Tembec Inc. Business Information, Profile, and History

Company Perspectives:

Tembec's corporate mission is to be a low-cost, profitable integrated forest products company converting forest resources into innovative and competitive quality products for customers while protecting the environment and creating positive long-term social, cultural and economic benefits for the region and its people, employees and shareholders.

History of Tembec Inc.

With headquarters in Montreal, Quebec, Tembec Inc. is a publicly-owned integrated Canadian forest products company involved in four product groups. Tembec's forest products group offers a range of commodity and value-added forest products, including softwood and hardwood lumber, pine lumber, oriented strand board, hardwood flooring, and engineered wood products. The group maintains more than 30 manufacturing facilities located in Canada, the United States, South America, and Europe. The pulp group produces kraft pulp, used for printing and writing, tissue and toweling, and the making of paperboard; high yield pulp, suitable for the manufacture of coated papers, cards, construction paper, as well as tissue, toweling, and boards; and specialty cellulose pulp, used in textiles, pharmaceuticals, food additives, industrial chemicals, nursing pads, sanitary napkins, non-woven products, diapers, and other absorbent products. The Tembec Paperboard Group produces fully bleached coated paperboard used in commercial printing, packaging, high-impact graphic corrugated boxes, litho-laminated packaging, and point-of-purchase displays. The paper group manufactures newsprint, specialty printing paper used in book publishing, light-weight coated papers used in magazines and catalogs, and converted specialty paper used to make such items as cups, coffee filters, file folders, and crepe paper suitable for medical and industrial applications. All told, Tembec operates more than 50 manufacturing plants and generates annual sales in excess of C$4 billion.

1970s Origins from the Shutdown of a Pulp Mill

Tembec was founded in the small town of Temiscaming, Quebec, a single industry town wholly dependent for the previous 50 years on a pulp mill owned by a multinational corporation, Canadian International Paper Company. Late on a Friday in 1972, the company issued a press release announcing that the mill would be closing. Within three months 500 people were out of work, and the town itself was on the verge of collapse. Heated demonstrations resulted, but some of the employees took a different approach. Believing that the company had made a mistake and that the mill remained a viable business, they launched an effort to buy the operation and operate it on an employee-run basis. Spearheading this small group of determined men was the plant's 33-year-old general superintendent, Frank Dottori. Born in Timmins, Ontario, he earned a chemical engineering degree from the University of Toronto and had gone to work for Canadian International Paper in 1963. Three years later he took a position with Texas Gulf Sulphur, then returned to his former employer, assigned to the Temiscaming facility as a control engineer. The mill manager, Jim Chantler, became a major influence, convincing Dottori and other young engineers that they needed to understand business as well as science. After the plant was closed, Dottori joined forces with other ex-employees, Jack Stevens and George Petty, to find a way to buy the business as an employee-owned enterprise, a rarity at the time. They later recruited Chantler as Tembec's fourth founder.

In July 1972 Tembec was incorporated as Tembec Forest Products Inc., to acquire the pulp mill. However, its owners were more interested in demolishing the plant than selling it. The matter received national publicity as the demonstrations continued and the Quebec government became involved, supporting the employee takeover, as did the Canadian Paperworkers Union. The law was also changed to allow union members to serve on a company's board of directors. After more than a year of effort, the former employees were finally successful, buying the pulp mill for C$2.5 million.

The sting of being fired by press release, and being treated like numbers instead of people, led the new management team to take a groundbreaking approach in building the company. Because Tembec was employee owned, the workers developed a greater sense of pride and were motivated to be more innovative. They also shared in the profits, which allowed the company to be more competitive. Employees earned less in salary, so that during difficult business conditions everyone made less, but when the company was doing well, they would share in the profits and earn more. Tembec also pursued a participatory management approach. A dozen committees were established and all employees were able to participate. The committee had equal representation from management and the union, and majority decisions were binding on the company. An open door policy was also established, and all financial information was made available to employees on a regular basis. As a result of this management model, Tembec was free of labor strife. Labor agreements that might take several months to hammer out at other companies were finalized in a matter of days at Tembec.

