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Western Forest Products: Major player on B.C. Coast

Western Forest Products is now the major player in the forest industry on the B.C. coast, being both the largest lumber producer, with production capacity of 1.1 billion board feet, and the largest tenure holder on the B.C. Coast. Through a very strong focus on margin, the company has turned in an impressive financial performance in the last several years, in spite of some very tough lumber markets. It has also launched a $125 million capital plan making strategic investments in its facilities, including new autograding equipment.

Clearly, Western Forest Products is the major forest industry player on the B.C. Coast. The company has 10 manufacturing facilities in the southern half of Vancouver Island, including the Chemainus sawmill (above) and eight timberlands operations on central to northern Vancouver Island, the Sunshine Coast, and Mid-Coast on the British Columbia mainland.

As part of our ongoing interviews with forest company leaders, Logging and Sawmilling Journal Editor Paul MacDonald sat down with WFP President Don Demens to talk about these upgrades, and how the company has turned things around.

Logging and Sawmilling Journal:

You took over as President of Western Forest Products this past summer. What are your top priorities for the company?

Don Demens:
I’ve been with the company since 2009, so it’s not like I’m brand new and we’re going to do something dramatically different—we will build on the results we have accomplished and remain focused on continuous improvement. We have been successful with a number of strategies, but I think there are three key areas that we will continue to focus on: one is building a culture of safety because a safe operation is absolutely critical; the second is matching production to market demand with an eye on managing our working capital; and the third is changing our business focus to a margin focus. In every part of our business we look at what we can do to maximize margin. It’s what got us to where we are today, and will continue to deliver results for our business going forward.

LSJ: You’ve talked about a demand driven market. Do you folks buy into this Super Cycle theory for lumber markets?

DD: If you take a step back, we see an improving U.S. housing market and lumber demand. Experts will tell you that they expect to see a doubling in U.S. housing starts over the next couple of years. We’re not experts at forecasting housing, but we believe that demand is going to improve in the U.S. over the next few years. China has also developed into a very good market for lumber products and we are excited about the future there as wood frame construction increases. Not to be overlooked, our traditional markets, such as Japan, continue to offer great opportunities. As the U.S. comes back, and China increases its demand for wood products, the markets are going to get better. Exactly when is hard to say, but gradual and steady improvement is what we forecast and we are positioned to take advantage of the markets when it is time.

LSJ: The housing starts seem to be coming along a lot better than some people expected.

DD: They are better, but you have to look at history. They are still at only 60 per cent of where they should be from a demographic point of view. There is still a ways to go until we see a robust housing market in the U.S. It’s hard to predict the exact timing. That’s why we focus on matching our production volumes to what the market will accept. We focus on what we can control and are positioned to respond to the market when the time is right.

WFP’s Don Demens

LSJ: Can you talk about Western’s $125 million strategic capital plan?

DD: We’ve announced two specific projects we’re working on right now.

Our first project is the $38 million upgrade of our Saltair sawmill, on Vancouver Island. The project is on time and on budget with $24 million committed and contractors selected. Our project team is preparing the site for arrival of equipment and installation of the stacker over the Christmas shutdown. This $24 million first phase includes a full upgrade to the edgers, trimmer, sorter and stacker for the mill, and will be complete at the end of the second quarter of 2013.

We’re also working on auto grading technology on the Coast for installation in our Alberni Pacific Division mill. Autograding is not new to the industry. B.C. Interior operators have been using it for years, very successfully. It has not been used extensively on the Coast largely due to the challenge of detecting defects inherent in our coastal species. We’re working on developing a system that will effectively do that. On the Coast we have a wide range of grades, so having an automated grading system that is accurate will allow us to improve efficiencies. This is an exciting opportunity. There will be more announcements over the next few months on how we are directing the capital. We take a lot of care in identifying the best opportunities and this takes time.

LSJ: What needs to be done to the company’s sawmills to make them competitive?

DD: We are very cognizant of costs and we manage them well. Our sawmill investments will be around driving efficiencies, making products our customers want and identifying where we can maximize production of products that deliver the best margin.

We believe continuous improvement enhances competitiveness. We have a margin improvement plan at all of our mills because we believe we can improve upon whatever we do. So every day our guys are out there working hard at finding efficiencies and reducing costs at each operation. This process extends to our timberlands group as well.

The second part is the strategic capital plan, which is designed to improve efficiencies and allow us to make the products that make us the most amount of money.

In terms of being competitive, one thing people may not appreciate is that there is a third leg to the stool for us. This is our ability to target specific log sorts, lengths and diameters for our mills to produce specific products, which is a tremendous opportunity. We have a flexible operating platform at our mills; we can target specific logs in our timberlands and we can bring them through to make specific products, product lines or run programs. The ability to target the right log to the right product is another way for us to increase competitiveness.

LSJ: With the Flexible Operating Platform, how does that work?

DD: In our individual mills, we can make different sizes of lumber and we can pull different grades and that distinguishes us from other suppliers. We can also run similar programs at multiple mills. Wherever the market demand is, we are able to move volumes back and forth. For example, if three or four inch product is a very hot item, we can respond by making more of it at a number of mills. We base production on the market that affords us the best opportunity for margin.

LSJ: How has the company been able to get through this downturn?

DD: We reduced costs, managed working capital, targeted the product lines that made us money and we focused on matching our production to market demand—that’s very important. Where the markets allowed us, we operated the mills, allowing us to further reduce costs by increasing utilization. We also completed the sale of some non-core assets.

All of our mills are running today, and we’d like to see more volume run through them, and we have the capacity to do that. However, the markets aren’t there yet.

We also have margin improvement in place, which has allowed us to get our teams together to look at where we can achieve gains throughout the company.

LSJ: Can you provide details about how things have changed?

