Westvaco Corporation

Biography

Company History: Westvaco Corporation is a major manufacturer of printing papers and envelopes, consumer and industrial packaging, and specialty chemicals that are by-products of the paper production process. The company began with the advent of automated papermaking, using wood instead of cotton as its raw material; it produced mainly printing paper for the domestic market until World War II. In the postwar era it integrated its production to make finished packaging products. Westvaco owns about 1.5 million acres of timberland in the United States and Brazil. Westvaco has intensified its international presence and currently serves customers in more than 70 countries. Nearly one-quarter of the company's income is now derived outside the United States. Westvaco spends heavily on research and marketing to locate markets worldwide.

Roots in Late 19th Century West Virginia

Born into a Scottish papermaking family, Westvaco founder William Luke came to the United States in 1852. Ten years later he began running a plant for Jessup & Moore Paper Company in Harper's Ferry, West Virginia. Although employed by Jessup & Moore until 1898, he set up a small plant of his own with his two sons in 1889. Originally established in Piedmont, West Virginia, a shift in the Potomac River and a 1922 municipal name change eventually put the same facility in Luke, Maryland, where Westvaco still operated a mill in the late 1990s.

The mill was one of many mills that, during the late 1800s, imported and developed automated wood-pulping technologies. Called the Piedmont Pulp and Paper Company, it became the first commercially successful sulfite pulp mill in the United States. Eventually U.S. makers used the sulfite process to make 83 percent of their paper. The Piedmont plant employed 60, and by 1891 it began production of printing paper under the name West Virginia Paper.

U.S. timber supply and automated processes lowered the price of paper and accelerated its consumption. In 1897 West Virginia Paper merged with West Virginia Pulp Company of Davis, West Virginia and became West Virginia Pulp and Paper Company (WVPP). It expanded along with the United States's growing demand, and it established a business headquarters in New York City. In addition to its white printing paper, it marketed pulp and chemical by-products. In 1904 William Luke relinquished the presidency of the company to his son John Luke, who held the position until 1921. William Luke died in 1912, at which time the company had four mills operating in West Virginia, Pennsylvania, Virginia, and New York.

Post-World War I Diversification

During the post-World War I recession, prices plummeted and strikes hit two-thirds of the industry, including WVPP. Sales and earnings reached a record level, however, in 1920, which would be unequaled for 20 years.

While white paper production volume remained relatively constant, diversification accounted for virtually all growth after World War I. The company produced its first kraft paper in 1921, the first year of David Luke's tenure as president. David Luke was another son of the founder. Used in U.S. packaging since 1907, kraft paper replaced many wood and textile shipping containers. As trees in the southern states were more suitable for kraft, between the world wars kraft production in the region skyrocketed. West Virginia's kraft output grew steadily for 15 years but then leveled off.

In 1929 WVPP introduced containerboard, a heavier, corrugated paper used for boxes. Federally approved for shipping in 1914, use of this material grew tremendously during the world wars.

During the 1920s WVPP began purchasing woodlands to supply its own wood pulp, but self-sufficiency in fiber supply remained a long-term prospect. By the 1930s very little virgin timber remained in the southern states. WVPP continued to buy land close to its mills and eventually owned extensive woodlands. The immaturity of the trees in its holdings, however, forced it to rely on outside suppliers for its pulp supply and prevented diversification into finished wood products.

Another son of William Luke, Thomas Luke, became president in 1934, inheriting a company with young diversification attempts and old mills. Three years later the company built a new mill to produce kraft and containerboard. By 1939 all five mills operated 24 hours per day.

The company's mills continued to operate at capacity throughout World War II. Wartime allocations made scarce the materials for expansion and repair, however. Although its facilities produced 20 percent more volume by war's end, WVPP's facilities emerged from the war badly in need of modernization.

David L. Luke Initiates Series of Expansion Programs, 1945-1963

Ascending to president in 1945, David L. Luke, a grandson of the founder, established the company's modern growth pattern. He immediately began the first of many expansion programs, spending the $17.5 million the company had accumulated during the war. The company also used some of its cash surplus to acquire more land, selling the trees too mature for papermaking to provide additional financing.

Wartime research greatly expanded paper's uses, particularly in containers. Postwar demand continued to grow so explosively that only production volume and market share concerned papermakers. The industry enjoyed favorable prices, consolidating competition, and growing demand in all areas of paper products.

