March 2003 - Logging and Sawmilling Journal -

Pacific Regeneration Technologies (PRT) has quietly grown to become the largest container seedling producer in North America and it’s looking to expand into the United States.

One current initiative that gets Kitchen excited is, interestingly enough, in Saskatchewan. PRT is doing some demonstration hardwood plantations at their nursery in Prince Albert, planting a range of types of hardwoods and applying different silviculture techniques to determine the best growth formula. It’s an intriguing project, says Kitchen. “There’s a movement to develop an agroforestry industry in hardwoods on the prairies and we’d like to be involved in that.” The company’s eastward march may not continue farther than Ontario, at least for the foreseeable future. “Quebec is interesting,” says Kitchen. “But they are organizing into a marketing board for seedlings, and that’s not the kind of environment that we operate in.”

The company is more familiar with the open market seedling supply systems in Ontario and Western Canada, and the western United States. In fact, the US is the logical place for further expansion, which is reflected in the company’s recent announcement to set up operations in Nevada. Only about eight per cent of PRT’s seedling production or about 10 million trees, currently goes into the US. That represents a very small portion of a very big market. But it is a market that needs to be handled cautiously, Kitchen notes. “A lot of Canadian companies have gone into the United States and regretted it, so we are going to be very careful. We have some good customer relationships down there and we would like to build on those.”

The seedling situation in the US is quite different from Canada, which presents both opportunities and challenges. The majority of seedlings are still grown by the big forest companies, such as Weyerhaeuser and International Paper. Governments, mainly through state nurseries, are also major players. Canada, in contrast, has only a small number of forest companies doing their own seedling production.

Most of the work is contracted out—a handful of BC companies and New

Brunswick-based J D Irving being the notable exceptions to this. And provincial governments have moved out of seedling production over the last 20 years. In recent years, large corporations in the US have become focussed on so-called “core competencies.” They take a hard look at what business they are really in and, as a result, often contract out, sell or break off other operations. An example would be Georgia-Pacific, which will be separating its consumer products and packaging business and its building products and distribution business into two publicly traded companies.

As part of this re-evaluation, G-P merged its timber operations with Plum Creek Timber Company. Another trend is the development of timber investment corporations, like John Hancock. These trends could pay off for PRT in the US if forest companies there come to the conclusion that their core competencies are in producing lumber and paper and decide to exit the tree growing business. “Like in Canada, growing seedlings does not have to be part of their business,” says Kitchen. “I can’t say that we are seeing that kind of thinking quite yet, but I think we will see it down in the US. There have been rumblings.”

Pacific Regeneration Technologies (PRT) had an interesting roadshow for investors on Toronto’s Bay Street when the company was raising capital for the PRT Forest Regeneration Income Fund a few years ago. One of the company’s founders, Ev Van Eerden, handed out small spruce and pine seedlings to the hard-to-impress market analysts and pension fund managers attending the PRT presentations in Canada’s business centre.

In the end, the hard-nosed business types at the meetings were won over by the company’s good news story—it’s all about growing trees—and PRT was successful in raising $56 million for its expansion (see sidebar story (page 24) on exactly how they raised the money). PRT’s earnest and refreshing approach on Bay Street was, and is, a true reflection of the mid-sized company. But that does not take away from the fact that it has quietly grown over the past 10 years to the point where it is now the largest container seedling producer in North America.

In 2002, the company produced over 130 million seedlings from its 13 nurseries in

BC, Alberta, Saskatchewan and Ontario and had revenues of over $35 million. This past spring, PRT produced its billionth seedling. The BC-based company did, however, have humble beginnings. The company was started as a result of a decision by the British Columbia government to get out of the business of growing seedlings in the late-1980s. Then—as now under current Premier Gordon Campbell—the government was looking at what businesses they needed to be involved in—and more importantly, what they did not need to be involved in. And it made the decision to privatize most of the provincial nurseries. The quickly-formed PRT won the resulting bid, and six nurseries scattered through the province were sold to the company for $5.7 million.

Heading up PRT and the buyout effort were long-time silviculture branch managers Charlie Johnson and Ev Van Eerden, along with managers of most of the nurseries. Since then, the company has expanded its operations into Alberta, Saskatchewan and Ontario, in addition to supplying American customers from its Canadian nurseries. And in January, the company announced that it will expand its operations into the US, by building a seedling nursery in Nevada, and contracting a cold storage facility in Oregon. It has weathered the industry cycles over the last 15 years. But the seedling business is not quite as subject to the stomach-churning ups and downs of the rest of the forest industry.