Tembec Goes Public in 1979

Tembec's successful launch was helped by a growing pulp market. Dottori started as the mill's production manager and a year later became mill manager. He then became vice-president of operations in 1977 before being named president and chief of operations in 1979, the same year that Jack Stevens became the first of the founders to retire. Also that year the company changed its name to Tembec Inc. and was taken public. Employees still retained a 50 percent ownership stake, however. Also of note in the 1970s was the 1977 incorporation of Temfibre Inc., a research subsidiary that looked to develop marketable products from mill effulent and waste streams.

Tembec marketed its products around the world, to Japan, Taiwan, Indonesia, Iraq, Italy, France, Germany, Cuba, England, as well as to Communist Bloc countries. The company first attempted to grow by external means in 1981 when it acquired Temfor of Ville-Marie, a plywood operation. Dottori became chief executive officer in 1982, a year when the pulp and paper industry began enduring one of its worst recessions in history. The company lost C$4 million in 1983 before business began to improve the following year. Despite these challenges, Tembec was able to survive without resorting to layoffs, a testament to the flexibility of the company's business model. Tembec returned to profitability in 1984 and prospects appeared bright, enough to warrant the investment of C$102 million to build a new state-of-the-art mill to produce a new product, bleached chemi-thermo-mechanical pulp (BCTMP), used to make file folders, printing papers, and disposable diapers.

After recovering from the recession, Tembec was faced with an increasingly competitive market for pulp and paper products. To meet the challenge, the company began to grow several fronts, the result of acquisitions as well as startup operations. In 1984 the company established Temcell to run its new BCTMP mill, the first in North America to sell its output on the open market. Sciere Bearn Inc. was acquired in 1986, and a year later Tembec added sawmills in Taschereau and Delebo. The company also acquired Equipement Boreal Hydraulique in 1987 and half-ownership of the TKL Sawmill a year later (the remaining 50 percent interest would be acquired in 1990). In 1988 Tembec established Temboard and Co. LP to take advantage of Temcell and other Tembec pulps.

Construction was started on a new mill, which became operational in December 1989. It produced a new three-ply paperboard, the top layer consisting og bleached chemical pulp, the middle ply from Temcell, and the bottom layer from bleached chemical pulp. Temcell provided stiffness and the chemical pulp enhanced the boards printing capabilities. Temboard was found useful in the folding carton business--appropriate for packaging cosmetics, frozen foods, health foods, pharmaceuticals, and tobacco--and the graphic arts market, for such uses as brochures, greeting cards, and post cards. To close out the 1980s, Tembec took steps to become a vertically integrated company with the acquisition of saw mills acquired from the G.W. Martin company, picking up facilities in Mattawa, Alban, and Huntsville.

Tembec continued its growth program in the 1990s. It acquired Howard Bienvenu Inc., picking up a sawmill in La Sarre, in 1990. The following year the company started up a second Temcell plant and opened a distillery to turn wood waste into ethanol, which could either be used as a fuel or a gasoline additive. Also in 1991 Tembec established EnviroTem, a subsidiary that was devoted to the development of new technologies to minimize the environmental impact of Tembec activities.

In 1991 Tembec became involved in a deal very much reminiscent of its own founding some 20 years earlier. Spruce Falls Power & Paper Ltd., which operated a newsprint milling operation in Kapuskaning, Ontario, was slated by its co-owners, Kimberley-Clark and the New York Times Company, for a significant downsizing. They were, however, willing to sell the plant to employees, ala Tembec, in exchange for the government giving it clear sale to Spruce Falls' other major asset, Ontario Hydro of the Smoky Fall hydroelectric station. Should the sale be held up because of a drawn-out environmental review, however, the owners threatened to close three out of four newsprint mills, putting 1,200 out of 1,450 employees out of work and threatening the very existence of Kapuskaning. Buyout talks were initiated, the employees put together a C$12.5 million bid backed by area residents, but after several months the deal fell through. A new buyout team stepped in, Tembec agreed to invest in the deal, and Quebec's premier took part in the negotiations. After twice extending their deadline, the U.S. co-owners agreed to a deal in October 1991. They sold the hydroelectric generating station to the Ontario government for C$140 million. The mill employees gained a 60 percent stake in the mill operation, and Tembec paid C$25 million for a 40 percent interest and promised to invest another C$15 million over the next three years in upgrades. Tembec would serve as managing partner. The mill enjoyed immediate success, as production increased by 40 percent over the next year, and the operation posted a C$4.5 million profit. In 1993 profits improved to C$15.7 million and C$50.9 million in 1995. In addition a C$36 million modernization program was launched. In 1997 Tembec acquired 100 percent of the Spruce Falls business.

