BRUSSELS, Sept. 4, 2012 (RISI) -Abitibi-Price, Bowater, Donohue, Consolidated Bathurst: Names from the past associated with newsprint production and, through mergers, most recently became AbitibiBowater. As newsprint demand fell drastically, so did the fortunes of the company, ultimately ending in bankruptcy. From the ashes rose Resolute Forest Products. President and CEO Richard Garneau believes the company is headed in the right direction and has expressed great interest in diversification that would change the face of a company that, despite all the changes, is still most recognized for the newsprint it makes.
His efforts have earned Garneau recognition as RISI's North American CEO of the Year. As one analyst commented, "He has done an excellent job in deleveraging the company despite the challenges in certain markets, specifically newsprint."
Garneau has a long history in the Canadian pulp and paper industry, working at times with Donohue, Norampac, Finlay Forest Industries, St. Laurent Paperboard and Domtar. Most recently, he was president and CEO of BC-based Catalyst from 2007-2010.
Resolute’s Richard Garneau, RISI North American CEO of the Year, sees many opportunities for the company
Resolute says now that the creditor protection proceedings are behind it, it has seized the opportunity to transform the organization. Transform into what? Garneau is straightforward when he says, "We want to make money."
Lest anyone think it is strictly about the bottom line, he adds, "We want to go from an organization that emerged from bankruptcy to one that will be profitable and sustainable. You do what is necessary for the environment; you work with the communities on the social side, and make sure that it's viable economically in the long-term."
Garneau admits that paper use may be on the decline, particularly in the developed world, but he says adamantly, "It's not going to disappear. For every ton of paper that you manufacture, you have to see that someone is going to use it to read, to increase or improve their knowledge."
Resolute says it is headed towards an "increasingly diversified product mix". Garneau explains that the company has evolved continuously over time. He notes that Abitibi was mostly newsprint but with the merger of companies, sawmills were acquired and the range of papers manufactured by the Company expanded. "Quite frankly, sawmills were a great addition because of it's integration. You have to understand how to harvest the wood. You have to keep in mind certification is important because your customers want to make sure that your operations are done on a sustainable basis."
"You extract the value when you process the lumber at the sawmills and get the chips that supply your pulp and paper mills. That's certainly a part of our diversification."
Although housing starts and construction in general have had a tough six to seven years, Garneau says it's back. "The wood has a look that is always going to be in demand. The Company has a pretty strong position in lumber that we would like to continue to grow."
The Company now operates 22 wood products facilities
On the pulp side, particularly after the acquisition of the three Fibrek mills, Resolute expanded its market pulp capacity to 1.8 million tonnes/yr, a significant portion of which is northern bleached softwood kraft, which Garneau notes is high quality. Resolute also produces some hardwood pulp as well as recycled pulp from two of the Fibrek mills (Menominee, WI, and Fairmount, WV).
To Garneau, this gives Resolute many options besides the traditional graphic papers the Company is known for. He mentions tissue-grade pulp as a possibility. And, eventually, the company has its eyes on rayon-grade pulp. "This is one of the options we are looking at."
That's not all. "When you look at diversification, certainly, when we look at the potential for new products, biofuel is eventually going to be one of the products I believe we are going to make with wood residue. The technology is not quite there yet, but we're pretty close.
"I can say we are a diversified company now with seven million tonnes: pulp, newsprint, lightweight coated, all specialty grades from hi-brite to super-brite to hi-gloss, plus of course our lumber offerings."
Based on all this, Garneau says depending on needs/wants, Resolute can help its customers optimize their supply chains.
By the numbers
|2011 sales CDN$4.76 billion 21 pulp and paper mills
• 1.8 million tonnes/yr market pulp
• 3.1 million tonnes/yr newsprint
• 2.1 million tonnes/yr printing & writing grades
14.7 million ha managed forest
22 wood products facilities
• 2.7 million board feet of lumber
• 98 million board feet remanufactured wood
• 145 million linear feet engineered wood
443.5 MW installed capacity at 7 hydroelectric and 7 co-gen facilities
Paper Retriever recycling operations in 19 North American cities
Approximately 10,000 employees
Besides value-added pulp and paper products, Garneau says the same holds true for its solid wood offerings such as finger-jointed and MSR lumber, I-joists and trusses. Another is something that Resolute is developing using smaller black spruce trees. They are crushed, dried, pressed and the fibers are glued. Beam lengths of 50 to 60 ft and widths of up to 4 ft could be possible. Although the product is "not there yet," Garneau says the development is typical of "the thinking we have that there is a future by optimizing the use of fiber we have. It is another advantage of having access to large tracts of forests in eastern Canada. This wood has different characteristics than southern species and although its growth cycle is much longer, it is very strong and there is an opportunity down the road to build on the potential of this wood."
