It's not every day that a major Canadian pulp and paper company announces a capital investment worth $310 million.
On March 16th, 2012, however, Tembec did just that, with news of its plans to pour hundreds of millions into its Temiscaming, QC specialty cellulose manufacturing facility in order to increase its annual production of green electricity, reduce sulphur dioxide emissions, and ramp up its production capacity.
The project has been dubbed a 'game-changer,' and is expected to position the facility as one of the most competitive mills in the global pulp and paper market. Tembec President and CEO James Lopez spoke with Paper Advance about the project, the product and the people behind the dollar signs.
Paper Advance: In an era characterized by fiscal restraint, instances of significant capital expenditure, such as the $310M investment in your Temiscaming facility, are rare. Could you walk me through the decision-making process that confirmed this investment was a good decision?
Lopez: The overall investment is $310 million, and it represents the largest investment in pulp and paper in Canada within the last 15 years. It is the largest investment ever made in one facility by Tembec, so that provides a bit of order of magnitude both for us, and for the industry. We looked at a few things when deciding where to invest. Seeing as how we had not made many significant capital investments in the last 7-8 years, we had a lot of pent-up opportunity. But that said, there were a number of things, or criteria we looked at before deciding on this particular investment. We had to determine if the market fundamentals for this business line were strong in the long-term, meaning, we had to ask ourselves if the demand for these products was going to be strong in the long-term, and the answer to this was 'yes.' We also needed to determine if there was a risk of this product (specialty cellulose) being oversupplied by competitors. Because there are significant barriers to entry for this particular market, the answer to that question was 'no.' Lastly, we had to determine if this investment would allow for superior EBITDA margins with reduced volatility, and the answer to that question was 'yes.' Essentially, we knew the investment was a good idea, but it needed to be weighed against possible risks. A lot of investments can look good on paper, but can be subject to uncontrollable factors.
Paper Advance: Did the fact that the proposed investment has significant environmental benefits mean the support from lenders was easier to secure?
Lopez: What made this project particularly attractive was the fact that electricity is the cornerstone. In fact, most of the revenues we expect to generate, will be from electricity. While it isn't a new phenomenon, utilities are now willing to pay a premium for 'green energy.' So, we knew there was a good market for this green energy, but the real lynchpin was our ability to secure a lucrative contract with Hydro Quebec. It's a 25-year contract for $106/megawatt, and this figure is indexed for inflation for the length of the contract's term. No other aspect in the forest products industry could offer this kind of guaranteed revenue. I only wish the rest of my business lines were like that!
Paper Advance: What will this investment mean for Tembec's labour force?
Lopez: Essentially, it will mean preservation. Temiscaming is an old facility, built in the early 1900s. There are parts of that mill that are reaching obsolescence. Geographically, the facility is in quite a remote location, and it serves as the economic hub for the region. It creates a lot of spin-off jobs in the forests and the surrounding community. Currently we have about 950 people on site; 100 of these are corporate staff. We don't expect any material changes in the labour force at the mill because of this investment.
Paper Advance: Does the company anticipate further capital expenditures in the near future?
Lopez: We're in the process of making a number of other investments and do expect to make further ones in the near future. A lot of these centre around energy. We're establishing an electricity turbine in France, an anaerobic waste water treatment plant in Matane, QC, and we're also making an investment at our pulp mill in BC. One of our sawmills in Quebec currently burns oil to dry lumber. This is a very expensive process and so we are making an investment to use biomass for this drying process instead.
Paper Advance: With the constriction of Canada's pulp and paper industry, how important is it for Tembec to develop speciality, niche markets? How has its product offerings changed in light of this over the past five years?
Lopez: It's critical. The industry is changing considerably. Profits are now being found in the food additive, chemical additive and pharmaceutical industries. They're being found in computers, in explosives, and in televisions, not in pulp and paper anymore. Not in buying fibre.
Because the capital investments required are so significant, and the barriers to entry so high for specialty markets, even once you spend the money, it can take years to develop and refine your product and so you need to make certain that your product offering is going to be well received by the market. We've done that with the high-tech, specialty cellulose market.
Paper Advance: Investments of this magnitude often imply collaboration with the public sector; Hydro Quebec in this instance. How has this requirement changed the way you do business?
Lopez: I don't think it has. When it comes to energy, collaboration with the public sector is a common occurrence, but I think that's about it. We often see public-private collaboration in trying to start up old mills, and this fails over and over again. This is business, and we need to be able to compete on an open market. When the needs of government converge with what industry can provide, then collaboration can make sense, but I'm not a proponent of outright giving, or getting, large government grants to do business.
Tembec is a manufacturer of forest products – lumber, pulp, paper and specialty cellulose – and a global leader in sustainable forest management practices. Principal operations are in Canada and France. With annual sales of approximately $2 billion, Tembec has 4,000 employees and is listed on the TSX (TMB).
About James Lopez
After 16 years in progressively senior positions at Tembec, James Lopez was appointed President and Chief Executive Officer in January 2006.
Mr. Lopez began his career more than two decades ago at Synergetics, an international consulting firm, where his client base included a diverse group of companies in the manufacturing sector, including Tembec. He subsequently accepted a management position at the Kellogg Company with responsibility for the construction, commissioning and ongoing operation of a major food-processing facility.
In 1989, Mr. Lopez joined Tembec as a Manager in Corporate Development, where he participated in or directed numerous projects related to strategic planning, business development and organizational development. He was appointed Vice President and General Manager of the Chemical Products Group in 1994, followed by Vice President, Specialty Products Division of the Forest Products Group in 1996.
Three years later, in 1999, Mr. Lopez was asked to take responsibility for the strategic and operational management of more than 40 million acres of public and private woodlands as Executive Vice President of the Forest Resource Management Group. This position included managing the supply of fibre to the Company's various operating divisions. In this position, Mr. Lopez worked closely with Tembec's previous President and CEO to significantly raise the Company's corporate sustainability profile. He led the Forest Resource Management Group to a number of landmark achievements in forest certification and conservation, which included playing a key role in establishing the Ontario Living Legacy initiative and Ontario Forestry Accord.
In August 2003, Mr. Lopez was appointed Executive Vice President and President of Tembec's Forest Products Group, which put him in charge of the Group's overall direction, including Forest Resource Management. He held this position right up to his appointment as President and Chief Executive Officer.
Mr. Lopez has been active in a number of industry trade and technical associations. He is a past Chairman of the Board of Directors of the Ontario Forest Industry Association (OFIA), the Forest Engineering Research Institute of Canada (FERIC), and Woodworks, an organization that promotes the use of wood in residential and commercial construction. He also holds a seat on, and is Chairman of, the Board of Directors of the Forest Products Association of Canada (FPAC) and is a Co-Chairman of the Bi-National Softwood Lumber Council between Canada and the United States. He is a member of the Board of Directors of FP Innovations and he sits on the President's Board of Advisors for California University of Pennsylvania.
Born in Beaver Falls, Pennsylvania, in 1959, Mr. Lopez is a graduate of California University of Pennsylvania with a B.A. in Economics.
A Tour of Tembec's Temiscaming Operations