Fletcher Challenge Canada: Assets shed; focused on groundwood papers

By Drew Miller, Executive Editor, Pulp & Paper Company Profiles

The company became a majority-owned subsidiary of Fletcher Challenge Ltd. of New Zealand during 1987, and in September 1988, changed its name from British Columbia Forest Products Ltd. to Fletcher Challenge Canada Ltd. At the same time, FCC's management was consolidated with that of Crown Forest Industries Ltd., which had been indirectly wholly owned by Fletcher Challenge Ltd. since 1983. However, the parent company sold its stake in Crown Forest to FCC for $896 million. The deal, finalized in February 1993, involved ownership of the Elk Falls pulp and paper operations in Campbell River, B.C., and approximately 300,000 acres of private timberlands in B.C.

More recently, in order to remain competitive, the company has turned to asset sales including divestment of several wood products operations and its 45% interest in Donohue St.-Félicien Inc. for $120 million at the end of 1991, control of the Finlay Forest Industries newsprint mill, its B.C.-based Crown Forest lumber and plywood operations in 1992, its Crown Packaging Ltd. corrugated containers business, and most recently, its 51% interest in TimberWest Forest Ltd. in 1997, a move which formally exited FCC from the wood products business. FCC has decided to focus on its core business of groundwood printing papers.

Strategically, FCC has begun to shift its operations in B.C. to a more value-added product mix while pursuing opportunities for future growth elsewhere, most likely in the U.S. and offshore markets. FCC has expressed interest in selling its Blandin coated groundwood paper mill and/or possibly acquiring a company that makes uncoated or coated groundwood, including newsprint. More immediately, FCC was selected as the target company for pulp and paper labor negotiations and must minimize the potential disruptive ramifications of a strike which began in mid-1997.

TWO BUSINESSES BEFORE; NOW ONE. In 1996, FCC operated in two principal business segments: pulp and paper (79% of consolidated fiscal 1996 net sales), and wood products (21%). But, with the sale of TimberWest, FCC has narrow its focus to the groundwood papers market.

In late 1996, the company announced plans to split its pulp and paper operations into separate business units. The move was designed to improve financial performance in the operations and to better compete in those markets. As a pulp maker for both integrated mills and the open market, the company competes with producers that are solely focused on market pulp. "If you look around the world, we're up against pure plays," said Douglas Whitehead, FCC's president and CEO.

NEWSPRINT AND SPECIALTIES. FCC makes newsprint and groundwood specialties paper at mills on Vancouver Island: Crofton and Campbell River (Elk Falls). Both mills have received much capital of late in order to make them both more competitive, and to reduce their exposure to commodity-driven newsprint markets. Through asset divestments and product mix changes, FCC's capacity for standard newsprint production in B.C. has dramatically declined, from 1.2 million tpy (before the divestment of Finlay Forest in 1992) to an estimated 775,000 tpy currently.

The spiral also reflects capacity shifts from newsprint to specialty papers in B.C., including a $29 million project at Elk Falls in 1991 and a $15 million conversion of PM No. 2 machine at Crofton from newsprint to directory papers in February 1994.

The machine conversion at Crofton reduced the mills newsprint output to 375,000 tpy on two machines, and makes the machine the largest-and one of the fastest (3,100 fpm)-directory paper machines in North America.

The mill's PM Nos. 1 and 2 were installed in the 1960s. A third machine, PM No. 3, was installed in 1982 and has a 304 in. trim and 4,000 fpm line speed. PM No. 2 produces 105,000 tpy of recycled-content directory paper using deinked pulp from Newstech Recycling Inc., which has a long-term contract to supply about 70,000 tpy to FCC. Currently, the mill produces about 122,000 tpy of 40%-recycled-content newsprint and about 55,000 tpy of 25%-recycled-content directory paper. Total mill production in 1996 was 435,000 tons of newsprint and groundwood specialty papers.

A former was added to PM No. 1 in 1988, and PM No. 2 was rebuilt in 1990. The company announced a $31 million upgrade to No. 3 machine in late 1995. The new equipment will increase the speed of No. 3 machine, increased production capacity by 25,000 tpy, and enable the company to step up to lighter-weight newsprint grades. Once fully completed, Crofton's capacity will increase to 475,000 tpy of newsprint and directory paper.