Regardless of how much lumber, pulp and newsprint is produced, trees have to be replanted—period. PRT’s expansion has been steady, but not necessarily slow. Example: they moved into the Ontario market in 1999 and are now the largest seedling supplier in that province. That was a combination of a new nursery in Dryden and buying existing nurseries. “We’ve established ourselves on both sides of Ontario and have been working on supplying customers with good quality trees,” says John Kitchen, who took over from Ev Van Eerden as company president and CEO this past summer.

Kitchen is quick to add that companies in the US, such as industry giant Weyerhaeuser, have long-established seedling programs. And just as it took a number of years for Canadian companies to decide to contract out seedling production, it will likely take years for the companies stateside to make that move. But when they do, the market is huge—the seedling market in the US is about four times as large as the market in Canada. There is also a huge potential in the US market for container-grown seedlings, which is a specialty of PRT and pretty much all that the company produces. The Canadian forestry market has made a gradual conversion to container-grown seedlings, while the US grows less than 10 per cent of its seedlings in containers—bare-root still being the preferred method. Kitchen and his colleagues at PRT believe they have a good story to tell to American companies about containerized seedlings.

The containerized approach produces more consistent, higher quality seedlings. The future, they believe, lies in growing seedlings in containers. “That’s the wave that we would like to be on in the US market because we know how the containerized seedlings system works. Our approach is to position ourselves as a player in that market and help that move to containerized seedlings happen there.” Further driving this move towards containerized seedlings, Kitchen believes, are the quality control programs in place at the forestry operations of the American companies.

The companies, like their Canadian counterparts, are involved in improvement programs, cross fertilizing different trees and carrying out research and development into what are the best seeds. “As that value increases,” says Kitchen, “the whole delivery system becomes more important. You’re going to want the entire system to work really well. “As the companies strive to achieve better results with higher quality and more highly developed seeds, they are perhaps going to want to look at containerized seedlings as part of the process of delivering a better product that will have a higher survival rate.” And opportunities are not just limited to the US, he says. “BC is a world leader in container seedling technology and there is an opportunity to take that expertise and technology to other markets.”

That said, Kitchen as new CEO makes the point that further moves into the US market and possibly into other countries will not be their central focus in the coming years. The overall emphasis will be on providing service to existing customers. “I believe it’s important in a downturn to do a good job with your existing customers. We want to position ourselves for the future, but we also want to make sure we are doing the right things for customers today.” They supply seedlings to most of the leading forest companies in Canada and want to make sure that these customers are kept happy.

The forest companies, all of whom are now facing financial pressures due to mediocre markets, are looking for new and more efficient ways of growing trees, planting trees and managing forests. In some situations, PRT acts as consultant to their clients, offering advice on what type of seedling might work best in certain growing conditions. When it comes to growing trees, local knowledge is king and everything is site specific. Having a nursery in a region is important, as is having knowledgeable people. It’s not like you can phone in a silviculture prescription, or grow seedlings, for a cutblock north of Thunder Bay from a nursery on Vancouver Island.

Operating large-scale nurseries across a good part of Canada is an expensive proposition—that was especially the case for PRT two years back with the spike in energy prices. When prices started climbing for the natural gas that heats their huge greenhouses, the company appointed a three-person task force to look for, and implement, savings. The end result was a 20-point plan that, coincidentally, reduced their energy costs by 20 per cent. “The big thing was people inside the company sharing ideas and best practices and putting them in place right away,” says Kitchen. “The end result was still an increase in our energy costs year over year, but much less than they would have increased.”

Some of the suggestions were quite innovative. One of the nurseries came up with the idea of taking the old Styrofoam seedling container blocks, and putting them together on the sidewalls of the greenhouses to form an insulation barrier and cut heat loss. “It was an ideal solution: it did not cost a lot of money and it used up waste materials.” It’s an example, says Kitchen, of how all the nurseries develop and share ideas to operate more efficiently.

