Fortress Paper CEO looks for opportunity where others see problems, “Paper Profit”. The Canadian forest and paper products sector is far away from it’s peak. Companies have been hit hard by the financial crisis, penalized by the strong Canadian dollar, and crippled by balance sheets that are over leveraged. However, out of challenging times, emerges opportunity for Canadian business. Chad Wasilenkoff, CEO of Fortress Paper Ltd. — which operates a banknote business, a wallpaper business and a pulp mill and Financial Post reporter Jonathan Ratner sat down for lunch to discuss how he is capitalizing the market.
Q The economy is on everyone’s mind these days. Are your businesses equally sensitive to growth?
A Our banknote business generally could be considered recession-proof. Banknotes are growing at 4% per year and they’ve done that for decades. Even in a financial crisis there is a little bit of noise, but not very much. Countries used to change over their banknotes every 14 or 15 years, but with the advent of colour photocopiers, scanners and digital processing equipment, they are changing their series every seven or eight years. There is also quite a bit of growth globally in emerging economies. They are all moving up in income status, but they still buy their fruits, vegetables and sandals off street vendors. That means more and more ATM machines on street corners, which is actually a driver for our business.
Q What about the wallpaper business?
A We had a few bad months, but we found it was just our customers reducing inventory. They were uncertain, but once they ran out of product, they quickly came back and had to order more. Historical data show that wallpaper also happens to be somewhat recession-proof. During the recession, people were forced to stay in their existing homes a little bit longer. But they still want to improve their surroundings, so they are do more renovations.
Q What’s the status of your third business?
A We’re going through a major conversion to make dissolving pulp at the mill we bought in Quebec. It will be shipped over to China, go through more conversion processes, then ultimately be made into rayon. The finished product is a substitute for cotton. Typically, rayon trades at a premium to cotton because it is a better product. However, the cost structure is significantly lower than cotton, so there is always going to be some margin whether it is for us, or the rayon producers. We’ve actually pre-sold about 80% of our production — half on dissolving pulp spot prices and the other half on the rayon price. So wherever the margin goes, we’ll be sharing in it fairly consistently.
Q How do you deal with fluctuating commodity prices?
A While there are no synergies between the businesses, we end up with some natural hedges, which helps. For example, when cotton prices take off, it hurts our banknote business. But at the same time, our dissolving pulp — being a replacement for cotton — does exceptionally well. Similarly, as prices go up it’s great for our paper pulp mill, but it hurts margins at our wallpaper division. When cotton spiked at the start of the year, the specialized cotton we use in banknotes was up 350% in the course of four months. It is very, very difficult to try to maintain any margins when you’re bidding on a deal today, and you’re underwater by the time you get the cotton.
Q When you make a pitch to investors, how do you characterize Fortress?
A We’re a growth story and we’re very opportunistic. There are very few synergies between our different segments and businesses, but the similarities are that they have very high barriers to entry, a good macro environment in terms of the growth profile, and supply and demand drivers. I always look at the industry first, then I go and try to find the best assets available in the world. I’m always interested is growing out each of those divisions individually, but at the same time they are also for sale at all times.
Q What is your experience doing business in China?
A I have a strong focus on China. I have been doing business there for about eight years and go there at least once a quarter. But I learned some hard lessons during the first couple of trips. I went over with a Western business style, but never got those return calls. So I’ve since hired cultural coaches to help understand how the Chinese do business. It’s all about developing relationships and trust.
Q How did you break into the ultra-exclusive banknote business?
A It was by far the most challenging investment I’ve ever had to make. It is a very secretive industry. They obviously don’t want a lot of publicity or press in terms of people knowing what is going on with security features and things like that. You have to have clearance. Once we owned a mill and we were part of this closed group, people still didn’t like to talk. A lot of the companies have been around for decades and are still family-owned. The customers — national banks — are very slow, conservative and methodical. You may have a great product and the right price, but everything needs to be absolutely perfect and the timing must be right. Once we develop the relationship and help cultivate it, it is great business because it is very sticky. The national banks are reluctant to change once you’re their supplier.
Q What is the biggest misconception about this industry?
A Most of the forestry sector is going through tough times. They spent a lot of capital and they are high-cost producers, so it is difficult to compete. We get thrown in with forestry companies where everyone says nobody can make money. But we are one of these unique companies in that we are coming in late, picking up assets at next to nothing because nobody else is looking, then turning them around. We have a longer growth profile, so we are not in a hurry. We’re also always looking to be the lowest-cost producer in anything we get involved in, so we can ride out these trends. I don’t know when forestry is going to turn or come back in vogue — if it ever will — but in the meantime we have to be prepared for a long, hard slog through these different businesses.