Financial Reports & Markets
PacWest 2004 Conference
By Pulp & Paper Canada
By Pulp & Paper Canada
Kudos to the person who decided to use the “Survivor” theme for this year’s PacWest conference in Jasper, BC, in May. Considering the economic climate and the work ethic of many mills these days, the will to survive struck a resounding note tha…
Kudos to the person who decided to use the “Survivor” theme for this year’s PacWest conference in Jasper, BC, in May. Considering the economic climate and the work ethic of many mills these days, the will to survive struck a resounding note that carried through the entire conference, including the conference forum, the technical presentations and, of course, the theme night festivities.
Officially introducing the theme of this year’s conference, Survivors – Out-think, Out-last, Out-perform, Bob Leslie, mill manager of Millar Western’s Whitecourt mill and conference chair this year, explained to the 248 people in attendance why it was appropriate that the conference theme was based on a TV reality show.
“Our companies are charting a course through the hazards and opportunities posed by heightened international competition, increased mergers and acquisitions and rapidly changing technology,” he explained, mentioning some of the tough realities faced in the industry today. “It’s essential that each of us answer the question: ‘What must we do to survive?'”
Everyone familiar with this pop cult TV program, knows that in one of the latest versions, a cast of all-stars – the winners of previous programs – was assembled to compete. “For this year’s version of PacWest,” stated Leslie, “we’ve assembled a cast of our own industry’s all-stars – cagey survivors who have come not to compete, but to share the benefits of their wide-ranging experience, and their hard-won wisdom.”
Leslie’s opening remarks pointed out the fact that so many people attended the conference emphasized the importance of the event, one of the industry’s leading technical conferences.
“Thank you for setting aside time – one of your most limited resources,” he said, “to join your colleagues and take part in discussions, debates and dialogues that will promote the continued advancement of our great pulp and paper industry.”
First, however, he introduced the program chair, David Flater, manager, process line at NorskeCanada, who also gave thanks to all presenters for not only sharing their time but also for sharing their knowledge during the conference technical program.
Flater, in turn, introduced the forum panel moderator, Harold Norlund, mill manager of Nippon Paper Industries, who described the forum as a “wealth of knowledge” and gave brief sketches of the background of each participant.
The road to ‘Out-Perform’
First up was James McNutt, executive director of the Center for Paper Business and Industry Studies. McNutt challenged the audience to follow the Innovation Imperative in order to ‘Out-Think, Out-Last and Out-Perform’, as suggested by the theme. This, he said could be done by recognizing that:
1. Off-shoring and substitution by alternative mediums will drive long-term demand below current levels;
2. North America is increasingly uncompetitive in pulp and paper production;
3. The industry’s cost based competition and capital rationing strategies have eroded its asset base; and
4. The industry’s composite financial performance has been pitiful and can/will dissuade future investment – even in an improved short-term environment.
Because of these factors, McNutt pointed out that the industry has been a poor performer since the 1970’s and that it faces an increasingly tough environment. On a more positive note, he stated that while the overall industry will struggle to fare well, individual companies can thrive if they use the next short-term upturn to embrace and leverage innovation.
“The value created in a business is generated by acquiring, building, maintaining and exploiting assets,” he explained. “But not all assets are created equal!”
Companies limited to ownership of commodity assets will not be able to create value for any sustained period of time due to the competitive nature of commodities, he emphasized. They must have something special – intellectual property in the form of patented technology, trademarks, copyrights or trade secrets.
“No innovation means that there is no intellectual property,” he said. “And if there is no intellectual property, there is no sustained value creation.” This, he stressed, was why innovation was imperative to create value.
Contingent on a global outlook
Doug Fromson, vice president of strategic analysis/market research for Jaako Pyry NLK, emphasized the importance of the international market for the business environment. He focused on what was in store for Western Canada, both in the global outlook for market pulp and what to expect in market pulp prices. In contrast to the old way (before 1990), when there was steady demand growth, new capacity staged to meet demand and relatively stable prices, explained Fromson, the new world had slow growth in mature markets such as Canada’s, rapid growth in emerging markets and the prices were quickly responsive to the balance of supply and demand.
As an example, he described the industry as having been similar to sumo wrestling…a lot of posturing followed by ritualized activity. This was in contrast to the present day situation which resembled the 100 meter dash, over and over and over again.
He pointed out that bleached market pulp is the predominant Western Canadian product, manufactured at 26 of 36 mills for two-thirds of Western Canadian pulp and paper capacity. While the outlook for market softwood kraft pulp did not hold much chance for greatly increased capacity or construction of new mills to produce top-quality NBSK in the region, there was potential growth in other parts of the world. The same, he said, held true for market hardwood kraft pulp since all major new capacity is based on low-cost Eucalyptus and Acacia plantations and the plantation growth rate will range from 4% to 10% in countries like China and Thailand.
