Catalyst Paper Corp
President and CEO: Joe Nemeth
WSA: Good day from Wall Street, this is Juan Costello Senior Analyst with the Wall Street analyzer. Joining us today is Joe Nemeth, CEO and president of Catalyst Paper Corporation. The company trades on the Toronto stock exchange ticker symbol CYT and in the US CTLSQ. Thanks for joining us today there Joe.
Joe Nemeth: My pleasure.
WSA: So starting off, please give us a history and overview there of the company?
Joe Nemeth: Yeah, so Catalyst Paper is actually the amalgamation of three companies, probably familiar names for those that follow the space. MacMillan Bloedel, a BC Forest Products and Crown Zellerbach all with over a hundred years of history. And these companies came together over the last few years and of course those who follow us know we also made a major acquisition of Biron, Wisconsin and Rumford, Maine Mills early this year. The company’s profile is approximately two million tons of printing and writing papers and about half a million tons of market pulp. And the range of printing papers, the larger segment ranges right from newsprint called “Uncoated Mechanical Papers” right through the coated freesheet and coated one-sided specialty. What makes us unique is that we have manufacturing facilities in Western North America, the Midwest and the East, which gives us unique ability to provide for freight logical and very quick response times to our customers. And one of our sources of pride is of environmental sustainability leadership position, where we have formal partnership for the number of leading environmental group and truly viewed as a green light and proactive company in terms of whether the certification system or the social responsibility activities we take and the communities we operate. Our goal is pretty simple to provide superior customer service to our customers and treat them the way we treat our employees as true partners and business owners.
WSA: Great. And can you talk about some of the recent highlights and drivers behind the Q3 results?
Joe Nemeth: Yeah certainly, so we recently announced our Q3 results and our EBITDA for the quarter was just under $40 million and free cash flow that exceeded $23 million, which is a significant improvement over previous quarter’s performance. And they really reflect the major investments that we made in the first half of the year to strengthen our North American platform. And that was more than just major capital investment in the mills, it included major investments in IT, infrastructure and information systems as well us pulling together a much larger robust leadership team on the operating side and in the sales and marketing side. And so although we’re pleased with the results, we’re truly not satisfied, because we have ambitious key plans to further improve other business and the determination to realize them.
WSA: Great. And what are some of the key trends that you are seeing right now in the sector and how is the company positioned to capitalize?
Joe Nemeth: To give you a little kind of more granular details, specific detail on my previous response, which ties into your current question is, there’s no question the paper industry is a mature industry deals with commodities in decline. And we don’t see this changing in the near future. And so the way that you win in this type of business reality is being low cost plain and simple. And so this has been the focus to Catalyst since I returned to the company a little over two years ago; is implementation of what we call, Step Change Cost Reduction in all our facilities. And how this has been realized, I will give you two of the top proven performance improvement processes that we have been implementing. The first of the program called Opportunities for Improvement and this is really about getting employees – gauging the hearts and mind of employees to come forward with ideas in a formal vehicle to improve the business. Now this is not a new concept; everyone talks about ideas and engaging their employees and so on and so on. But I will challenge how many companies truly do that effectively and make it a formal program that truly gets the majority of employees engaged in participating? Let me give you a little bit of facts about our program and what I think is unique about it. The first is that we are fully endorsed by union leadership from day one. One of the challenges a lot of big industrial companies have is truly getting the hourly, unionized work force to number one want to and to be able to participate in these type of programs, we have that from day one.
This is not just a salary leadership in the company engaged, but getting all of the hourly employees. And in its first year, this program was launched in January of 2014, we had over 900 ideas brought forward and we had to capture over $16 million in annual savings. What’s exciting now was the company having doubled, with in size, with the inclusion of Biron and Rumford, we are now on track to over double that in terms of number of ideas and significantly increase the amount of annual savings. So this is not a small program, but a step change program in terms of engaging the hearts and minds of people, and seeing at the bottom-line.
The other program is the Formal Mill Revitalization Program, which is sitting down and doing an honest assessment of where each mill is on the cost curve and honestly you want to be on the low end of the cost curve, because that means you can make money even at the bottom of the cycle. When we get an honest assessment, initially of our mills, say average in the third quartile, which is the upper half of the cost curve, which means a lot of the times you are struggling to break even never mind make money. So we to the process actually change the leadership with every single mill, so I have brand new leadership at the mill. We sat down with them and said we need to set goals that move these mills from third quartile to first quartile and do it in less than 24 months. Now anyone that’s been in the industry would have said that isn’t just a difficult goal or an ambitious goal, that’s an impossible goal. What’s interesting and what I’m really excited about is that we are not just talking about it, we are doing it and a specific example I’ll give is Powell River. This is the first mill where we implemented the program about 12 months ago and what we’ve seen year-over-year is fundamental change in the mills cost structure, it is now positive on EBITDA basis making money, it has the best safety record in the mills’ history and we have buying and support from union leadership on the changes we are making. And this includes every area of the mill. Just to give you a sense of when I say mill revitalization, it’s looking at the asset configuration in some cases, shutting down assets and investing in others. It’s looking at the entire organization structure from salaries to manning and putting very aggressive targets and reducing the headcount so that you’ve got lower cost structure. It’s looking at fundamentally increasing machine productivity and speed goals, it looks at doubling energy island output and then doing major reductions in fixed cost spend so it’s every single area of the mill, very ambitious goals but very specific actionable items and then implementing them.