In 1994 Tembec merged it Temfibre and Temeco operations to form its Chemical Products Group. Also in that year it forged a 50-50 joint venture with another Canadian company, Cascades Paperboard International Inc., to buy a sulfite fluff pulp mill in Landes, France, which was on the verge of closing. The price was a single franc. Tembec provided marketing and technical expertise, while Cascades took over management services.

Fully Integrated for the Future

Tembec fulfilled its effort to become an integrated forest products company when in 1995 it paid approximately C$350 million to acquire Malette Inc., a Timmins, Ontario-based, family-owned company. Unlike other acquisitions Tembec made throughout its history, Malette was a healthy company. Tembec picked up a number of attractive assets, including a lumber mill capable of producing 250 million board feet each year and a bleached kraft pulp mill. Malette also owned a 41 percent interest in a machine finish coated paper mill. As a result of this acquisition, Tembec rounded out its product profile. To help sell the expanded product line in Europe, the company established a new trade office in Switzerland. To bump revenues even further, Tembec invested C$65 million to build an oriented strand board line. The addition of Malette contributed to strong growth in the company's balance sheet, which benefited from higher pulp prices and a weak Canadian dollar. In fiscal 1995 sales totaled C$873.2 million, a 75 percent increase over the C$489.8 million posted the previous year. Net earnings improved from C$72.7 million to C$118.6 million.

In the second half of the 1990s, Tembec completed a number of acquisitions. In 1998 it acquired the Pine Falls Paper Company newsprint mill located in Pine Falls, Manitoba, which was no longer able to compete effectively in an industry that was undergoing consolidation. Tembec paid C$70.4 million in cash and stock and assumed more than C$200 million in debt to buy Crestbrook Forest Industries Ltd., a financially troubled British Columbia pulp and lumber company. The addition of Crestbrook facilities made Tembec Canada's largest market pulp producer and fourth-largest in lumber production. Also in 1999, Tembec acquired a BCTMP mill in Matane, Quebec.

Tembec's expansion program continued in the early years of the new century. It acquired Marks Lumber Inc, an Ontario lumber remanufacturing operation. It bought two French pulp mills; A.R.C. Resins International Corporation, producer of formaldehyde and adhesives for use in fiberglass insulation, binders, and laminates; Duratex Hardwood Flooring Inc., Davidson Industries Inc., supplier of specialty woods; and a St. Francisville, Louisiana, paper mill. In 2002 Tembec acquired a high yield pulp mill in Chetwynd, British Columbia, and a year later added sawmills in La Sarre and Senneterre, Quebec, and Chapleau, Ontario.

In 2001 Tembec added other Canadian forest products companies facing challenging conditions. It was already a soft year for lumber sales when the terrorist attacks that struck the United States had an adverse impact on the world economy. Moreover, the U.S. Commerce Department decided to impose anti-dumping duties on Canadian products, based on Canada charging forest companies low fees to cut timber on government-owned land. As a result, Tembec and other Canadian companies saw their sales drop significantly. The matter would linger into 2004. Tembec encountered other obstacles as well. Overall there were too many sawmills and not enough available lumber in North America, a situation that prompted the company to look to make more value-added products. Aside from the rising cost of raw materials, energy prices were also rising. In addition, Tembec faced the emergence of lower-priced competition from such countries as Brazil, China, and Russia, all of which possessed large forest resources and low monetary values. Nevertheless, Tembec had proven over the course of three decades that its employee-empowered business approach was flexible enough to meet any challenge.

Principal Subsidiaries: Pine Falls Paper Company Ltd.; Crestbrook Forest Industries Ltd., Spruce Falls, Inc.; Malette Quebec Inc.; Davidson Industries Inc.

Principal Competitors: Abitibi-Consolidated Inc.; Canfor Corporation; Cascades Inc.

Chronology

• Key Dates:
• 1972: Employees of a shuttered pulp mill form a company to buy the mill.
• 1973: The mill acquisition is completed.
• 1979: Tembec goes public.
• 1986: The Temcell subsidiary is launched.
• 1995: Malette Inc. is acquired.
• 1997: Company acquires 100 percent of Spruce Falls.