“The world is not about to run out of industrial wood for pulp,” said Fromson. As for BCTMP, Western Canada is the leader due to high quality, low-cost fibre and good power prices so the outlook of western BCTMP is better than it has ever been.
The threats to survival for mills in Western Canada were caused by a combination of low prices and therefore low profits since this made adequate reinvestment in facilities difficult. “Attracting capital for new investments is both difficult and expensive,” Fromson explained, since capital moves to the locations with the highest return.”
Along with these problems, there was increased competition from the southern hemisphere, erosion of demand for paper and social demand, eventually reflected by government policy, that reduced operational efficiency and increased costs.
But there were many strengths to be counted. These included high quality residual chips, low cost reliable energy supplies, well-established infrastructure, an educated labour force and stable social and political systems. He listed the priorities as:
– Getting the best price and supply regime possible,
– Optimizing the market mix to get the best possible mill nets and grade margins, including developing market niches and new products,
– Optimizing every facet of the supply chain and operations; and
– Optimizing cash management and financing along with allocation of capital expenditures.
– Fromson summarized by saying that most mills will survive…but only with effort and innovation.
Constraints to industry innovation
The president and CEO of the Forest Products Association of Canada (FPAC), Avrim Lazar, started his presentation by explaining the economic importance of the industry to Canada. The forestry industry, he said, made up 3% of the Canadian GDP currently. It provided livelihoods in 1200 communities, with jobs that were irreplaceable of those. The wages were 67% greater than the national average and the industry was the largest user of high tech equipment. In addition, he said, the industry was critical to Canada’s trade balance.
Canada was the leading exporter of forest products in the world, with approximately $30US billion a year in sales, compared to the nearest competitor, the US, coming in at
around $20 billion, followed by Finland and Sweden near $10 billion.
Canada was still dominant but losing ground due to increasing international competition. “We cannot afford to take our global position for granted. Our competitors are transforming themselves rapidly,” said Lazar, listing the Russia/ China Nexus, the EU’s eastward expansion and Latin America’s fast growing fibre as real and/or potential threats. Many competitors also enjoy such advantages as tariff protection, subsidies, cheap labour and state-of-the-art capital stock.
While Canada does enjoy some key competitive advantages such as a highly skilled labour force, abundant high quality fibre, stable political environment, reliable business structure, relatively low energy prices and a history of leadership in innovation, there were some serious challenges to be faced. These included the structure of the Canadian industry, the tax, regulatory and other business climate issues, the appreciation of the Canadian dollar, the lumber dispute and the weak profitability that limited investment.
While some factors were beyond our control, Lazar said, our future was still largely in our own hands.
“There are two possibilities,” he said. “Our current trajectory was a slow but steady decline of our position both in the domestic economy and in global markets but this could be changed by revitalization through accelerated renewal.” This, he explained, was a more customer-focused, innovative and globally-oriented industry.
How to attain this? It definitely required action by both the government and the industry. “A shared vision of the future can help guide the renewal process,” he said. Lazar suggested that the industry should take a lesson from Finland where a strong industry-government partnership can be a key ingredient to success.
Action items for the industry, in particular, included differentiating products, investing in capital renewal, increasing skill levels, improving labour realtions and greater investment in R&D and innovation.
“Getting there,” he stated, “is a shared responsibility.”
Survival in this industry today
Bill Mahoney, senior vice president, Pulp & Paper Group, GL&V USA summarized the necessary steps to survival in his presentation, entitled “To survive in this industry today, you must continually innovate, judiciously maintain control of costs and deliver excellence in execution”
“We have all been overwhelmed with information and comments from industry analysts, shareholders and the investment community for many years,” Mahoney said. However, he pointed out the industry was in better shape than it had been in 1997, There was more focus on core business, capital expenditures had been reduced significantly, there was improved control on capacity and volume produced, among other factors.
Mahoney said he believed the industry was poised for improved financial performance and shareholder returns when the market and economy strengthened.
So what are the problems?
“We are still one of the highest capital intensive industries on the planet,” Mahoney said. “Capital investment is not keeping up with depreciation (aging asset base). Debt/Equity levels are high, holding back capital investment and expenditures.”
He also pointed out, regardless of production consolidation, the market price for pulp and paper products has not significantly improved in 10 years or more. The latest, fastest and best technology for quality/uniformity, is being installed outside North America. This proved that the competitive landscape had turned dramatically global.
He cautioned that for the foreseeable future, the industry needed to improve its collective financial results, without the benefit of improved markets or substantial material investment.
Mahoney ended his presentation by stating that there was a changing relationship between the customer and the supplier. “Today, in our North American Forestry and Paper Industry,” he said, “the Customer and the Supplier absolutely need each other if they are to move forward and hope to unlock the potential.”
Survival: A Mill Level Perspective
Dave Ingram, general manager for Western Pulp, gave a concrete example of survival by listing some of the improvements at the Squamish mill.
“Production,” he said, “was trending up each year with daily production increased 18% between 1990 and 2003.”
