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Cascades recycles into a forestry powerhouse Add to ...

The Cascades Christmas party, held in the arena in Kingsey Falls, Que., is always a blow-out affair and this year's version should keep the boozy tradition intact. The theme is " Chicago," as in the musical. The women will show up in slinky black dresses, the men in dark, 1920s suits. About 1,500 Cascades employees and their families are expected to go - that's three-quarters of the entire local population - and "we're not leaving till 4 in the morning," says Cascades chief executive officer Alain Lemaire.

While the employees and managers of Cascades always look forward to the party, they're already in a festive mood. That's because the packaging and tissues company had a sweet reversal of fortune this year. The shares are up 32 per cent since January, after a grim 2005, when the soaring dollar and energy costs clobbered the business. Now, the profit margins are expanding, the earnings are improving and the company that makes the little cardboard roll inside your toilet paper is on the move. This week, it announced the purchase of Domtar's 50-per-cent stake in Norampac for $560-million. The deal will give Cascades full ownership of Canada's biggest maker of containerboard - the heavy cardboard used to make the brown cardboard boxes.

Cascades' good fortune is all the more remarkable when you consider that the bulk of the Eastern Canadian forest products industry is in gruesome shape. The shares of newsprint maker Abitibi-Consolidated are down 44 per cent this year. Burdened with debt, the company had to unload the best growth asset, its 50-per-cent stake in Pan Asia Paper, last year. Domtar is trotting into oblivion. Norampac is gone and much of the rest is merging with the fine-paper division of mighty Weyerhaeuser. Tembec - whose market value has gone from $1.5-billion to $110-million since 2002 - might not even be around much longer. The latest quarterly report warned that there is "reasonable doubt" the company will survive as a "going concern." No surprise there: The operating loss from continuing operations in the nine months to the end of June was a stunningly bad $339-million.

How did Cascades emerge from the forest products flame-out intact?

Cascades, formed by the Lemaire brothers - Bernard, Laurent and Alain - in 1964 and 30 per cent owned by the family, is not your standard industry player. The company doesn't murder trees with abandon, grind them into bits and transform them into egg cartons, toilet paper, cereal boxes and the like. It has always used recycled fibres - the papers, magazines and the like that you leave on the curb for pickup - as its main raw material. Every year, Cascades uses 2.4 million tonnes of recycled paper, the equivalent of more than 30 million trees.

The advantage of recycled paper is far lower cost, relative price stability and growing supply, as recycling becomes mandatory across the continent. The cost of "virgin" fibre keeps climbing as expenses, such as diesel fuel for harvesting machines, rise and the size of cutting areas is reduced in an effort to preserve forests.

Avoiding virgin fibre wasn't enough to spare the company from woe, of course. Cost reduction became an obsession. Mills that were not performing well were closed. Water and energy savings became a priority. Cascades' energy reduction effort has been so successful that it has made more than $6-million (U.S.) by selling carbon credits in Europe. The rise of the C-buck didn't hurt Cascades as much as it did other Canadian forestry companies. It had a natural dollar hedge because half of the recycled paper it buys comes from the United States.

The upshot from all these efforts: The operating profit margin rose from 8 per cent to 12 per cent over the past four years. No wonder Cascades is expanding through acquisitions while its Ontario and Quebec rivals are fighting to stay alive. In the third quarter, Cascades' profit rose threefold to 12 cents (Canadian) a share, for a total net haul of $10-million.

What's next? Quebec considers Cascades a proud Quebec company. It is, but the Lemaire brothers consider the "Quebec" label as much a stigma as an asset. Domtar was so Québécois that it appeared to become captive to the Caisse de dépôt et placement du Québec, the pension fund manager that owns about 18 per cent of the company. Look what happened to it. Cascades (in which the Caisse owns only a few shares) wants to be neither a Quebec nor a Canadian company. "We have to be a North American corporation," Alain says. "We have to buy everywhere."

There is lots of room for growth. In the North American recycled boxboard business, Cascades is the second-biggest player. In linerboard, it's No. 7. In tissues, it's No. 4. The company expects most of its growth to come from the United States. Christian Dubé, the chief financial officer, says the company is starting to develop a following among American investors and made its first presentation to a Wall Street investor conference in the autumn.

Plenty to celebrate at the Christmas party? Alain Lemaire says he'll be on the arena stage cheering with the employees.

ereguly@globeandmail.com

 

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