Diversification is important, Garneau repeats, "because business cycles come at different points. Diversification along with a more value added product mix brings the potential for more stability and profitability."
Resolute can make 2.1 million tonnes/yr of P&W grade paper
Back to Square One
The purchase of Fibrek is seen as an insulating factor for Resolute. Besides the aforementioned US recovered fiber pulp (RBK) mills, the purchase includes the St-Felicien, QC, softwood kraft mill, a location with which Garneau is very familiar. Besides being a native of the region growing up on a farm, as a young chartered accountant with Donohue, he was appointed first resident controller of St-Felicien.
"As far as I was concerned it was integrated then," he says, taking a different twist on the theme of integration. Linking it with the sawmills, he explains, they were acquired to feed the pulp mill and the pulp mill brought stability to the sawmills. "Investments were made in the sawmills at the right time because of the difference in the cycles. I think we are back to Square One, bringing back the integrated complex approach where you optimize harvesting, sawmill operations and your pulp. And it's all together in the same area. There is an opportunity here, long-term, to create value for our shareholders."
Garneau strongly believes that St-Felicien with its annual consumption of 700,000 tonnes of chips brings stability to the operations. "You can better control your species; you can mix them. It's an opportunity we have to manage it more efficiently."
Although the key of the purchase was the re-integration of the St-Felicien pulp mill with the sawmills, the two RBK mills are a plus because it provides Resolute with a larger offering. For example, for tissue producers, particularly AfH products, Garneau says it is an advantage being able to provide 100% recycled pulp.
Resolute now has 21 pulp and paper mills
Resolute is not new to the recycling sector, even with the Fibrek purchase. It has extensive collection programs that amass more than one million tonnes/yr, about 75% of which is old newspaper (ONP).
Overall, Resolute uses about 700,000 tonnes/yr of ONP in its furnish. Among the paper mills using RCF are Thorold, ON, Calhoun, TN and Augusta, GA. "Until recently, we used some at Thunder Bay, ON, but it has been phased out because it is not efficient to transport ONP from Toronto some 1,200 or 1,300 km to Thunder Bay," Garneau says. "In some cases, it just defeats the purpose of recycling."
Garneau also addressed the issue of competition for RCF. "Recycled is more challenging now with the great demand from India and China. There are not many profitable newsprint mills that can use ONP very efficiently."
"We are going to continue to try to optimize our collection processes and continue with the program but eventually we will use less and less."
Resolute's South Korean mill produces newsprint from 100% RCF but the case is different. The quality of material it collects is quite high and the yield difference is quite significant.
According to Garneau, one of the main issues that affects the economics of recycling paper significantly is the rise of the Single Stream collection in the U.S. "It's a big contamination issue with a significant downside. The yield that used to be 80%+ is now, in some cases, below 70%. And, the price of acquiring material is under pressure because of the great demand in China and India. They have labor costs we cannot compete with to remove and sort unwanted material."
Although other opportunities from Single Stream may arise - PET, glass, metal recycling - the cost of installing and maintaining these sorting systems is high and landfill costs for material that cannot be recycled are increasing. "Single Stream puts more pressure on the final user," Garneau adds.
The Company is developing new value-added wood products
Back in the woods
This leaves Resolute's forests as an essential asset. It currently manages 14.7 million ha of forest, almost all of which are in Canada: Ontario, Quebec and Nova Scotia. The goal is to get to 80% FSC certified by 2015. Resolute is already the largest manager of FSC-certified forests in the world and has surpassed the half way point on its 80% goal.
"Especially when you sell your products in Europe, being FSC-certified certainly helps. In Europe, they are looking at FSC as the certification of choice," Garneau says.
He adds that he believes that all certification schemes are good and notes that in most cases, the Company has not changed the way it operates. "It just shows that we have not only the right practices, the right harvesting methods to ensure the forest will grow back, but that it's renewable and that wildlife has enough blocks that are not touched, that they can continue to thrive in this environment."
Garneau recalls that he paid his university tuition by harvesting trees, on advice from his father who told him to buy a chainsaw and work for a contractor that sold sawlog quality trees to a sawmill. "A few years ago, I went back to the harvested blocks and the trees are almost ready to be harvested again."
Still, the Company is not completely self-sufficient in wood. "I would say we are highly self-sufficient, especially in Canada," Garneau says. "In the U.S., all of our mills buy wood on the market." The U.S. mills make up over 40% of Resolute's total capacity.
As much as possible, Resolute tries to feed its pulp mills with chips from its sawmills. Garneau says this is the most efficient method. "You have a better handle on quality and on the chip size. For example, when you chip in the bush, you don't have the same level of debarking compared with a ring debarker at a sawmill. It is the ideal way to do it."
It also helps to optimize sawlog processing and to process as much wood for profitable lumber and then the residuals for chips.
