Kevin Clarke spent the last year wrenching his Richmond-based paper company from one of the worst downturns in corporate history.
The chief executive of Catalyst Paper (TSX:CTL) has done exactly what he said he’d do when took the job last summer: jump-start productivity, eliminate the rumour mill among employees and improve market share.
But luck hasn’t been on his side.
“Unfortunately, in the second quarter, we had two sizable fires that knocked us out of business for the equivalent of about 31,000 tonnes [of production],” Clarke recently told Business in Vancouver.
In April, a fire broke out at the company’s Snowflake mill in Arizona.
Aided by 40-mile-an-hour winds, the blaze quickly spread across the mill’s storage yard and wiped out 14,000 tonnes of recovered waste paper.
Then, in May, “human error” caused a second fire to rip through Catalyst’s Powell River mill, resulting in $1.6 million in losses.
Worse yet, the company had to eat the cost of the fires because they fell below an insurance policy deductible of $2 million.
On top of that, a stronger loonie further cut into profits in the first and second quarter.
All told, Catalyst posted a net loss of $70.5 million in 2011’s first six months.
“I’m very disappointed,” said Clarke.
“Take away the things we can’t control, which are currency [and] price of recycled materials, and look at the operational efficiencies that we left on the table, that I think in the first quarter amounted to $8 million or $9 million, and in the second quarter was … $20-plus million.
“So if I told you I was happy to leave $30 million on the table, you should shoot me.”
The company’s stock has since retreated to $0.11 per share from a 52-week high of $0.55 on January 26.
Mike Richmond, a forest products analyst at Salman Partners in Vancouver, believes the company is facing “huge headwinds.”
“It’s a tough business,” said Richmond. “And the problem is they’ve got these big assets that are not running full, so they’ve got high fixed costs, their end markets aren’t great and they’re getting squeezed on the inputs.
“I don’t know how you turn it around.”
Clarke, meantime, knows better than most the challenges his business faces, which is why he’s spent a lot of time in the last year getting the company’s paper machines up to snuff and increasing market share with key customers.
“Our inconsistency in delivery is one of the frustrating things that I am personally working on,” said Clarke.
“That’s why all the mill managers are reporting to me directly.”
The company has also struck a favourable labour agreement with workers at its Snowflake mill, improved its safety performance and approved a plan to increase pulp capacity by up to 35,000 tonnes.
Catalyst is also reviewing alternatives for its US$250 million of 7.375% senior unsecured notes to get its capital structure back in line.
“I think we’ve made great progress, and the headwinds we have, we have to find a way to overcome,” said Clarke.
But Catalyst isn’t the only pulp and paper company facing challenges.
Richmond said the stronger Canadian dollar has limited the ability of pulp producers to cash in on what have been record pulp prices, topping US$1,040 per tonne during the second quarter.
For Canfor Pulp Products (TSX:CFX), the strengthened loonie coupled with higher production costs “combined to offset the record … list pricing seen in Q2”, Richmond wrote in a research note to investors.
Still, Levi Sampson, president of Nanaimo’s Harmac Pacific pulp mill, said the recent price spike buoyed profits for his employee-owned mill in the second quarter despite the exchange rate.
“Every cent the dollar goes up has a huge impact on the operation,” said Sampson.
“But we’re still profitable at these levels, and I would suspect most other pulp companies in B.C. are as well.”