The industry set high prices, required more prompt payment, and used the cash influx to build new mills during the late 1940s. Capacity caught up with demand by the late 1940s, and surpassed it by the mid-1950s, creating the need for more development leading to automation, product consistency, and new uses for paperboard. Although still reliant on white paper, WVPP put much of its postwar development efforts into these areas.

Profit margins in the commodity-based paper industry remained slim during the 1950s, and a company's technological efficiency determined its success. The cyclicality of the industry meant that for the next 30 years papermakers invested in capacity additions. When they did so, they lowered prices precipitously. David L. Luke's expansion programs, however, coincided with the industry downturns. While occasionally requiring more debt than that to which the company was accustomed, automation allowed it to cut its work force for each of the next ten years.

The first major work stoppage since World War I occurred in 1952, when 4,000 employees struck. Labor relations flared up more frequently in the postwar era, decreasing earnings on occasion, well into the 1970s.

The company got more short-term use of its land in 1952 when it discovered a use for its hardwoods. Traditionally, only younger and softwood trees had been used for paper. Hardwoods on WVPP's land holdings used for paper allowed the company to reduce production costs.

Encouraged by the premature utility of its land, over two years the company aggressively increased its holdings 75 percent to 749,000 acres. Most of the money spent on expansion in the 1950s, however, went to equipment modifications required by the technology.

WVPP sold its output mainly to companies that converted it to finished products. Priced as a commodity, paper prices often changed dramatically, making earnings erratic. Demand, however, constantly increased, providing a greater cash flow.

Use of paperboard, a noncorrugated material for consumer product containers, grew explosively during David L. Luke's presidency. Just as kraft paper and containerboard accounted for the company's prewar growth, paperboard made up most postwar growth.

The 1953 acquisition of Hinde & Dauch Paper Company, a box maker, allowed WVPP to bypass distributors and represented the first major move toward integration. Hinde & Dauch (H&D) used WVPP's paperboard to produce its parent company's first finished paper products. Bleached paperboard was found to take colors as well as printing papers, making it highly adaptable to packaging uses. In 1955 WVPP purchased color presses to produce paperboard finished to client specifications.

West Virginia Pulp & Paper Company slowed expansion and improvement during the mid-1950s in its traditional sectors of printing papers, kraft, and containerboard, in favor of its new division. The company closed H&D's paper mills but built more than 20 new assembly plants for it during the next ten years, to make the most of H&D's knowledge of package design and experience with marketing finished products. These new plants allowed for the first increase in WVPP's work force since World War II. By constantly automating to reduce labor costs, its number of employees began to level off again by the early 1960s.

WVPP purchased a Brazilian paper box maker in 1953. By the end of the 1950s, the Brazilian subsidiary financed its own production expansion with fewer employees.

Demand for white printing papers began its first large increase in decades in 1954 as a population boom and renewed prosperity increased consumption of printed materials. Demand for all paper products grew so explosively in the 1950s that by 1956 the industry could not meet demand. WVPP's earnings increased out of proportion to sales, peaking at $16.3 million in 1956 after five successive years of gains.

The industry responded by rapidly expanding its capacity. WVPP typically upgraded one machine at a time, rather than building or buying new mills. This method slowly consolidated production into larger and fewer facilities. By 1959 WVPP completed its largest spending program, doubling capacity at the Luke mill; but when domestic growth slowed, prices collapsed. Despite annual sales records, for the next five years WVPP's earnings fluctuated wildly--at one point dropping to as low as $8 million. Other factors that depleted earnings included new technology that produced more pulp from harvested trees as well as price wars following the entry of forestry and container companies into paper. WVPP, which also sought to enter new markets, lowered prices as well.

Many companies waited for demand to catch up, but West Virginia Pulp & Paper continued its ten-year expansion plan. It focused on relatively inexpensive converting plants rather than mills, but its debt grew more sizable. The timing of the expansion speeded WVPP's recovery; by 1962 demand began to catch up to the capacity added in recent years. The spending program was completed and the company issued only $60 million in bonds.