Resolute has customers in 90 countries
More growth in Latin America
Resolute sends products to 90 countries now. Where will its markets grow? Garneau says that for paper, the Latin American, Indian and Asian markets will continue to grow. "Obviously, we will continue to have some bumps along the road, especially with the value of currency," he adds, citing the significant depreciations of the euro, ruble, real, and others.
Garneau believes that Resolute's long-term best option is to take advantage of the growth in demand based on the location of its mills, for example, close to the St Lawrence River transport system in Quebec. The Augusta mill is also well-located for export.
The Calhoun, TN, and Coosa Pines, AL mills already export to Europe. "I think there is significant potential especially when you look at the population of countries such as India with 1.2 billion people, and they don't have trees the way that we have, nor does China. It is a big opportunity for the Company to serve these markets."
Looking at the specialty grades, Garneau says Resolute will concentrate on the domestic (US) market. Overcapacity already exists in Europe so he cannot see the Company trying to compete there.
For pulp, Garneau is looking at the great demand in China. "They are already almost the biggest pulp user. It is an opportunity to really expand in this market. Over time we'll send more pulp to Asia because it is where the growth is."
Eventually, tissue will also be an opportunity. Currently, per capita tissue consumption is not high in India or China but will continue to grow. Garneau explains this does not mean shipping parent rolls of tissue to Asia. Rather, the opportunity will come for Fibrek's RCF mills and St-Felicien, the pulp mills in Thunder Bay and Fort Frances, ON, as well as Coosa Pines, AL, which already makes a hygiene grade of pulp. As well, there are also opportunities for the Calhoun and Catawba mills.
As for lumber, he adds, it is more difficult for an east coast producer to export to Asia because of the distance. However, he notes that west coast producers have benefitted significantly from the growth in demand for solid wood products and that this increased demand will continue. Despite geography, he still sees the Asian market as an opportunity for Resolute's solid wood offerings.
Paper use “will not disappear,” Garneau states
What’s in a name?
|When he joined Resolute, or AbitibiBowater as it was then known, Garneau felt strongly that a new corporate identity was needed. Rather than spending millions on a consultant to help with the choice, the company decided to do it mostly in-house.
A company-wide contest was held with 1,400 employees participating. And, it was not a case of sending in a name. The company used it as an opportunity to engage employees. The employees had to spend time, on average about 45 minutes online, explaining their choice of name.
In the end, two employees, one from the Fort Frances, ON, mill and one from the Calhoun, TN, woodlands operations, came up with Resolute Forest Products, noting among other things that the company was resilient and that they were optimistic about a strong future. They split a $30,000 prize.
Also, as Resolute is based in Quebec, being bilingual is very important and the name translates easily from English: Résolu.
After, a representative from the New York Times was talking with Garneau and joked that the company was so serious about cost cutting, it even cut two letters from its name.
Cut the debt
In recommending Garneau for the CEO of the Year award, one analyst said that Garneau "has helped Resolute retake a leadership position in the industry." How does he respond to such remarks? "Certainly the objective is to have very little debt by 2014. It's a principle I got from my mom. She used to say: ‘When you don't have debt, you're rich.' And that's what I share with the employees. If you don't have to pay the interest, and we don't have to worry about repaying the debt, then we're going to be able to re-invest in projects that make sense and we can certainly hope for a good future.
"The thinking has changed over time. I remember when I started in the business; at that time you had to have debt but I think we have all learned how difficult it is when you have too much debt and what kind of damage it does to a company."
He adds that opportunity follows when a company has liquidity. This gives a company flexibility when deciding on investments.
Having little or no debt also gives a company flexibility to buy back shares. With its liquidity, Resolute has a program underway that when the company feels its share price is not at a level that reflects the true value, it can buy back shares. For example, recently it bought back a number of shares at $11 when Garneau states the book value is closer to $35 per share.
This is a lesson Garneau learnt from his time at Donohue, which was considered by some to be the best managed forest products company in North America. "As far back as 1974 when Donohue only had one mill, this focus on cost and cost control was really part of the day to day culture of the organization. But not only cost control, Garneau recalls, but the ability for all employees to participate.
"When you talk about it, when you're serious about it, when you do things that are visible for anyone to see so they know it's important. You have to lead; that's when you spend, it's because you see an opportunity to create value."
This attitude has been transmitted from Donohue. "I still believe it is a value you have to exploit, that you have to harvest because everyone in the Company can participate. There is always ways and means to do things in a way to cost less but arrive with the same results. It's all about paying attention to the details."
Again, Garneau harks back to his youth. "Being born and raised on a farm, there are a lot of things that you can do that cost nothing and can save you a lot of money. When you have all the employees believing in this principle, it's surprising what you can do."