In addition to machine improvements, Crofton has also experimented with product innovation such as making and selling 43-g newsprint on the domestic market. The rising cost of virgin fiber in B.C. was a key reason for considering 43-g. The 43-g is expected to take at least 10% less fiber than is used in producing the standard 48.8-g.

The Elk Falls pulp and paper mill in Campbell River on Vancouver Island is a Crown Forest Industries (CFI) facility brought under direct control of FCC in 1993. CFI, formerly Crown Zellerbach Canada, was acquired by Fletcher Challenge Ltd. in 1983. The mill is said to be one of Canada's best pulp and paper facilities.

The Elk Falls facility hosts three good-size machines, producing standard newsprint and, with the addition of a soft-calendered roll in 1990, manufacturing soft-calendered high-brightness specialty grades. PM Nos. 1 and 5, built in 1952 and 1982 respectively, manufacture approximately 400,000 tpy of standard newsprint. PM No. 5 has a Valmet Symformer with a 334 in. trim and 4,400 fpm line speed. The plant's No. 2 machine, originally installed in 1957, has a soft-nip calender and makes 150,000 tpy of uncoated groundwood specialty papers. Sheet quality is reportedly close to that of supercalendered "B" (SC-B). During 1996, the mill produced 491,000 tons of newsprint and groundwood papers.

One machine at the Elk Falls mill is dedicated to the production of containerboard and kraft papers. The capacity of this machine, originally installed in 1966, is approximately 100,000 tons, half of which is Metaliner, a lightweight linerboard product. The product uses lower cost sawdust rather than woodchips in the pulp, resulting in a smoother, more consistent surface which performs better on customers' converting lines. Production of whitetop grades tallied approximately 65,000 tons in fiscal 1996.

A third newsprint mill was the Finlay Forest plant in Mackenzie, B.C., which FCC relinquished in July 1992. The mill's financial performance, hurt by high transportation costs, was abysmal. FCC continues to operate a pulp mill at Mackenzie. A fourth newsprint mill project in Arizona has been officially dropped, following years of study.

COATED PAPER. FCC acquired Blandin Paper of Grand Rapids, Minn., in September 1977. As currently configured, Blandin makes LWC groundwood printing papers on three fairly small machines and one larger, modern machine (No. 6). All four of Blandin Paper's machines feature off-machine coaters, supercalenders, and winders. The large (306 in. trim), fast (over 4,000 fpm) PM No. 6 was installed in 1989 as part of a US$350 million project. The new machine has significantly increased annual production capacity, making Blandin the sixth largest producer of LWC in North America. Production in 1996 was 424,000 tons.

Blandin Paper owns 190,000 acres of timberland in Minnesota but buys more than 55% of its log needs through open-market stumpage purchases. Recycled fiber comprises 2% of the mill's furnish and is supplied from outside vendors. As of early 1997, there are no plans to add a deinking plant at the mill. However, the company has plans for a US$42 million upgrade for 1998 to replace the existing headbox and twin-wire former on the No. 6 paper machine. Capacity will increase by 42,000 tpy.

FCC decided in late 1995 to upgrade the Blandin mill by building a US$28-32 million coater on the No. 4 paper line. Completed in February 1997, the new coater, however, is not expected to add any new significant incremental capacity, but will improve production efficiency and allow penetration of higher-value specialty markets.

In a surprising move, FCC announced plans to explore "strategic alternatives" for the Blandin mill in early 1997. Among the alternatives FCC is considering in addition to a sale is a joint venture, merger, acquisition, or expansion. A decision of the mills future is expected before year-end 1997.

MARKET PULP. The company manufactures market pulp at three locations in B.C.: Crofton, Elk Falls, and Mackenzie. In early 1992, the company sold its stake in the Donohue St.-Félicien mill in Quebec. Market pulp shipments in the year ending June 30, 1996, totaled 527,000 short tons, excluding shipments to Blandin Paper.

The Elk Falls kraft pulp mill is a single-line mill which started operation in 1956. It is one of the largest manufacturers of "mini-chip" kraft pulp, with about 170,000 tons of annual capacity. The mill also has capacity to manufacture about 52,000 tpy of semibleached kraft pulp, which is used by customers to manufacture newsprint and directory papers. The mill manufactures two main types of pulp: Elk Prime mini-chip pulp and conventional long-fiber semibleached pulp. Elk Falls pulp production totaled 173,000 tons in 1996.

