Optimistic outlook for Pyramid Lumber in Seeley Lake, MT

A year ago, things looked bleak for Roger Johnson and his Pyramid Lumber Co. in Seeley Lake. Thanks to a creative loan package, a stable work force and a steady supply of logs from the Bitterroot salvage cuts, Johnson has reason to be optimistic.

By MICK HOLIEN of the Missoulian

Pyramid Mountain Lumber sets production records after being on verge of closure two years ago

Editor’s note: This story originally appeared in the fall 2002 issue of Western Montana InBusiness, a Missoulian publication that focuses on business news. For information on how to subscribe to InBusiness, call Rhonda Dursma at 523-5329.

SEELEY LAKE – Much like the steam engine from the classic children’s story, Pyramid Mountain Lumber is a story about the little company that could – and did.

The family-owned and operated business in Seeley Lake announced in November 2000 that it was closing, a victim of low lumber prices and not enough capital for mill modernization.

But now, two years later, Pyramid is setting production records and looking optimistically – albeit cautiously – to the future.

The company was able to restructure its debt, thanks to a low-interest debt package. The deal provided cash to buy computerized equipment that helps make the mill more competitive. It all means that, in the space of just about two years, Seeley Lake’s primary employer has gone from the brink of closure to peak performance.

When Pyramid Lumber was founded in 1948 by the Johnson and Mood families, it was one of five mills operating in the Swan Valley.

Now, Pyramid stands alone.

But the fact that it’s operating at all is a tribute to a private-public partnership developed with the help of the Missoula Area Economic Development Corp. The MAEDC stepped into the picture with a six-pronged program to keep the mill open almost as soon as Pyramid announced its intention to close.

The $4.6 million package arranged by MAEDC included low-interest loans, a credit line and a community development block grant. It allowed Pyramid to buy two pieces of computerized equipment to give the company a chance to break even in a tough market and restructure existing high-interest debt.

"Really what we needed was to be competitive," said Loren Rose, the company’s comptroller.

About $2.5 million was used to purchase an optimized board edger and a curve sawing gang edger. Essentially, the equipment analyzes each log and decides the most efficient way to cut it.

"The equipment primarily is recovery equipment, equipment that lets you get more product out of a log," said Roger Johnson, company president and son of one of the founders. His two sons also are involved in the operation.

With the installation of the computer-controlled equipment, Pyramid is operating six, 10-hour shifts and is close to employing as many workers (135) now as it did when production marks averaged some 52 million board-feet a year for about 10 years up to mid-2000.

But that amount of lumber was produced using two shifts or 80 work-hours. The plant now is operating 60 hours a week, yet this year anticipates 60 million board feet of lumber production using fewer logs.

The new equipment means that the mill can get 10 to 15 percent more lumber from each log, Johnson said.

Dick King, executive director of the Missoula Area Economic Development Corp., said reducing Pyramid’s debt load and getting the money to buy more advanced equipment was key to the company’s future profitability.

"That debt service didn’t go up but their productivity did," he said. "That makes your bottom line stronger and you can weather some of the down cycle."

King credited the company’s tenacity in seeing the completion of the financial package to fruition.

"Had it not been for the commitment of the management and the owners of the company to hang in there as we went through all kinds of hurdles to clear we never would have got it done," he said. "Our role was to push the process forward, take care of our part of the financing and do a lot of hand-holding and conversations as we ran into hurdles to try to find people to solve the problems."

"We’ve seen so much happen in the lumber industry over the years," King said. "This company is well-managed and they’re on top of things and when you’ve got competent people and you look at this and you see the value (and) you just have to structure this a little better, that’s where we can help."

Getting more product from each log is vitally important, especially considering the current lumber market, Johnson said.

"The lumber market isn’t a whole lot better than when it was back in 2000 when prices just wouldn’t support our operation and we made the decision we probably should shut down," said Johnson.

He’s not confident the market is bound to improve.

"I think more and more of us in the industry are coming to realize that markets that we see today are what we are going to see in the future," said Johnson. "We have become such a global market. Any more there is a lot of imports coming in from Europe and South America and New Zealand and in pretty staggering quantities."

He believes an increase in the market price, however, just increases the amount of foreign import.

"I think it’s kind of a Catch 22," said Johnson. "One of the things that would help us if our dollar lost some strength against the foreign currency. That would help prices raise a little bit without having more influence on imports."

Decreased profit margins could help smaller, community-oriented Montana mills like Pyramid, said Johnson, because local investors are more likely to settle for less return.

"A lot of the independents in the next 10 years are probably going to be more suited to Montana than some of the corporations from out of state," he said. "They have stockholders that are going to demand a certain return on the dollar, and our markets don’t provide us that."

"It’s our living. We are our own board. We can make the decision that a couple more years of breaking even is acceptable or not," said Johnson. "Who wants to stick with slimmer margins. I think that’s kind of the key to it."

"We’re more able to do the niche markets," he said. "We handle them better than the bigger companies. Most of us try hard not to be on the commodity side."

The final piece of equipment in Pyramid’s five-year plan, an optimized small-log saw mill, also will be geared toward what Johnson sees as the future of lumber: the ability to maximize production of smaller diameter trees.

Pyramid still is considering when the purchase and installation of the small-log mill makes the most sense, said Loren Rose.

