Pulp and Paper Canada

News
When Donohue’s MICHEL DESBIENS speaks . . .


December 1, 1999
By Pulp & Paper Canada

It’s been called the best-managed company in the business. Despite the industry’s recent troubled times, it has been able to post some handsome profits. It’s just made several acquisitions that have b…

It’s been called the best-managed company in the business. Despite the industry’s recent troubled times, it has been able to post some handsome profits. It’s just made several acquisitions that have boosted it to the rank of Number 4 among the world’s newsprint producers with an annual capacity of 2.5 million tonnes (t). It also owns 17 sawmills and one market pulp mill in Quebec — St. Felicien. (The Matane, QC, BCTMP mill has just been sold to Tembec.) And, according to Donohue president and ceo Michel Desbiens, the ride is not over yet.

Starting with mills in Clermont and Amos (which itself only opened in 1982), the company has grown spectacularly in the last five years. The original pulp mill in Clermont was built in 1909 under the East Canada Power and Pulp Co., which went bust in 1913. The mill was taken over by Donohue Brothers Reg’d and the company name was changed to Nairn Falls Pulp and Paper Company. The present company took over in 1920 but leased the mill to Mead Investments and later to Murray Bay Paper Co. Ltd. The paper mill was completed in 1929. In 1933 Donohue again took over.

Most recently, Donohue made the headlines in 1996 with the purchase of the QUNO assets from The Tribune Co. in Chicago. This included the newsprint mills in Thorold, ON, and Baie Comeau, QC.

In 1998, it made a big move south purchasing two newsprint mills in Texas — Lufkin and Sheldon — from Champion International for US$450 million. Earlier this year, it acquired full ownership of Finlay Forest Industries (a newsprint mill and two sawmills, based in Mackenzie, BC) by buying Slocan Forest Products’ 50.1% interest. Donohue had held 49.9% of the company since 1994.

Through its expansion phase, the company has been a favorite of the financial institutions and analysts despite its reliance on a commodity such as newsprint. Why? The Donohue mantra is discipline and cost control. This goes across the board to all its assets and is not just a “flavor of the month” being passed down from on high. Michel Desbiens explained: “We’ve been successful because we’ve been disciplined. We have a culture where cost control is essential. It’s not managed as a program or ‘when the market is difficult, business is difficult’. It’s managed on a day-to-day basis. It’s something that we control properly and we make sure we maintain it. That’s the way we stay profitable.”

Donohue’s growth by acquisition has been done in its core businesses: newsprint and lumber. “Even if we like pulp,” Desbiens explained, “it’s more cyclic and it is more difficult to maintain a competitive position.”

Basically, the company has tried to structure itself to meet its shareholders’ expectations, to generate an adequate return on investment. “We try to stay close to our managers so we have a very flat organization and we try to control our costs (all details from fibre to paper delivery). We call it the Donohue way.”

Efforts are also made to maintain market stability. Donohue is not an “in/out” producer or supplier, Desbiens stressed. “We try to build a share of a certain sector and we try to stick with it, in bad times or good times. So we follow the cycle and we maintain that level of participation in the market. To do this we not only try to keep a competitive position, we also try to keep a quality position.”

At the time of its expansion, there were other newsprint mills on the market. Donohue did not look at Pine Falls Paper because it did not meet its criteria. “We looked at Maclaren (Masson, QC). On a strategic basis it didn’t bring anything to Donohue so we walked away from it.

“We try to look at it globally. Not only does it need to make sense to our market distribution, but it also must be highly competitive in the long-term.”

Finlay Forest Industries in Mackenzie, BC, was acquired in full because Donohue was familiar with the mill and it thought it would have better control if it were sole owner. “We thought it would create a little flexibility if it were part of Donohue instead of being a business by itself.”

With an extensive modernization recently completed including a new pulping plant and turbo-generator and two sawmills side-by-side, Desbiens is convinced that Finlay is an excellent asset whose inherent advantages includes excellent access to the West Coast and Asian newsprint markets. Some optimization is still needed.

Donohue will remain a newsprint producer in the long-term. “We have some modern facilities, state-of-the-art assets. We are investing in these assets on a continuous basis. Every investment we do is to keep them cost and quality competitive.”

There are some older mills in the stable, most notably the Texas and Baie Comeau sites. Baie Comeau’s PM3 has just been rebuilt and Desbiens said that the mill will receive an extra injection of capital “with time”, especially once the announced Texas modernization is complete. The goal will be quality improvements.

Donohue ensures all its units are self-supporting and contributing to the company’s profits. “It’s not an approach, but the way we manage our business,” Desbiens explained. “It has to be done across the organization, not isolated. Everyone has the same culture. When we hire someone, we make sure he joins the approach of the corporation.”

Donohue will continue to acquire and will ensure that all new units will be profitable. “If it’s not profitable when we buy it, the money has to be spent right away to make it profitable.” There are three criteria for new acquisitions: part of the core business, market-driven and profitable in the short-term basis.