And so Powell River is well on the way to fully achieve its goals and what’s really exciting is all the learning, all the experience of Powell River, we are now rolling over to our other mills and in fact we’ve already launched formal programs of the two US mills mid-year this year and we’ll be launching the final two mills at the end of this year or early next year.
WSA: Certainly I think you basically covered most of the goals and milestones that are coming up for the next year, perhaps you can walk us through your background experience and talk a little bit about the key management?
Joe Nemeth: I think that’s a good question. My background is 100% in this industry, so some may say I’m crazy but this is the industry I know and love. So way out-of-school a little over 30 years ago, I joined the industry and probably also makes me unique is, I’m actually a forester by education and background working in the woods at first and then worked my way up through operations, first on the solid Woodside so lumber and plywood plant, then on the pulp and paper side, so I have an operating background, but my last 10 or 15 years before taking over as CEO has been very much focused on sales and marketing. So I guess I’m a little unique in that my entire history is in the industry, I understand its cradle to the grave and I have pretty deep experience in the two line functions of operations and sales and marketing.
My senior management team has a pretty similar background and one of the things that wasn’t necessarily planned from day one when I returned to this company and incidentally my first formal full-time job outside of government was with this company a little under 30 years ago. So I just started with Catalyst Paper as a management trainee and so I kind of need to come back into it the full cycle as a CEO two years ago. So that’s a little bit about my background.
The senior management team is fundamentally different than when I came here. When I came to the company it was a $1 billion company in revenues and we had eight senior executives. Today we have doubled the size of the company two billion and we only have six senior executives, so it’s a much leaner team. Every single one of those senior executives, are handpicked by me, and are newcomers. Not to the industry, but to the company. And similarly the five mill managers are all brand new as well. So I have a handpicked senior management team that I know, that I trust, that I’ve worked with before and what’s really exciting is when you get a team like that, that knows each other, trusts each other has experience together, you can accomplish some pretty amazing things.
WSA: And what are some of the key drivers there that you wish perhaps that investors better understood about the company?
Joe Nemeth: Yeah, I mean this is not a complicated business and what I’d say to people is two things, judge us by our results and our progress and then two, judge us by do we have a strategy and vision? Are we focused on the right things and more importantly things that we actually have high level of influence or control over? Because you and I can worry about foreign exchange and market pricing and government policy, but we really have no or little influence over those things. So legitimate concern is you’ve got to take into consideration and have if you will risk mitigation scenarios available, but there’s not much you can do. What you can do is focus on the things you can control, which is your cost and quality and productivity of your asset base and that is everything when you have billions and billions of dollars invested in your mills and then how you go to market. What are the products you sell, where do you produce them and sell them and how do you treat your customers? And for me that all comes back to how do you treat your employees, because if you treat your employees really well and engage their hearts and minds, guess what? They will probably have that same attitude and that same perspective, it’s going to show when they deal with customers or suppliers. So it’s all about focusing on the one or two or three things that have the biggest impact on your business that you truly can control.
WSA: Great. So once again joining us today is Joe Nemeth CEO and president of Catalyst Paper Corporation. The company trades on the Toronto stock exchange ticker symbol CYP and in the US CTLSQ currently trading at 2.40 a share Canadian, Market cap is about $34 million Canadian and $22 million US and before we conclude here to recap some of your key points, why you believe investors should consider the company as a good investment opportunity today?
Joe Nemeth: To me if we have a vision and a strategy, and we are delivering upon it and I guess everything is about timing. And so I might suggest today that as we have our success and going forward have more success, today’s stock price doesn’t reflect that yet, so it’s all about timing. If you believe in the vision and strategy we have, if you look at the results and believe that they can sustained and go forward basis in terms of the trend, is something that I would suggest people should take a second look at.
WSA: Well we certainly look forward to continue to track the company’s growth and report on your upcoming progress and we’d like to thank you for taking the time to join us today Joe and update our investor audience on CYP. It was great having you on.
Joe Nemeth: Thank you so much Juan.