Vancouver — Ev Van Eerden can recall the sense of trepidation he felt when he gave up the comfort and security of his civil service job to run a private company with forest nursery operations in British Columbia.
"You almost felt naked in those first few days," said Mr. Van Eerden, recalling the switch from his government office in Victoria to the boardroom of a financial consulting firm, where he was separated by partitions from his new business partners.
"We had no pencils, no files, no nothing."
The opportunity to work in the private sector came up in 1987, when the B.C. government was looking to get out of the reforestation process and wanted to find a buyer for six seedling nurseries that had been managed by Mr. Van Eerden. His boss, Charlie Johnson, the head of the province's silviculture department, wanted to keep the nursery employees together. So he suggested to Mr. Van Eerden that they find a way to buy the seedling centres.
John Kitchen, President & CEO Pacific Regeneration Technologies Inc. at the nursery in Pitt Meadows BC, September 15, 2005. (Lyle Stafford/The Globe and Mail)
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At the age of 52, neither had any experience in running a business. But armed with a five-year government supply contract, they secured a $30-million bank loan and, after moving into a small Victoria office in September, 1988, started work as senior executives of Pacific Regeneration Technologies Inc.
Two decades later, PRT is the largest producer of containerized forest seedlings in North America, a publicly traded income trust and a consolidator in an industry comprised mainly of private mom-and-pop-style operators.
A supplier to some of Canada's largest logging firms, the company is expected to generate more than $40-million in revenue this year from 16 nurseries in the U.S. and Canada.
With the recent acquisition of Pelton Reforestation Ltd. of Maple Ridge, B.C., PRT has the capacity to produce about 220 million seedlings annually, an amount equal to 34 per cent of Canada's annual seedling consumption.
The company's success is widely attributed to the underlying nature of its business, which is predicated on a legislated revenue stream, and the work ethic and vision of Mr. Johnson, the first chief executive officer, and his vice-president, Mr. Van Eerden.
"They brought in high quality people right from the beginning," said John Kitchen, CEO since 2002. They included Chris Worthy, a financial consultant who helped to get the company launched, and Bruce Devitt, a respected forester. "These were people who helped the company develop in a way that would work as it got bigger."
In the early days, Mr. Van Eerden said, the biggest challenge was figuring out how to run an employee-owned company with locations stretching across B.C.
Another challenge was getting the employees to feel at ease with the fact that they had stepped outside the comfort and security of government jobs.
"Charlie and I weren't businessmen, so there had to be a lot of trust developed between management and the employees," he said. That took many personal visits and loads of motivating to get people to buy into the business model.
Before it went public in 1997, PRT was also challenged by the fact that it didn't generate much in the way of profits. This was partly because of changing technology in the forest seedling industry, which was switching from the traditional bare-root method -- where seeds are planted in a field -- to a system where seedlings are grown in Styrofoam containers inside greenhouses.
"We had to invest a lot of money to convert from bare-root to container growth stock," Mr. Van Eerden said.
Although Mr. Worthy insisted that the company adopt conservative accounting practices, the need for funding remained an issue because of the continual need to invest in greenhouse technology.
"We could always see the day coming when the banks would say that 'You have $35-million worth of debt and you need to get your balance sheet strengthened,' " Mr. Van Eerden added.
That day came in 1996, when PRT went looking for a cash injection to finance a nursery expansion and buy back shares from the principals when they retired. The company hired Vancouver-based Capital West Partners to raise private equity capital, but found the price was too high.
Going public via a share offering was also ruled out because PRT was too small and didn't have the kind of revenue growth that would get investors excited.
But having written a business plan for the company, Capital West partner Jerry Bellerive recognized that it could go public as an income trust, a financial structure in which income from operations is passed onto the unit holders seeking steady earnings.
Mr. Bellerive thought the structure could work because PRT's business is based on the fact that any time a tree is cut down on Crown land in Canada, it has to be replaced.
"As long as you know how to make money in the seedling business, your revenue is assured forever, or at least until all the trees are cut down," he said.
Since PRT went public, raising $56-million from the sale of trust units that trade on the Toronto Stock Exchange, the income trust has been managed from Victoria by a separate, employee-owned company.
It was structured this way to give the employees an incentive to increase the cash flow for the benefit of the unit holders.
Under the 20-year management contract, if employees can raise the cash distributions above a threshold of $1.10 per unit annually, the management firm is entitled to a share of the excess cash, that would then be distributed to the employees. The cash distributions have never yet reached the threshold level. This year, distributable cash is expected to be 98 cents per unit, rising to $1.08 in 2006, according to a Mark Bishop, a forestry analyst with RBC Dominion Securities Inc. in Vancouver.
Yesterday, the trust units traded at a high of $11.40 and closed at $11.25, above Mr. Bishop's $11.20 per unit target price.
The financial controls, which were in place before it went public, prepared the company well to function in a highly regulated environment and to meet public expectations, Mr. Kitchen said.
PRT's largest Canadian rival is about one quarter its size. Competitors include companies such as Coast to Coast Reforestation Inc. of Edmonton and Forestcare Corp. of St. Williams, Ont.
Gaining an initial foothold in the United States in 2003, with nurseries in Oregon and Nevada, was considered an important step because it allowed the company to get closer to private land owners and government agencies, which prefer seedlings to be grown locally. Ultimately, Mr. Kitchen wants to take the company to a wider international community.
Looking back to the early days, Mr. Johnson advises anyone taking on a similar challenge to have good strategic planning and "you need to keep the employees focused on that strategic direction."
Right from the start, he said, management could see that PRT was a relatively large player within the forest seedling sector. The company knew that the majority of its competitors were owner-operators, who would eventually want to sell, he said. "That is ultimately what happened."