DD: We are now focused on maximizing the margin from every log we harvest. Our coastal forest provides a diverse fibre timber supply, with five different species, from small logs through to very large logs, and varying grades. We take those sorts and where we believe we can internally deliver the maximum margin, we will saw them in our mills, and where we believe there are other alternatives, we will sell them into the log market.

One of the big differences on the Coast is that there is an active log market that allows us to participate in businesses that we’re not directly invested in, like the veneer business, where we supply peeler sorts to the veneer companies on the Coast. It provides another degree of diversification for our business. We target the logs to where they provide the best margin and value to our company

Since 2008, we have reduced our debt from $230 million to $30 million, so we’re exiting this very difficult recession with a much better balance sheet than when we started. This involved a tremendous amount of work, but we’ve had great support from our main shareholder, Brookfield, and from our employees.

Generally, we are a much leaner company today. We operate at significantly lower inventory levels than we ever have in the past, and we’ve grown sales volume by about 50 per cent, since things bottomed out. It’s pretty encouraging stuff.
All of this has allowed us to deliver twelve straight quarters of positive earnings in a really tough market environment.

“Over the next few years, I think we’re going to see a real uptake in wood frame construction in China and that’s going to be a real benefit to our business.”

LSJ: The Coastal forest industry has seen a steady decline over the years. Is this the new business model for the Coast?

DD: We believe the Coast is a very good place to do business. It affords great opportunities because of the diverse fibre resource, you can differentiate your products, maximize margin opportunities, and the products and the species are in demand around the world. We also believe Western’s integrated business is a model for the Coast. We have the scale and unique ability to utilize the entire profile and attract and maintain the infrastructure required to be globally competitive.
The industry has weathered pretty severe times, though. It’s important for people to note that the operating environment still remains challenging. Our lumber markets have shown improvement. Log markets, which improved in 2011, have retreated a little bit, and the value of our pulp logs and chips have been negatively impacted by falling pulp prices. So there are still challenges out there.

For the Coast to see some really great returns, you need to have all the segments working. We believe things are going to get better and the recent improvement in lumber pricing provides us with greater confidence. We think that the B.C. Coast is a great place to do business and it will get a lot better as these segments come around. We’re really excited about the future.

LSJ: What about the tenure situation?

DD: In terms of what can improve the viability of the Coast, for us the key is tenure security. Since 2004, our AAC has declined by about 40 per cent. Our scale of investment on the Coast and our utilization of the AAC is of benefit not only to our company, but to a lot of companies. We have more than 50 domestic log customers, and we have more than that in domestic value-added customers. So, insuring we have security of tenure to support our investment and the coastal industry is paramount.

LSJ: What’s the company’s view on log exports?

DD: A lot of people are concerned about log exports. We take a very measured approach; log exports account for about 12 per cent of the volume we handle. The vast majority of that comes from areas that are logistically challenged—where transportation costs make it very difficult for you to go in and economically harvest.

As markets come back, we fully expect those logs to end up back in our mills. Also it’s important to note that our log exports actually drive more volume to the domestic market. In 2011, we increased our harvest by 1.1 million cubic metres, and our log exports went up 350,000. But that means we supplied an additional 750,000 cubic metres to our mills, and our domestic customers’ mills. It’s that balanced approach that supports local manufacturing and we are demonstrating it.

LSJ: What is your take on the China market?

DD: We increased our lumber volumes in China as demand in the US market declined. Most of the volume we supply is commodity lumber. We have focused our efforts on the Chinese market not only because they take commodity lumber, but they will take higher value specialty products as well. So we sell cedar as well as appearance-grade hemlock for a variety of applications, including doors and windows.

On the commodities side of the business, we’re excited about all the work and the resources the industry and the B.C. Government and federal government have put into the Chinese market to showcase the opportunities of wood frame construction. Over the next few years, I think we’re going to see a real uptake in wood frame construction and that’s going to be a real benefit to our business.

As the middle class grows in China, we expect to see an increase in the demand for our higher value products as well. Longer term, we see the market continuing to grow.

LSJ: Is China the huge opportunity that some people paint it to be?

DD: The economy in China continues to grow and there is a huge and growing population. We think it’s a great opportunity—you have a market that did not really exist in China a few years ago and today it is key part of our future. For the wood products business, you can see a pretty bright picture. Keep in mind that with all the talk about China our traditional markets like Japan and our Western Red Cedar lumber segment continue to offer excellent opportunities.

LSJ: The B.C. forest industry has been hit with two tragic fires in the last year, and sawmill dust is being looked at as a possible cause. Can you talk about the recent initiative the industry has announced with safety dust audits?

DD: We are part of the CEO committee on this issue. We’re all committed to making sure our workplaces are safe. We are working hard to identify ways to mitigate or reduce the amount of dust in our operations. We expect to see an industry protocol set up, and we expect audit procedures developed where third parties will be able to come into our mills and audit to confirm we have undertaken appropriate measures to reduce hazards. From our perspective as a company, all of our mills have been inspected, through BCWorkSafe, and all of our mills are compliant. We also have dust protocol measures at each one of the mills to ensure we are managing this hazard

LSJ: You’re the fourth generation in your family to be involved in the forest industry. How has your family been involved in the coastal industry?

DD: My family has been pretty involved in the coastal forestry business. My father, uncle and grandfather operated sawmills on the Coast for years. My great grandfather was involved in the industry in the eastern U.S. My two brothers are also in the business. As for me, I worked in one of the pulp mills on the Coast for a summer job then went right out of university into a management training program in the industry in Northern B.C. I was fortunate to have had the opportunity to manage a sales office in Japan and then returned to BC to manage both mills and marketing. I’ve been in the business for 25 years and it has been a great business to work in.