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Business

Company rolls on in toilet paper market

| Wednesday, Oct. 22, 2003

LEWISTON, Idaho -- Giant rolls of toilet paper big enough for Paul Bunyan are spun 24 hours a day at this sprawling factory along the Clearwater River.

In its 100th year of existence, Potlatch Corp. is a leading bathroom tissue producer in the West and is making inroads in the East and Midwest in a quest for greater market share. Its goal is to put a not-so-soft squeeze on sales of industry leader Charmin, made by Procter & Gamble.

But Spokane, Wash.-based Potlatch does not produce its own brand of paper. Rather, it makes the house brands for Albertson's, Safeway, Fred Meyer, Vons, Jewel and many other grocery store chains. As those chains have swallowed up competitors across the country, they have carried Potlatch products into new markets.

Today, Potlatch products are in Dominick's stores in the Chicago area; in Kroger, Genuardi's and Acme in the East; Randalls in the South; and Smith's in the Rocky Mountain states.

Potlatch has carved a niche by trying to match the quality of top brands while remaining cheaper.

"Our growth has been to keep up with the brands," said Bob DeVlemming, vice president of sales. "It allows stores to be proud of the quality they put their name on."

Potlatch is No. 1 in private-label grocery production in the United States, but holds only about 2 percent to 3 percent of the overall paper products market. P&G, Kimberly-Clark and Georgia-Pacific dominate, with name-brand products like Northern, Kleenex, Cottonelle and Charmin accounting for 80 percent to 85 percent of sales.

The industry is a tough one, however, with cost-cutting common and profits slim. Potlatch made just $100,000 in profits on its consumer paper products division in the most recent quarter, after losing $5 million on that sector in the second quarter.

The company's overall third quarter performance was much better, with profits of $22.2 million, because of a strong performance by its bigger, more lucrative timber products business. In the first nine months of 2003, Potlatch reported profits of $20 million, compared to a loss of $31.9 million a year earlier.

The company's stock has been selling in the $32 range, recovering from a low of $18 earlier this year. In 1998, it was trading at $40.

"They've had a good run," said Steve Chercover, an analyst for D.A. Davidson & Co. in Portland, Ore., on the recent stock rise.

Potlatch's strategy of growing with its existing clients and adding consumer paper products in higher-profit categories is solid, Chercover believes, although he rates the stock neutral at this point.

"They might still need additional (manufacturing) capacity to take on new clients," he said.

He noted that with stiffer price competition in the paper industry, much of Potlatch's good recent performance hinges on rising prices for oriented strand board, a substitute for plywood used in the construction industry, rather than its tissue business.

Still, Potlatch makes 92 percent of the private label bathroom tissue sold in grocery stores in the West, and one-third of all the bathroom tissue sold in grocery stores in the West, according to the company.

In toilet paper, the top name brands are marketed with the promise of elegant softness. Then come the higher-end store brands, followed by the cheaper store brands sold strictly by price. At the bottom are institutional products intended for public places like stadiums, airports and shopping malls.

Potlatch ignores that low-end market. It believes there are plenty of customers for its better-quality private label tissue. In particular, the company is interested in offering its products at wholesale club stores like Costco, which account for a growing part of the retail business.

It was consumer research in the early 1990s that convinced Potlatch that shoppers were willing to spend a little more for softer store brands of bathroom tissue, company spokesman Mike Sullivan said. At the time, store brands were primarily a rougher, lower quality product at much lower prices.

In 1992, the company retooled its paper machines at its Lewiston factory to make the softer paper, spending $110 million on a new machine which produces nearly a mile of tissue per minute.

Next year, Potlatch will activate a new $66 million paper towel machine in Las Vegas that will produce its first direct competition to Bounty, the leading seller among top-quality paper towels.

"That's a big deal to us," DeVlemming said.

The company already has a plant in Benton Harbor, Mich., that converts the giant rolls of toilet paper into consumer-sized rolls. It is searching for a second plant in the Midwest to serve its customers east of the Mississippi River, officials said.

In the meantime, Potlatch is contending with some shareholder criticism. Earlier this year, 18 percent of shareholders voted in favor of a proposal to study the company's dividend payments.

About half of Potlatch shares are held by members of the Weyerhaeuser family, who are big investors in the timber industry, and some shareholders have claimed the family is taking too much money out of the company in dividends. In 2001, Potlatch lost nearly $80 million, but still issued dividends of $1.17 per share.

It was the second consecutive year the proposal from John Osborn, a Spokane environmentalist and stockholder, was rejected. Osborn has also been a critic of Potlatch's environmental practices, and would like the company to spend more reducing pollution.

Sullivan said the dividend study proposal was considered redundant because Potlatch regularly reviews its dividend policy.

Additional Information:

About the company

COMPANY: Potlatch Corp., based in Spokane, Wash.

FOUNDED : 1903 in Potlatch, Idaho. Name is an Indian word for 'a celebration of gift giving.'

PRODUCTS : Lumber and timber products, pulp and paperboard, consumer paper products.

EMPLOYEES : 6,200 nationwide.

CEO : L. Pendleton Siegel.

ACREAGE : Potlatch manages 1.5 million acres of timberland in Idaho, Minnesota and Arkansas and has 14 manufacturing sites in those states.

SALES : $1.3 billion in 2002.

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