"We want it to be capable of handling the smaller material that we anticipate coming off the Forest Service with their program to reduce the threat of fire in the woods," said Johnson.

However, he said, U.S. Forest Service policies make the predictability of the supply and accompanying planning virtually impossible.

"It makes it very difficult when you don’t know where your next log is coming from," said Johnson.

With the supply unpredictability, Pyramid has looked to eastern Montana since 1993 to augment its timber supply.

"Eastern Montana has been predominately stud mills and pine doesn’t make a very good stud so the mills have been going around the pine stands on the east side for years," Johnson said. "We looked at a third of our log requirement to come from the east side. That’s a low-quality pine, but we have managed to put it into industrials and common boards and make it work for us over the years."

In hindsight, Johnson said he’d do two things differently.

"We’re a very cyclical market and always in the past if you just tough it out the market’s going to come back and it really hasn’t come back," he said. "This is the longest stretch of flat market that we’ve had for a long time. I think when those prices peaked and came off, we were still feeling that we would gain some if not all of that again in a good market."

Amid signs that the market wouldn’t rebound, Pyramid could have cut back to one shift and possibly avoided the closure announcement.

"The last four years we have had some record consumption years. Building has been good, yet mills haven’t been doing well," said Johnson. "That’s a pretty scary scenario because you’ve got a very high demand but yet your price has not reflected that."

The company also chose to make a substantial down payment for a piece of computerized equipment that was bought before the closure announcement.

"It took some of our reserves that would have helped us cope with this market a little longer," Johnson said.

The future for Pyramid Mountain Lumber is one of cautious optimism.

"We just get up every day and try to do the best we can to be the last one on the vine," said Johnson.

http://missoulian.com/display/inn_business/biz01.txt

**************

Community forged rescue for Pyramid

By MICK HOLIEN of the Missoulian

Financial packaging gave mill needed boost

Pyramid Mountain Lumber’s decision in November 2000 to close the business was a unanimous decision of its five-person board of directors – but that didn’t mean that it was an easy decision.

"That was a real tough time. It really caught people off guard. It just rattled everybody," said Loren Rose, the company’s controller and a board member.

Employees were told, as required by federal law, that the business would close early in 2001.

"There was 60 days for a lot of bad things to happen and not a lot of good things that could happen," he said.

But the family-owned company didn’t feel it had any choice other than to shut down. The board preferred closure to declaring bankruptcy, which might have allowed the company to continue operating – but might have left creditors holding the bag.

"Bankruptcy didn’t sound right. It didn’t feel right. It wouldn’t have been right," said Rose.

Days after the announcement, the Missoula Area Economic Development Corp., urged on by MAEDC member Bob Kelly, a former Champion International employee, set up a meeting with Pyramid to discuss possible options and assistance, according to Dick King, MAEDC’s executive director.

"It was pretty apparent to me that they hadn’t taken advantage of financial packaging," King said.

The company instead was harnessed by short-term bank obligations with accompanying high interest rates.

So, the board of the economic-development group decided to attempt to forge a rescue package which eventually consisted of county, state, federal and private and public involvement.

Board members Alfred and Doug Mood weren’t sure they were interested in keeping the plant open and watching their interests in it erode further, said Rose, and expressed interest in selling their 40 percent share of the company.

Charlie Parke, a Drummond-area rancher-logger, who had worked for the company as a contract logger, surfaced to buy the shares and voted with the Johnsons to pursue options to extend the company’s life.

Parke’s willingness to become involved and the fact he was an outside investor proved to be important, not just financially but psychologically.

In the meantime, logs also started coming from state sales from the Bitterroot Valley fires of 2000; the resulting increased cash flow allowed Pyramid to pay down some of its loans, thus increasing MAEDC’s collateral position, said King.

"We got some of the best logs anywhere," said Rose. "It gave us a shot in the arm that we didn’t expect."

And employees, still uncertain of the company’s future, continued to produce lumber at a record pace.

"They didn’t even know whether they were going to have a job," said Rose. "We’ve really been blessed with our work force and the way things worked out."

A $4.6 million loan was obtained from Two Rivers Bank in Bonner, and after 80 percent of it was guaranteed by the Rural Development program of the U.S. Department of Agriculture, the state Board of Investments purchased 75 percent of it from the bank.

The Board of Investments, under its value-added program, provided a 2 percent interest rate for the first five years.

In addition, Liz Claiborne and Art Ortenberg, who have a residence and property in the north end of the Swan Valley, liked how the company did business (they had sold logs to Pyramid in the past). They made a $250,000 interest-free loan to MAEDC for one year.

In turn, MAEDC loaned Pyramid that money and $332,000 from its revolving fund, which when combined with a $368,000 Community Development Block Grant loan and a $1 million SBA operating line, gave the company operating capital while waiting for the rest of the deal to come together.

An initial $2.5 million enabled the company to buy two pieces of equipment to get more product from less resource. They found the pieces of computerized equipment at a Sierra Pacific mill in California and managed to arrange a four-month, no-interest deal, according to Rose.

"We ended up with a lot of things that we wouldn’t have if we bought new," he said. "Another angel looking after us, if you will."

http://missoulian.com/display/inn_business/biz03.txt