At Crofton, the bleached kraft pulp mill has two lines: the first started up in 1957 and the second in 1965. It is equipped with two continuous digesters and eight batch digesters.

In 1992, the mill completed a two-phase modernization designed to allow for better environmental performance, improve operating efficiencies, and raise capacity by about 77,000 tons to 352,000 tpy. The upgrade, which proved to be more time consuming and expensive than originally projected, cost over $300 million. Crofton's pulp production totaled 263,000 tons in 1996.

FCC's third pulp mill is at Mackenzie in interior B.C. The mill is a single-line mill which started operations in 1972. The mill produces bleached kraft pulp for the Blandin operation, as well as for sale on the open market. As a result of its remote location, the mill has access to high-quality fiber, producing one of the highest-strength pulps in the world. Integration with the adjacent Finlay Forest newsprint mill led to strong operating rates at the pulp mill and is expected to continue, even though FCC no longer owns part of Finlay Forest. Pulp production totaled 190,000 tons in fiscal 1996.

The company plans to commence production of mini-chip pulp at Mackenzie with a $57 million installation that will include a new sawdust digester. Construction began in September 1995, with production starting up by year-end 1996. The project adds 85,000 tons of mini-chip pulp to the mill's annual production capacity, largely offset by a 68,000 ton reduction in northern bleached softwood kraft long-fiber pulp production. This project, coupled with the Elk Falls mill improvement, will increase total Triax production by about 110,000 tpy, while long-fiber capacity will be reduced by about 104,000 tpy (68,000 tpy at Mackenzie and 36,000 tpy at Elk Falls).

WOOD PRODUCTS/TIMBERWEST-GONE. FCC has been exiting the wood products business with the sale of up to nine sawmills and wood plants since 1989 and the closure of several others. However, FCC formally exited the business when it sold its 51% stake in TimberWest, which controlled FCC's forestry, logging and lumber operations in B.C., in early 1997. TAL Acquisition Ltd., agreed to acquire TimberWest for $674 million. TimberWest has capacity for 685 million bd ft/year and 1.5 million m3 of woodchips at five B.C. sawmills.

Until the sale, TimberWest operated as an independently managed public company. During 1996, approximately 566 million bd ft were produced. The sale of TimberWest is consistent with the company's strategy of narrowing its business focus on groundwood printing papers.

LABOR STRIKES. Over the past few years, FCC has had its share of labor headaches. A 1992 strike at FCC mills lasted five weeks. During late 1994 and early 1995, FCC's paper production was severely disrupted by a seven-week union workers strike at the three B.C. pulp and paper mills. Estimated lost revenues for the key grades top US$130 million, with lost earnings near US$17 million.

In early 1997, FCC was once again chosen as the target company for the latest round of wage and benefit contracts throughout B.C. Ending weeks of negotiations in July, workers at the Crofton, Mackenzie and Elk Falls mills, struck, idling roughly 4,850 mtpd of pulp and paper that could tighten supplies of newsprint and market pulp. It was uncertain whether the strike would end by press time, as both sides contemplated a long confrontation. FCC could face newsprint losses each day of up to an estimated US$1.14 million (based on operating at full capacity).

FINANCIAL PERFORMANCE. In its fiscal year ending June 30, 1996, FCC reported earnings of $154 million, compared with year earlier earnings of $108 million (excluding a nonrecurring gain). Sales in fiscal 1996 were a record $2.4 billion, up from a record $2.2 billion in the previous year. Strong demand for pulp and paper products and record product prices in the second half of 1995 were the principal factor in the increase. However, aggressive inventory destocking by pulp buyers resulted in weak demand and significantly lower pulp prices in the first half of 1996.

For the first nine months of fiscal 1997 ending March 31, 1997, FCC reported a net loss of $20.8 million on sales of $1.44 billion.

AT A GLANCE:

Further information on Fletcher Challenge Canada and other companies in this series can be found in Pulp & Paper's 1996 Pulp & Paper Company Profiles: Performance and Strategy Analysis of North American Paper Companies.
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