomplishments, the Los Angeles Times named Crown Vantage to its list of the 100 best-performing companies in California in 1996.

The middle to late 1990s continued to be a very rocky time for the North American paper industry as a whole. In 1995, sales were strong across the board, and Crown Vantage, one of the industry leaders, achieved revenues in excess of $1 billion. However, beginning in 1996 and continuing through 1998, the industry’s fortunes declined steeply. This decline was the result of the Asian economic crisis that sent paper imports into the United States to record-level highs and deflated paper prices across the board. Despite these weak market conditions, Crown Vantage achieved and maintained a sold-out position on coated publication papers from 1996 to 1998; yet the company’s sales base was far from certain, and management felt it necessary to implement strategic, cost-cutting moves.

In mid-1997, the company decided to close its smallest mill in Newark, Delaware. The two-machine, non-integrated operation had the capacity to make 10,000 tons per year of uncoated premium printing papers, but since January 1997, it had produced only very short runs of specialty grade papers with the yearly total stopping short of 2,000 tons. Management consolidated premium specialty grade production at its Massachusetts and Ypsilanti, Michigan, mills as well, moving economy text and cover production from those mills to its New Hampshire base. The company also sold 108,000 acres of timberland in New England and the Southeast for $36 million to pay off some of its long-term bank debt. Yet even with such efforts, Crown Vantage experienced losses for the year totaling $32 million, due largely to the continued low price of paper products in North America.

In 1998, the demand for paper in the United States remained strong, but imports continued to flood the market, and the industry continued to suffer from the ongoing influx of cheap imported papers, which covered a range of paper grades and product markets. The price of Crown Vantage stock plunged 63 percent to reach a low of $3.25 per share, lower than the minimum $5 maintenance standard required for Nasdaq listing. The company lost $8.8 million in the first half of 1998, roughly $8 million more than it had lost the year before. By year’s end, it reported a net loss of $140.5 million or $14.79 per share, which, after a major fixed asset write-down and other one-time charges, translated to an operating loss of $8.3 million. In order to maintain its competitiveness, Crown Vantage asked and was allowed to continue its Nasdaq listing pending improvement of share value. The company also implemented additional moves to cut operating expenses. Per ton costs, helped along by a decline in the price of natural gas and more favorable energy contracts, fell 3.6 percent due to lowered pulp costs and lower energy costs, as well as from lower chemical usage and improved operating expenses. As a result, company costs fell 12 percent during the next 12 months.

The company also changed its orientation to focus its efforts, realigning operations into two major businesses: Specialty Papers and Printing and Publishing Papers. It combined its coated and uncoated printing papers into a single business and assigned each of its two new business divisions a vice-president of manufacturing and a second vice-president for sales and marketing. At the same time, it reduced its workforce by seven percent. With the retirement of Leopold and the election of Robert Olah to the post of chief executive officer in early 1999, Crown Vantage instituted the organizational changes necessary to focus on becoming a marketing-driven company with the goal of increasing its top-line revenues.

The Future: Capitalizing on Upticks in the Market

Management also focused on initiatives to improve the company’s financial structure and reduce its debt. In 1998, after reaching an agreement with James River, by this time known as Fort James Corporation, to drop mutual monetary claims dating back to the spin off, Crown Vantage received $33 million in pay-in-kind notes. It was simultaneously successful in settling a six-year property tax dispute it had engaged in with the town of Berlin, New Hampshire, concerning the taxability of factory machinery. The settlement of this suit, which held that machinery was not assessable, reduced the company’s tax bill by $2 million per year and allowed it to reverse accruals for withheld taxes in the amount of $9 million.

Company Perspectives:

Crown Vantage’s strategic focus is to develop, manufacture and market printing, publishing and specialty packaging and converting papers. The company takes pride in the development of committed, long-term relationships with customers as well as in its innovative products and service. Its strategy is to differentiate itself from the rest of the industry by focusing on specialty markets and niches —the higher value-added grades of papers: text and cover stock, for instance, used for annual reports and other high-end printing, and the coated publication papers for special interest magazines, catalogs and covers.

However, even such positive turns of events could not stem the slump in the paper industry. In early 1999, with prices of paper and pulp near historical lows, the company decided to divest its most commodity-oriented paper and pulp mills, those in Berlin and Gorham, New Hampshire, for about $45 million in order to raise money to pay down its debt. The sale of the mill to American Tissue Company, a New York-based papermaker with Wisconsin operations, was also part of a move to explore new supply chain relationships, to build on sales and marketing while outsourcing manufacturing operations. The agreement with American Tissue created a strategic alliance to produce some of Crown Vantage’s high value-added brands. At the same time, Crown Vantage began to outsource distribution and warehousing operations in New Jersey, Chicago, and Los Angeles. It also developed a web site to promote sales and service to a new market—the small-quantity consumer—which had been underserved traditionally through existing distribution channels. Lastly, Crown Vantage expanded its efforts to take advantage of its relationships with multinational companies to expand it sales of packaging papers worldwide.

Because of the diversity of Crown Vantage’s markets and the broad range of its product lines, it had never had large-scale production numbers in specific markets. In fact, by reconfiguring its operations, Crown Vantage hoped to buffer itself from declines in the non-specialty, mass-produced paper markets. Thus, while analysts looked for improvement in the paper industry to begin in the second half of 1999, projecting a yet stronger outlook for 2000, Crown Vantage management hoped for the balance of supply and demand to tip in its favor earlier and entered 1999 ready to market its products aggressively. Fortunately, customer demand remained strong, and no competitors had announced the development of new paper mills in North America. Crown Vantage’s top priorities thus included: paying down its debt and growing in profitable segments, as well as edging its share price back upward. In order to reach its goals, it planned to engage in product development to further shift its base to higher value-added products and to replace the sales volume in specialty paper it had lost during the last two years. As it celebrated the 125th anniversary of its Guardbridge facilities in Scotland and the 75th anniversary of its Port Huron, Michigan, plant mid-year, Crown Vantage also targeted markets for its specialty packaging and converted papers, including: food service, label, multi-wall bag, technical and industrial, flexible packaging, paperboard packaging, and gift wrap. The company’s target strategies included sending sales and product specialists out to serve these specialized niches.