This is an integral part of their business approach, which is to focus on ongoing improvements at their operations and for customers. “I think you always have to be looking at ways to get better and we try all sorts of things. “I think the changes we are going to see in the future are going to be on the tree improvement side and in the relationship with customers. With the core seedling business itself, you are always going to have different ways of growing trees, but the fundamental goal is not going to change: the reliable production of good seedlings.” But he notes that there is always going to be room for improvement in growing seedlings since it involves an evolving area—biology—and sometimes unpredictable factors—weather and agriculture. Kitchen sees his role as the new CEO of PRT as that of someone who will continue to lead the move to innovate and create value for customers.

Creating value means investment in areas where the payback is sometimes not certain. He cites the research work that is being done in hardwoods in Saskatchewan. While it is not adding to the company’s bottom line, it positions the company as a source of information, and perhaps partnering, for their customers down the road. “Our focus is to stay positioned properly through this downturn. We don’t want to cut all the research and development, or the people that we are going to need. We need to protect our core.”

He believes the company also needs to be conscious that it can help educate the public about the forest industry. There is a lot of inaccurate information out there right now. “I think our company and our people have a role to play in helping the industry get its message out about reforestation. “There is nowhere in the world that does a better job of reforestation than in Canada. There are over 50 trees planted for every person in BC every year, but there are school kids who think there aren’t going to be any more trees in 15 years. There is a lot of misinformation out there.”

PRTsees increased demand in seedlings to kick in during 2004

PRT has seen some reduction in seedling business which could be attributed to the countervail on lumber going to the US, but this decline is broader based, says company CEO John Kitchen. “It’s really more the industry uncertainty itself that has had an impact on the company,” he says. PRT estimates that seedling demand in Canada was down by about 10 per cent in 2002. PRT itself saw a decline of about six per cent in their 2002 volume.

The countervail has resulted in some lumber producers, such as Canfor, actually increasing their lumber production, much to the dismay of southern lumber producers in the US and the Coalition for Fair Lumber Imports. The coalition was hoping for a curtailment on the part of Canadian producers. This increase is expected to have a ripple effect on seedling suppliers, such as PRT, with additional business coming down the road. “This will lead, at some point, to an increase in demand for seedlings,” says Kitchen. “We trail the production cycle a bit because of the way silviculture is done, but we’re closer to the harvest than we used to be. I think we would see some recovery in 2003, but the demand will really kick in during 2004.”

Company goes the Income Trust route to raise capital for expansion

PRT took an innovative approach to raising capital a few years ago when it started a major expansion drive, including moving into the Ontario seedling market. The company is employee-owned—with more than 100 employee shareholders—and they did not want to dilute that ownership by taking the company public, on the Toronto Stock Exchange for example, to raise money. Instead, the company issued $56 million of what are termed “income trust units.” The income trust structure works for the company, and apparently for investors. “One of the key things is that we have a contracted customer base and we can predict our revenues pretty reliably every year,” says PRT CEO John Kitchen.

Upwards of 95 per cent of their business is done on long-term contracts with large blue-chip forest companies. There is also, Kitchen adds, a legislated demand for their product, seedlings. “It’s simple—if you want to cut trees, you have to reforest. There are statutory requirements to that effect.” The steady cash flow that results is appealing for income trust unit investors. While there are no guaranteed returns, income trusts are generally expected to return between nine and 12 per cent annually. The fund pays unit holders quarterly, by way of distribution of interest, dividends or capital/cash flow generated from the business of PRT. Units of the fund are listed for trading on the Toronto Stock Exchange, with the trading symbol PRT.UN.

Though PRT did its capital raising way back in1997, income trusts have recently become quite fashionable in the investment community. There are now more than 150 income trusts on the TSE, 57 of them created during 2002. BC-based forest company West Fraser Timber has plans to issue its own income trust fund in 2002. The SFK Pulp Fund raised $414 million last August to acquire Abitibi-Consolidated’s pulp mill in St Felicien, Quebec. The main goal with using an income trust—besides raising capital—was to keep control of PRT in the hands of the people who work there. Just how important is it to keep PRT employee-owned? “I think there’s great value in it,” says Kitchen. “It’s important for people to have their money on the line and to have a stake in what happens.” That sense of ownership simply means they care more. “When they are locking the gate on the nursery at night, they are locking the gate on their place,” he says. “It’s a good feeling.”

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