Interfor CEO Duncan Davies’ workday begins in the B.C. forest company’s downtown Vancouver head office at 6:30 a.m. with a few quick calls to senior managers in its British Columbia and U.S. operations.
He asks them: is there anything that he should be worried about?
Publicly traded Interfor (TSX:IFP) has grown over the last decade to become one of the five largest lumber producers in North America with 18 sawmills in four distinct regions: the B.C. coast, the Interior, the U.S. Pacific Northwest and the U.S. South. Over the phone with his managers, Davies wants to know what has changed in each region, what the tone is in the lumber marketplace and what’s on the minds of his senior people.
It’s not that he’s a micromanager – far from it. Davies wants senior leaders to be free to accomplish their goals. But converting logs to lumber is one of the most volatile businesses in North America. There are always forces at work that could drive Davies’ ship off course.
Davies has been chief executive at Interfor since 2000. He has led the company in its transformation from its coastal logging and sawmilling roots to a pure-play lumber producer, turning out three billion board feet of lumber a year and employing 3,400 people.
He is 66 years old. He and his wife, Donna, have two adult children, but he’s not thinking about retirement. He said he’s having “way too much fun.” Interfor has a succession plan based around younger executives within the organization, but for now, it is Duncan Davies’ company to run.
Interfor was in a death spiral when he first came on board as a consultant in 1999. Today it is one of the best-positioned Canadian forest companies to weather both the looming softwood lumber battle and the beetle epidemic that destroyed most of the Interior pine forest. Its Interior mills are in regions least affected by the beetle. And two-thirds of its operations are in the United States. U.S. assets are not just a good investment opportunity, Davies said. They are a hedge – a balance to counter potential American trade action on lumber.
Davies built Interfor around finding the balance between often contradictory forces, whether it was hedging against potential softwood duties, meeting the needs of investors or operating on public land where there are multiple social constraints.
Davies always wanted to be in the forest products business. It was the biggest industry in B.C. when he was young. His models were people like forestry industrialist H.R. MacMillan. He was born and raised in Victoria, received his degree in economics at the University of Victoria and went to graduate school in forestry at the University of British Columbia. He studied under B.C. forest economics icon Peter Pearse, and after university he was seconded to the staff of Pearse’s Royal Commission on Forest Resources.
“It was a seminal time for me,” he said of working for the commission. “It was an opportunity to work with some incredibly bright people focused on the future of the industry, and on the relationship between forest policy and attracting investment capital into the industry, while trying to balance off those interests against public ownership of the resource.”
Those principles have guided him ever since. Building value is what Davies and Interfor are about. To achieve it, Davies has crafted a strategy based on balance. He understands the perspective of investment bankers because he has been one, he understands mill operations because he worked in mills, and he learned about public policy from Pearse. He brings all these perspectives to a decision.
After the royal commission, Davies joined the Canadian Imperial Bank of Commerce, where he advised corporate lenders on forest products matters, learning in the process how bankers think about the forestry business.
He left the bank for the BC Resources Investment Corp., living in northern B.C., where he worked on restructuring that organization’s troubled Prince Rupert pulp mill and associated sawmills. He learned how things work on the ground.
In 1987, he went back into the investment sector, specializing in project financing and mergers and acquisitions within the forest products sector for Pemberton Securities. He learned to balance the interests of corporate lenders, who want certainty that their investments are sound, with those of shareholders, who seek growth.
Davies has co-owned a sawmill in Campbell River, was vice-president of corporate development at Pacific Forest Products (TSX:XCF) and has run his own consulting business. Bill Sauder, founder of Interfor, hired him as a consultant in 1999 when Sauder came out of retirement to stave off Interfor’s collapse. It was bleeding money at the rate of $1 million per week, and its lenders were deeply worried.
Sauder knew Davies from his earlier background in banking. That knowledge proved helpful in talks he and Sauder had with their lending syndicate. They used excess inventory to pay down debt and cut $100 million a year from operating expenses, returning the company to profitability. Davies joined as president. In 2000 Sauder retired, and Davies became CEO.
Davies brought a financial lens to Interfor, and an operational understanding of how to create value. RBC Capital Markets analyst Paul Quinn said Davies is not typical of CEOs with an investment banking background. Such executives usually are all about growth, Quinn said, and don’t pay attention to costs as much as they should.
“He’s been a surprise,” Quinn said. He made mistakes early on – buying coastal lumber company Primex only to shut its operations down a few years later.
“But think about where he has come from. He was mired in the coast of B.C. with all sorts of environmental issues, and now his platform is two-thirds production in the U.S. – a pretty competitive platform. He has really turned things around.”
Davies has differentiated Interfor from others in the lumber business by establishing strict financing and operating discipline.
On the operating side, that has meant modern, efficient facilities with a solid management team and workforce located in regions where there is a high-quality timber supply. On the financing side, Davies imposed strict limits on how much debt he is prepared to take on relative to the amount of equity capital. He won’t buttress high returns on equity by taking on too much debt.
“You can’t predict what’s going to happen with markets, or with currency or with all these other things,” Davies said. “So finding the balance between the amount of leverage in the business versus the amount of debt in the business is something that’s really important. What we have found over the years is that a relatively conservative approach on leverage makes more sense in a highly cyclical and unpredictable business.”
Davies also won’t risk the company by holding on to underperforming facilities. Within two years of venturing into the U.S. in 2004, he closed operations there. On the B.C. coast, he has closed five of Interfor’s seven sawmills, believing that Interfor was too exposed to risk over timber supply issues. Davies said he has not abandoned the West Coast; he is just taking a long-term approach. After all, it took 20 years to achieve the landmark Great Bear Rainforest agreement. As First Nations become more involved in the forest sector, new opportunities for investment could open up.
The downsizing of the coastal business has been matched by growth in the Interior, where Interfor invested $150 million in rebuilding its Adams Lake sawmill and a further $90 million in upgrading mills at Castlegar and Grand Forks. Interfor likely has more capital invested here now than ever before, Davies said.
He sees the biggest opportunity for growth in the U.S. South, where Interfor has nine mills. They are in good timber baskets and there are opportunities to improve their performance.
Davies said he isn’t surprised that the softwood dispute has returned – just disappointed. Interfor may have mills on both sides of the border, but there is no question as to which side he is on.
“I don’t know how this is going to unfold. We have structured our business in a way that gives us some protection against that. But I am not at all interested in sacrificing one portion of my business [B.C. mills] for the advantage of another. I’d like a fair and balanced arrangement that works for well-run businesses on both sides of the border.”