At the same time, manning reduced by 15%, product quality and bale appearance improved, WCB costs reduced 38% in the past six years, chemical usage reduced significantly. All in all, operating supply costs reduced 24% in six years.
From his own experience and from the information at the mill, Ingram’s conclusions led him to advise others to pick key areas for improvement, focus on those key areas and to persist.
“Think outside the box,” said Ingram. “It’s silly to think if you do the same old thing the same old way things will improve. If it’s really important to you it will become important to all those working with you.
“In summary, don’t ever give up.”
Quality, not Quantity
Joking that he was only there because his Whitecourt mill manager and the conference chair, Bob Leslie, had promised a hefty increase in production in return for a speech, Mac Millar, president of Millar Western Forest Products spoke about “Size Doesn’t Matter: It’s Not Survival of the Biggest.”
With Millar Western mills in Whitecourt and Boyle, AB, and Meadow Lake, SK, the 2003 gross revenues were $500 million. Millar spoke of the pulp innovation in his company which had only entered the pulp sector in the 1980s, with advanced technology, which produced leadership in BCTMP product and market development and introduced 100% aspen.
At the same time, Millar Western’s environmental leadership was due to the state-of-the-art environmental control technology at the Whitecourt pulp mill (1988) and the world’s first zero-effluent market pulp mill at Meadow Lake pulp mill (1992).
The responsibility for forest stewardship was taken seriously in sustaining forests for the future through progressive forest management practices. Millar spoke of the innovative aboriginal involvement and responsible public consultation.
Yet, through all this, Millar Western was, by comparison, a small business with only 800 employees in four facilities. Millar’s explanation for this included consistent performance, attracted capital, reinvestment in business and the ability to pursue growth and adapt to change.
Definitely, survival of the fittest, not the biggest.
Millar’s advice for other mills was to follow Millar Western’s example.
“We deal with people fairly,” said Millar. “We deliver a high-quality product, keep our financial house in order and we are committed to continuous improvement.” Other factors which have helped Millar Western’ success include investment for the long term and attracting and retaining the best people who were highly skilled, motivated, flexible and non-unionized. The company policy is to share the business with the employees so that they have a direct stake in the company.
At the end of the conference, Bob Leslie acknowledged all the contributions that had been made by the PacWest committee and all the benefits for everyone of attending the conference.
“We’ve come together, we’ve shared news, we’ve exchanged important information, and we’ve generated new ideas,” he said. “We’ve also renewed alliances and friendships that span the boundaries of provinces, regions and corporations.
“That willingness to share information, to trust our colleagues, to celebrate each other’s accomplishments, is a big part of our industry’s success. Over the years, we have learned that, by helping one another, we help ourselves. That’s how progress is made. That’s why Western Canada’s pulp and paper industry has been such a resilient survivor – such a respected global leader.
Awards on Saturday night
At the end of the week, an awards banquet and dance was held to celebrate another successful PacWest conference. During the evening several import
ant awards were given out.
Best Technical Paper – H.R. MacMillan Eagle Trophy was awarded to Gavin Baxter, Tembec for his paper “Progressive System Closure at Tembec’s Skookumchuck Kraft Pulp Mill. Part I – Project Description and Analysis”, co-authored by Bruce Burns, Tembec Industries, Skookumchuck; Michael Paleologou, Jean-Noelle Cloutier, Roxare Thompson, Paprican, Pointe Claire; Michael Towers, Paprican, Prince George. Accepting on Gavin’s behalf was Al Ward, Albert Pacific Forest Industries.
From Jo ann Roy, Manager of Events, PAPTAC, and Mike Austin, Austin & Denholm Industrial Sales
Western Mill Managers Conference
In addition to the PacWest conference, PAPTAC hosted a lunch with the Western Mill Managers and representatives of the PacWest Conference Organizing Committee. Here are some highlights from the conference:
The 3rd Annual PMSRT was judged a success again with the involvement of four pulp machine departmental personnel. This year attendees came from Vancouver Island, the BC interior and Northern Alberta, with the moderator arriving from Idaho. Topics covered ranged from mill manning levels to sheet wrinkles in the press section and dryer, with a little new technology thrown in for good measure.
The Pulp Machine Round Table idea, although not necessarily new, was one which seemed timely when it was first arranged for the 2002 PacWest conference in Jasper. Too often in this industry we try to forge out on our own and not take advantage of the skills and knowledge of our peers.
The first year had eight attendees and was highly regarded as a source of information and invaluable for contacts made. Attendance dropped off in 2003, probably due to mill issues, but this year’s turnout produced a lively and interesting with many useful suggestions coming forth.
Here at Celgar, I attribute the solving of one of our major issues directly to discussions that took place at a previous round table and followed up later with contacts made there. In my mind the costs of the trip were significantly outweighed by the benefits, a distinction too readily overlooked. Potential gains are significant and in the current operating environment we have to take advantage of every opportunity we can.
From Dwayne Sklapsky M/R Coordinator Celgar Pulp Company