In reaching the employees, Garneau says that generally speaking, the Company is building upon its recent success. It takes time, he adds, particularly when looking at the many years of hardship the Company suffered. "It has been a very tough ride."
He cites the 2000 acquisition of Donohue and the huge debt the Company had to manage. At some point, it was difficult to see any light at the end of the tunnel. "Where were we going with $6-7 billion of debt? How were we going to repay that?"
Driving hard into the future, Resolute believes it is headed in the right direction
Turning the stones
There is now a better understanding among the employees. "You build on that. When you're profitable, it's fun. You come to work in the morning and you can think about how you can improve, how you can build value even though it's challenging and the market is not what it once was."
There are still things that can be done. Garneau likens it to turning a stone to see what's underneath. "You turn the stones and then you make another pass, and then a third, a fourth. It's the way we look at it. There are opportunities."
It has become the philosophy of the employees. This creates the momentum to carry the Company forward. Seth Kursman, vice president, corporate communications, sustainability and government affairs, says that culture change must come from the top. "What has happened here in the last 18 months is extraordinary."
|A legacy that Resolute inherited from its predecessors was a collection of some aged mills with old equipment, especially in eastern Canada, mills that for too long relied on newsprint. Tough decisions had to be made. The most recent closure came in mid-2012 when the former Bowater Mersey mill in Liverpool, NS, was shut.
There are vast woodlands attached with the mill, about 0.5 million acres. Resolute has already had interest in the land from a number of international buyers. “They are very interested in the land. It has a lot of value: sawmills, a co-gen facility that can produce 25-27 MW. As for the mill, I don’t think the mill will ever make printing and writing grades in the future. Whoever buys the Mersey operation, it will be with the understanding and covenant that no P&W paper will be manufactured on the Mersey site.”
Also, Garneau says Resolute does not want to see the land end up in foreign hands and harvested for export. The preferred option would be for a North American buyer that would put the wood into the sawmills. Biofuels are also an option. This could be an issue as there are some in the province calling for the government to expropriate the land.
As for other mills, Garneau knows the Company has a number of older mills but that all the less efficient ones have been closed. “The network that we presently have is what I would describe as very good. There are always mills that have something that needs to be corrected or improved.” For example, there are programs underway at the Augusta and Iroquois Falls mills to improve quality. We are now investing in the mills we believe have a future. We are very cautious on the way we spend our money. Our maintenance of business capex is anywhere between 55 and 65% of depreciation.
“With that, we look at projects that have a payback of a year or less. When you focus on a very short payback, you always find ways to have projects that have a good return.”
As Garneau worked for Catalyst, also a financially troubled newsprint producer, did he think he was jumping from the frying pan into the fire when he agreed to lead Resolute? He explains that when he left Catalyst, retirement was beckoning. However, he received a call from a financial firm heading the search for Resolute's CEO, and when he became aware something could be possible, he decided to consider it. "I didn't have this thought when I left Catalyst. But now I'm having fun. I was planning to have fun on my farm, playing with my old tractors.
"Now I'm here running this Company and smiling. And hopefully, my shareholders will smile too. And I think I was too young to retire in any case."
Where will Resolute be in five years? Garneau laughs and says he would like to have the answer to that question himself. However, he believes opportunities will present themselves. "By managing the Company in a way to position Resolute ahead of its competition, then the right opportunities will present themselves."
Garneau tells a story of his Donohue times when the late Pierre Peladeau, founder of Quebecor, was the majority share owner of Donohue. There was an annual strategic planning exercise and Peladeau came into the meeting and said he did not believe in strategic planning. "He told us that the opportunities would present themselves and if you're ready, and if you're really looking for them, you'll position the company to take advantage of them."
In other words, a well-run company will have opportunities. "You can plan and we know that with all the planning we've done in the last 18 months, it can change so quickly."
It's really the position that the Company is in that will be the deciding factor. For example, Garneau cites low debt, good liquidity, ability to generate cash, to have the employees on board and to believe there is a bright future. Shareholders with a long-term view are also a necessity. Looking at the results quarter by quarter is a type of disease, he adds.
Looking at the customer side, it is necessary for clients to believe that a company will be able to supply them all the product they want, on time, with high quality. "It is one of the daily considerations that we make sure we always meet our quality expectations and our paper specifications."
Customers like stability, someone they can rely on, someone they know can deliver on short order, without damage. "Our employees are focused on providing that kind of service to our customers. It helps to secure their jobs longer term."
Garneau came on board after the bankruptcy so he can't speak to the damage caused by all the turmoil of the recent past. "Customers appreciate the service, product and commitment we have. I even said to them that a best price increase is a cost decrease."
Garneau repeats that paper will not disappear. Being focused and being dedicated will bring the ability to compete. "OPPORTUNITIES will come."