The length of the industry's recession and the growth of H&D encouraged a renewed push toward finished products. In 1957 West Virginia purchased Virginia Folding Box Company, an assembler of cigarette packaging. It eagerly expanded the acquisition and reorganized itself into six divisions, four of which were in the business of converting: bleached boards, building boards, fine papers, H&D, kraft, and merchant paper. The company decentralized each division and provided each with its own sales force.

As new materials, particularly plastic, threatened to replace older forms of paper packaging, technical research intensified during the mid-1950s and the early 1960s. Higher than the industry average, WVPP's research expenditures enhanced its reputation for product development. Research and development spending quadrupled during the ten-year period, ending 1961 at $4 million annually.

WVPP pioneered several processes, including the use of electronic controls in production, the marketing of waste by-products in the chemicals division, the use of hardwoods, and the development of Clupak, a more elastic kraft paper. The company typically licensed or sold new technologies to pay for additional research.

By 1959 packaging grades of paper made up two-thirds of West Virginia's production volume. By 1960 the demand for office and printing papers (at one time WVPP's primary product) provided growth to the long-stagnant industry. Then oriented toward finished products and marketing, WVPP set up a separate sales force to sell directly to printers and paper converters.

When paper prices improved in the early 1960s, WVPP made the most of its recently completed investment program. The renewed efficiency and a change in its accounting method finally pushed 1965 earnings past the 1956 level. The downturn, however, had raised the competitive level of the industry. Like its competitors, WVPP came out of the late 1950s and early 1960s more diversified, integrated, and less production oriented.

WVPP exported negligibly until 1960, when three percent of sales went overseas. Although it did not pursue international markets actively for another 20 years, in 1962 it set up an international division to explore manufacturing possibilities abroad and established foreign subsidiaries in Europe and Australia.

David L. Luke retired in 1963. During his tenure the company had changed dramatically. At the end of World War II, West Virginia Pulp & Paper Company had produced commodity grades of paper for a few hundred customers, but by 1959 it had its own sales force selling a variety of finished paper products to a customer base of 11,000. The company had developed the marketing techniques and made the necessary acquisitions to get it started in finished conversion while keeping debt to a minimum.

Diversification and International Expansion, 1963-1988

Hesitant to join his family's company at first, David L. Luke's son David L. Luke III became CEO in 1963, after working 11 years for WVPP. He maintained the product development momentum initiated by his father and continued to upgrade efficiency with frequent spending programs. Like the rest of the industry, however, he reevaluated the use of debt in the coming decade. In 1962 the Luke family controlled 30 percent of the company's stock; by 1984 it controlled only two percent.

Still pursuing self-sufficiency in fiber supply, the company's land holdings were constantly becoming more productive. WVPP acquired its millionth acre in 1964. Research into forestry techniques produced hybrids that were not only more disease resistant but capable of growing three times the wood fiber per acre than the strains of 15 years earlier.

Shrinking timber reserves nationwide escalated land value further. Beginning in the late 1960s, WVPP developed land of commercial value and purchased additional timberland closer to its mills. Operating in 22 states, this latter strategy proved important when transportation costs inflated during the 1970s. Lower land values in the early 1970s allowed additional land purchases. Even though these lands provided only ten percent of its raw material requirements, in the long term they stood to raise the degree of self-sufficiency.

During the mid-1960s, the growth rate in earnings once again outpaced sales. Operating near capacity once again, the company was able to reduce the debt it had assumed to complete its expansion program. Most of this investment went to make its three main mills more efficient. Nearly half of sales in 1967 came from products introduced in the previous ten years. This success and resulting heavier cash flow tempted the company to offer consumer products, a segment profiting several of its competitors. WVPP purchased C.A. Reed Company in 1968, maker of disposable paper products. Although the disposables market soared in the 1960s and 1970s, WVPP sold it after only seven years.

White printing papers used by business systems also boosted sales. Although the industry began to see overruns again, WVPP began another expansion program in 1967. It included the building of a new white paper mill in Kentucky. At $90 million, it was the largest project ever attempted by the company. In 1969 the company changed its name to Westvaco Corporation. Growing dependence worldwide on North American pulp and timber helped make Westvaco less dependent on the health of the domestic economy, exporting ten percent of sales by the early 1970s.

Commodity-type production continued to plague the industry. In the early 1970s the industry suffered once again from too much capacity, higher production costs, and low prices. Tougher environmental standards and a weaker economy hastened closure of plants industrywide. Westvaco closed plants, but its frequent incremental upgrades kept shut-down costs low. Leaner by default, turnaround came quickly.