Desbiens said that all the Donohue mills are well-positioned for export and North American markets, including Texas, with easy access to rail and water. Since the purchase of the Texas mills, Donohue’s newsprint markets are split between Canada, the US and offshore with US publishers buying the lion’s share of Donohue’s production, 69%. Offshore customers account for 24% of production with the rest staying in Canada.

This type of market split should remain stable for the time being, according to Desbiens. “We always said, for a North American producer — I’m not saying in 50 years from now, but for the next 10 to 20 years — having anywhere between 20 and 30% of your North American capacity on the export market makes sense.”

He doesn’t believe offshore competition will be much of a factor. “With globalization and consolidation, we will see a steady business in North America. One thing that people tend to forget is that with globalization in newsprint, pulp and commodity grades, you will see a better balanced business around the world, including North America. It has to be or the whole business will collapse.”

Cycles will always be there

The cyclicality of the pulp and paper industry and the timing and volatility of the cycles have been discussed ad infinitum. But, the cycles will always be there, Desbiens said, just not to the “extremes” the industry has experienced. “We’ll still see the cycles; there’s no choice because we’re at the mercy of any economic downturn anywhere in the world and that’s one reason why I talk about global markets.’

He cited Asia as an example. “The European and North American businesses were good but only because the Asian business collapsed. We saw the impact all around the world. We have new players from South America and Asia and these will make the fluctuations in the cycles, not the North Americans.”

With the new Cluster Rules in the US, the closing of some mills because of the age of the equipment, increased competition and mills shifting production to other value-added grades, Desbiens does not believe we will see as much market pulp being made in North America. It will come from offshore suppliers.

Outperforming the competition

Donohue stock is often rated a “buy” by institutional investors because its earnings to sales ratio was 10% in 1998 compared to an industry average of 1%. Desbiens reiterated the Donohue creed of cost control as the main reason for its performance, “maintaining all our units on a low-cost level, generating profits. Once in a while
you have an exception, but not for a long period of time. We modify when it’s not competitive or when it doesn’t generate a profit.” This keeps Donohue competitive. If needed, downtime is taken.

It all comes back to discipline. If a unit doesn’t generate a cash contribution to the corporation, it’s not a good business to be in, Desbiens added. “So, it has to be corrected.”

Donohue’s administrative costs are also low. The principle is to put money into areas that give a return. The philosophy is based on optimization of assets.

Besides the corporate discipline, the main reason why Donohue is successful is that it has been “careful” in its acquisitions, “picking and choosing” them. “We don’t try to be big for the sake of getting bigger,” Desbiens said.

Keeping tabs

Donohue recently announced that it was installing a “new” paper machine at its Lufkin, TX, mill. This machine was operated by Gold River Newsprint Partnership (BC) from 1988 until 1993. The machine seemed to disappear for years but Desbiens said he had been in touch with Fletcher Challenge which had bought the machine, disassembled it, repacked it, but had never installed it in any of its mills.

“I was trying to acquire that machine until 1998 when they accepted to discuss the potential sale of the machine. We finally sat down and we were successful in buying the machine. The machine will be modified but it’s a good machine (Beloit Bel Baie III) and it was available rapidly, so we didn’t need to re-invent the wheel. It was a good decision.”

Donohue had plans to modernize its other mills but didn’t “push” because the need was not urgent. When it acquired the Texas mills, there was that urgency for a new machine.

Identifying a good match

How did Donohue plan its acquisitions? Desbiens said that when the company was doing its strategic planning in the early 1990s, it had looked at QUNO. It had always believed the companies were a good match and Donohue management respected QUNO’s method of operating. On several occasions, Donohue had tried to negotiate a purchase through a third party. In summer 1995, Donohue was looking at the best possible acquisition and approached The Tribune Corp. very seriously. The bid was made and accepted. Desbiens recalled, “Even it was a successful company, we though we could do a lot with this outfit, and we did.”

Cost reductions were made by taking the same approach used within Donohue. “To me it was turning point for Donohue to acquire QUNO because at that stage we had enough cash flow to do other things.”

The company has always been active in acquisitions. It has a small team that works in this area constantly. “We had looked at many, many acquisitions. We had done Finlay in 1994 so we were ready to move when it did happen.”

At the same time (early 1990s), it was studying QUNO, Donohue had identified the Champion assets in Texas as a potential match. It was felt it would fit the company’s marketing strategy, that the mills had a lot of potential. “We felt it could have been a good deal for Donohue. When we got a positive answer from the seller, we were ready to jump on it.

One of the reasons why the QUNO and Champions mill were attractive to Donohue was their proximity to water and markets other than North American. “So you can distribute your risk across the market place.”

Although the inherent philosophies do not differ, the Donohue businesses are kept completely separate. Its solid wood business is totally independent of the pulp and paper operations. All transfer prices, e.g., chips, are market value.

