New president asks company’s suppliers to cut costs to share pain
Gordon Hamilton
Sun
The subprime mortgage crisis in the U.S. is ready to send the Canadian lumber industry into an even deeper financial trough likely to last another 18 months, Canfor Corp.’s new president forecast Friday.
Veteran business leader Jim Shepard, who took over the reins of Canfor only seven weeks ago, said in an interview that the company is facing a $200-million loss in 2007, largely because he believes banks will foreclose on one million American homes this year.
“This is the worst I have ever seen,” he said of Canfor’s financial situation.
The company’s balance sheet is sound, thanks to a $551 million softwood lumber refund at the end of 2006 but it is bleeding cash and has asked its suppliers to share the pain by cutting their own costs by 15 per cent.
Further, Canfor announced Friday that its senior vice-president of operations, Patch Bonkemeyer, has left the company. Bonkemeyer had only been with Canfor since last August.
In an interview with The Vancouver Sun, Shepard outlined his thoughts on what he sees as a deepening financial crisis that is causing the Canadian forest giant to hemorrhage money with every carload of lumber it ships south.
The subprime crisis is depressing housing starts even further than would be the case in a cyclical downturn as banks foreclose on homeowners and put their houses on the market.
The crisis stems from banks approving mortgages at rates below prime to people who would not otherwise qualify during the period when housing prices were going up. Those mortgages are now coming due at a time of higher interest rates, resulting in a growing number of homeowners unable to meet their payments.
“The projection is — and this is the really scary one — that by the end of the year there will have been one million home repossessed in the United States,” Shepard said.
“One million homes will go back on the market. That’s one million homes that will not be built.”
U.S. housing starts have already plummeted from a 2005 high of more than two million to 1.48 million in 2007. Lumber prices have followed starts down, closing Friday at $311 US a thousand board feet.
The crisis for B.C. sawmills has been building for the last nine months. Canfor lost $42.7 million in the first quarter of the year and there’s no relief in sight, Shepard said.
“We are on a trajectory to lose the best part of $200 million this year.”
The growing subprime crisis, coupled with other domestic issues — softwood lumber taxes, increased costs associated with the pine beetle infestation and a rapidly escalating Canadian dollar — means Canfor might as well be stapling $100 bills to every carload of lumber it ships into the United States, said investment analyst Paul Quinn of Salman Partners.
Quinn agreed the Canfor president has correctly sized up the the industry outlook.
To stem the bleeding Canfor has taken the drastic step of asking suppliers to cut their own costs and has approached unions about cost-cutting. Shepard sent out a letter dated June 20 to suppliers seeking the 15-per-cent saving.
“I am doing the best I can to be fair and at the same time to be as efficient as we can to get our costs down so that we can survive in the difficult 18 months ahead,” he said of the letter.
Rick Publicover, executive director of the Central Interior Logging Association, said if the savings can be made by better programs to improve delivery of products and services, then it is a positive move.
But for those suppliers who have fixed costs, options are limited.
“If they just come to them and say we are going to take 15 per cent off the top of your price, that’s definitely not going to work.”
Publicover also noted that suppliers feel Canfor “always wants to share the pain but not the gain.”
If the company intends to reward those who make the cuts when markets improve, Publicover said the promise needs to be formalized.
Shepard is sharing the pain personally. Along with all other salaried employees, he has taken a 25-per-cent salary cut himself, dropping his pay from $650,000 a year to $495,000.
Quinn said that’s a positive goodwill sign, but wondered what the reaction to the drive to reduce costs would be from workers.
“It’s just not the same as the guys working in the mill who have taken out a large mortgage themselves,” he said.
Shepard is not the first to sound the alarm about the impact of the housing crisis on B.C. lumber companies.
Hank Ketcham, president of West Fraser Timber Co., the country’s largest lumber producer, said April 24 that the industry downturn is the worst he can remember in his 34-year career.
Shepard acknowledged that he is a newcomer to the forest sector. But he has considerable business acumen — including nine years as president of heavy equipment distributor Finning International — and was brought on by the Canfor board as interim president to steer the company through the downturn.
“I have only been in this business seven weeks. My disadvantage is I don’t know anything about this business. My advantage is that I am not carrying any baggage, preconceived notions or thoughts that I have seen it all happen before because I don’t know what is going to happen. I am just listening,” he said.
© The Vancouver Sun 2007