During the early 1970s the government kept paper prices and labor costs stable but put a freeze on earnings as well. U.S. paper production reached record levels. By 1972 the government loosened its restrictions on paper somewhat, but fierce price competition negated a four percent price increase approval in 1971.

Wage and price controls were lifted altogether in 1974, allowing the industry to pass on production costs. Like the industry's recession in the early 1960s, these price controls contributed to integration, as producers sought to increase earnings in areas outside federal control, particularly finished paper products.

The paper industry was now increasingly accountable to federal regulations. The Federal Energy Administration forced Westvaco and 12 other paper companies to convert certain plants to coal burning from oil. The Department of Justice blocked an attempt by Westvaco to acquire the remainder of U.S. Envelope, the largest domestic producer of envelopes, of which Westvaco owned 58 percent. The paper industry had been investigated repeatedly for antitrust compliance and been named in private suits. Although Westvaco settled suits out of court it had never been indicted.

In the ten years ending 1975, Westvaco almost doubled sales, while simultaneously reducing its work force. During the mid-1970s demand in all sectors began to catch up with capacity, but growing production costs dampened earnings.

Energy shortages of the early 1970s prompted Westvaco to turn to its land holdings once again by mining coal for its own consumption. By 1974 it achieved 40 percent fuel selfsufficiency by burning its own waste from the production process. Such conservation efforts would help earnings substantially in the late 1970s.

The 1980s were turnaround years for papermakers. The industry started to spend on capacity once again. Although Westvaco now converted more than one-third of its paper production in its own plants, growth in the use of the personal computer and in the publishing industry gave way to rapid increases in demand for Westvaco's traditional printing papers.

By the mid-1980s, Westvaco emerged from one of the worst five-year periods for the industry with six straight earnings records. In addition, it had completed its spending program. These programs drained earnings, but at their conclusion the company earnings jumped dramatically, and the company produced more paper with larger, more efficient units and less labor. David Luke III began four such programs in his 24 years as CEO.

By employing its own sales force, Westvaco diversified not by acquisition, but by tailoring products for customers. Research and sales forces emphasized new uses for bleached board in microwave food packaging and liquids packaging.

During the mid-1980s, the company took a series of antitakeover steps. Although at record levels, debt was lower than in most companies in the forest products and packaging industries. David Luke III's final spending program of $1.6 billion was financed 80 percent internally. Unlike those before it, the program intensified product development instead of production efficiency.

Westvaco set up trade offices in Tokyo and Hong Kong in the mid-1980s to tap the skyrocketing Asian and Pacific markets. Finished products paved the way for increased activity overseas, and by the late 1980s exports reached 15 percent of sales. The consistently profitable Brazil operations began to export, after holding 20 percent of Brazil's corrugated box market for decades.

Significant growth in the printing industry in the late 1980s led to capacity expansion. Westvaco emphasized heavier-weight printing papers, despite the industry's cyclicality, which forced buyers to cut costs occasionally.

Emphasis on "Differentiation" in the Late 1980s and Early 1990s

During David Luke III's 24 years as CEO, Westvaco did more than most papermakers to free itself from the cyclicality of commodity production. His program that accomplished this, "differentiation," continued under his successors--his brother John A. Luke, who became CEO in 1988, and John A. Luke Jr., whose attainment of the CEO position in 1992 represented the fifth generation of Lukes at the company helm. For Westvaco, differentiation meant manufacturing specialized products that met specific market segment needs. By lessening its reliance on commodity grade products, Westvaco would thus protect itself from the inevitable downturns of the cyclical paper industry; and, in practice, differentiation had proved to be a successful strategy for Westvaco through the mid-1990s.

Westvaco's specialty chemicals were a prime example of differentiated products. This business segment was bolstered in 1992 with the acquisition of North American Carbon. By 1995 Westvaco held a virtual monopoly of the U.S. market in carbons for automotive emission control devices, a sector that generated $15--$20 million each year. The company sought to strengthen its position further when it announced late in 1995 a plan to spend $80 million to build a new activated carbon plant near its Wickliffe, Kentucky fine papers mill, with operations scheduled to begin in mid-1997.