Desbiens is tempted to classify the reuse of recycled paper the same way. He said the price varies differently from sawn wood as well as from virgin fibres. “It is more related to supply:demand of ONP and newsprint. We figured some locations close to the big centres should be using ONP or OMG.” This is why the Thorold, ON, mill (close to Buffalo and Toronto) has transformed itself in recent years to using 85% recycled fibre (Pulp & Paper Canada, March 1998). Whereas, the Baie Comeau and Amos, QC, mills, being far from a ready source of recycled paper, continue to use a 100% virgin furnish. ONP or OMG is bought for these mills only when there is an obligation, “a real necessity of life”, Desbiens said.

The availability of recycled fibre was one of the reasons Donohue bought the Texas mills. By mid-2000, the Texas mills will be using 85% recycled furnish from the current 40% level. Cost control starts at the very beginning of the process for Donohue. It has its own collection and sorting operations in Canada and the US for recovered paper so that a high proportion of its recovered paper is controlled in-house. For example, it runs the Donohue Paper retriever program in Texas.

In most of the US, the required level of recycled furnish in newsprint is a percentage of the total supply. It does not have to be, e.g., 40% across the board. “So,” Desbiens explained, “we combine our shipments and work with our customers. But again, being in the recycled business is not necessarily an answer. It has to be well-positioned and well-controlled.

Discipline above all

Desbiens does not think the industry in Canada is in good shape because it does not return an adequate return on investment. It does not earn its cost of capital. “Basically, they have to close down what is not efficient and secondly, they have to be better disciplined. The industry cannot survive by working on cash contributions. It has to be profitable. To do this, they have to control their supply because the demand can only take so much and doing so to get an adequate pricing scenario on the long-term.”

The trouble is that too many companies are working on a short-term basis, keeping the operations running “full blast even if they have no orders.” Desbiens said it is not a question of supporting the business or supporting the price, but rather a question of if the market can absorb it. “If it cannot, you must shut down capacity.” This must be done globally, not just in North America. “People have tendency to go elsewhere and dump paper all over the place and they think it won’t affect the market. Newsprint, pulp and all the commodity grades are global and if you create a surplus somewhere, the price will collapse. The same thing happened with lumber. When the Japanese market dropped, we flooded the North American market. You see the same scenario happening all over the world. The industry must be disciplined. I have to put emphasis on this.”

Consolidation within the industry is not over, in fact, Desbiens said the industry doesn’t have a choice. “I don’t think, for the industry’s sake, we should stay the way we are. We should continue consolidation, acquisitions, mergers, closings. We have to reduce the number of players. We have to have more responsible players.”

“Bigger” players are also needed, because they are strong and have enough cash flow to shut down the “lame ducks. They have to shut down obsolete equipment, build where there is a need, and control what they do. Again, if consolidation does not create a better discipline, it’s useless.”

Desbiens believes companies should focus on specific niches otherwise discipline is lacking. “It should be focused. You should not be bigger for the sake of getting bigger; it does not create any value. And, we have to create value for the shareholders. The big investors should be attracted to the industry, not walk away from it, so they have to have a reason.”

For 2000, Desbiens sees a stronger pulp sector with firmer and higher prices, without the peaks the industry has experienced in the previous cycle. Markets should be stronger because there is less capacity. He said slightly over two million tonnes will disappear.

Newsprint will “have to go up or some people will be in trouble. The supply:demand balance is getting better. There is no new capacity except in the European Community. Specialty papers is one place where the market is getting stronger and supplying the specialty market will reduce the pressure on newsprint.”

However, like it not, the Canadian industry is related to the Asian economy. “W
e see the situation getting better so it will help North American businesses. We see newsprint getting better for that reason.”

Donohue has had a long experience working with publishers. In its Clermont mill, it has had or has partnerships with The New York Times, Knight-Ridder and Gannett. It bought QUNO from The Tribune. Its parent company is Quebecor, one of the world’s largest commercial printers. It also owns several daily newspapers in Quebec. Its founder was the late Pierre Peladeau, a flamboyant Quebec entrepreneur. The company is still family-owned.

Desbiens said the company manages its relationship with Donohue as a major investment. “They look upon it as an investment and they’re pretty pleased with the return they are getting. At first it was purely a supplier:customer relationship. Now, it’s mostly like a major shareholder. They treat us as an investment. They require certain returns and they ask us to act in relationship to that. There is an excellent relationship.

The board is very aggressive, Desbiens noted, looking at business as an opportunity with a constant eye on the potential of any business. “They are very supportive in what we do. We’re very fortunate to have a major shareholder like that. It’s not like many other corporations. They are very supportive of any acquisition or expansion as long as there is a good payback for Donohue.” Desbiens said this philosophy has pushed Donohue to perform better.

No looking back

In conclusion, Desbiens said he quite optimistic as Donohue heads into the new millennium. Markets are promising. The Asian problems are “diminishing”. He added that the company is well-positioned.

Any old equipment will be shut, e.g., Lufkin, TX, will shut three machines when the new paper machine is installed in late 2000. And, these old machines will be demolished, not sold. Baie Comeau will be revamped on a continuous basis. It just received a $100-million infusion for PM 1.

“We have state-of-the-art equipment. We have no lame ducks. Donohue can generate a lot of cash and is in a better position than anyone else. We don’t have to look at our backs all the time to see what’s coming after us.”


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