In the early 1990s differentiated products accounted for two-thirds of company sales, compared with only one-third a decade earlier. John A. Luke Jr. aimed to increase this further, to about three-quarters of overall sales. A major step toward this goal came in 1995 when Westvaco sold its corrugated container operations to Weyerhaeuser for an estimated $85 million, the rare occurrence in company history of an asset sale. Westvaco's exit from the corrugated container business promised to free up capacity at its Charleston, South Carolina mill for production of additional differentiated products, such as decorative laminates for kitchen countertops, which were made from saturating kraft paper.

Westvaco also continued to expand overseas as another basis for future growth. Subsidiaries were established in South Korea and Singapore in 1992 and in China, the Czech Republic, and India in 1995. Brazil, however, continued to be Westvaco's largest foreign beachhead, and the company's operations there were increased in 1996 with the opening of a new container plant in Pacujus and the purchase of a consumer packaging plant in Valinhos. Almost one-quarter of Westvaco's 1996 revenues were generated outside the United States, and John A. Luke Jr. set a goal to increase that figure to one-third within ten years.

Westvaco enjoyed an exceptionally strong year in 1995, fueled in part by a market upturn, with record revenue of $3.27 billion and record net income of $280.8 million. The company's stock split three for two that August. Meanwhile, environmental issues came to the fore when the Council on Economic Priorities placed Westvaco on its 1995 list of the country's eight worst corporate polluters, citing 1992 toxic emissions more than three times the industry average. For its part, Westvaco announced plans in early 1995 to spend $140 million to upgrade its bleached pulpmaking plants so as to eliminate the use of elemental chlorine. Environmental groups had been lobbying paper companies to eliminate this use of chlorine because of the creation of the highly toxic chemical dioxin as a by-product.

In early 1996, David L. Luke III retired from the Westvaco chairmanship, and John A. Luke Jr. added the post of chairman to his roles as president and CEO. In September of that same year Westvaco formed a joint venture with SCANA Corp. to build and operate a $160 million power cogeneration facility at Westvaco's North Charleston, South Carolina kraft paper mill. The new facility would enable Westvaco to make future expansions in its manufacturing operations at North Charleston. The company also announced plans to build a $20 million technical center in North Charleston with laboratories and offices for its specialty chemicals division.

From the late 1980s through the mid-1990s, Westvaco had been one of the steadiest-performing companies in the paper industry. Westvaco's emphasis on differentiated products and its reinvestment programs may have cut earnings over short-term periods, but it provided a sounder basis for long-term growth. The company was also well positioned to take advantage of an increasingly open world market, all of which added up to a promising future.

Principal Subsidiaries: Westvaco Development Corporation; Westvaco Latin America & Africa; Westvaco Pacific Pty. Ltd. (Australia); Westvaco Europe, S.A. (Belgium); Westvaco Foreign Sales Corporation (Belgium); Rigesa, Ltda. (Brazil); Westvaco do Brasil, Ltda. (Brazil); Westvaco Canada, Ltd.; Westvaco Quebec (Canada); Westvaco Shanghai (China); Westvaco Svitavy, spol. s r.o. (Czech Republic); Westvaco Hong Kong, Ltd.; Westvaco India; Westvaco Asia, K.K. (Japan); Westvaco Korea, Ltd.; Westvaco de México, S.A. de C.V. (Mexico); Westvaco Singapore Pte., Ltd; Westvaco Worldwide Distribution, S.A. (Switzerland); Westvaco Taiwan, Ltd.

Principal Divisions: Bleached Board Division; Chemical Division; Consumer Packaging Division; Envelope Division; Fine Papers Division; Kraft Division; Timberlands Division; Westvaco Worldwide.

Further Reading: Ferguson, Kelly, "Westvaco Corp.: 'Differentiation' Means Key to Success," Pulp & Paper, April 1995, pp. 36-37. Parker, Marcia, "Quietly, Paper Giant Girds for Downturn," Crain's New York Business, March 18, 1991, pp. 3, 25. Plishner, Emily S., "The Old Guard: Why Straitlaced Westvaco Should Interest Value-Minded Contrarians," Financial World, January 30, 1996, pp. 52, 54. Westvaco 1888-1988: Centennial Recognition--The Early Years, New York: Westvaco Corporation, 1988. Source: International Directory of Company Histories, Vol. 19. St. James Press, 1998.

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