Alexander Toeldte came to International Falls more to listen than to talk.
Toeldte, CEO of Boise Inc., met last week with managers and workers at the International Falls paper mill as part of a six-day, five-state tour of the facilities owned by the young company.
Though here to listen, Toeldte and Falls mill manager Terry Ward offered to talk to The Journal about the status and future of the company, which was formed in February following the Aldabra 2 Acquisition Corp. purchase of the paper and packaging assets of Boise Cascade, L.L.C. Boise Inc. operates five paper mills, five corrugated products plants, a corrugated sheet feeder, two distribution facilities, and a transportation business. It employs more than 4,600 people.
The first half of 2008 brought difficulty to just about every economic facet of the nation. And Boise Inc. was no different.
The company experienced a 7 1/2 percent cost inflation over a 90-day period at the beginning of the year. That inflation represents the strongest, and a more steep, cost inflation Toeldte said he can remember since the early 1970s.
“That makes it a year that turned out to be a lot tougher than we thought at the beginning of the year,” he said.
Yet demand has been reasonably good and the company has responded with successful cost increases, Toeldte said.
“(The Falls paper mill is) actually doing very well when we factor in those changes externally, and performing better than one should expect given those external changes, but not good enough against our plans at the beginning of the year, the expectations that we had, the expectations that the investors have on us,” he said.
The company faced massive inflation in the costs it pays for just about everything, he said. He pointed to, among other things, energy costs, such the roller coaster prices of natural gas, which represents the company’s largest fuel consumption.
Chemical input costs have also increased massively, though the company may be in a better position than its competitors because it earlier chose longer-term contracts to fix prices as much as possible, he said.
More competition for fiber has driven up those costs, he said. “Wherever we have even had a slight fiber cost reduction, the increase in diesel to transport the wood ate any gains or added to the increased costs,” he said.
The Falls paper mill faces a few unique challenges among those it competes with, Ward said. Geography is challenging because normally a paper mill can draw wood fiber from a 100-mile radius of it. Because of the international border and a national park cutting off wood supply from the north and east, the Falls mill must draw fiber from a further distance south and west, Ward said.
“It means longer freight hauls to get fiber here... and diesel fuel costs have increased dramatically,” he said. “So the cost of getting that raw material to the mill puts this mill at a disadvantage with the mills we compete with.”
Regional differences in the costs of wood fiber also gives some mills an advantage. Mills in the south pay less for wood fiber than the Falls mill, he noted and mills in the Pacific Northwest pay much more than the Falls mill.
The Abitibi-Bowater paper mill is completing construction of an $83 million bark boiler. The company, like the Falls mill, will need bark to fuel the boiler. So the Falls mill will compete with Abitibi-Bowater paper mill for bark that could drive prices up a bit.
Ward called the regulatory climate in Minnesota tough, giving a possible advantage to mills in other states.
“We are where we are and we need to learn how to live here and make the best of it,” Ward said. “And that’s what we do here every day.”
Meanwhile, Toeldte noted that Ward leads teams called SWOT — strength, weaknesses, opportunities and threats — across the nation to look for opportunities to conserve energy.
That activity ranges from simple things like rechecking set points and checking for steam leaks and loss of energy from every piece equipment, to replacing equipment with more energy-efficient pieces, and considering alternative fuels.
“Some of (the alternative fuels) are really innovative ideas, non-obvious fuels, and we don’t want to tell our competition what we’re finding,” he said with a smile.
The company is also considering agreements with power companies that supply energy to the company. The company generates about 67 percent of its own power through recycling of remnant wood in the recovery process.
“We’re also scanning the whole technology landscape constantly about alternate energy technologies — ways of creating power,” Toeldte said. Most of the technologies require a lot of up-front capital investment, however, and the company is not interested in taking an economic bet on them, he added.
Toeldte said the company’s “speed plan” accelerates all improvement efforts on the key dimensions of safety, delivery, and profit — the company’s three priorities.
The speed plan addresses other elements, including customer and operating issues, product development and financial performance.
The speed plan is an effort to adjust to the changed economic environment, Toeldte said.
“We came into the year with certain expectations about how life might change around us,” he said. “We went from a low inflation environment to a steep inflation environment and that completely changes your need for cadence and speed.”
The speed plan calls for the Falls mill, and the others, to conserve fiber — “getting everything we can out of it to the extent we can impact price,” Ward said.
The company is conserving and even switching to less expensive chemicals, Ward said.
Ward also said the speed plan at the Falls means seeking “steady, reliable, high performance” without production peaks and valleys.
Labor costs at the Falls mill are less of an issue than effectiveness, flexibility and skill, Toeldte said.
The papermaking process is very high-tech and complex. “We’re expecting increasingly more from all our people in terms of technical competence,” Toeldte said.
A decision a few years ago to place a will sheeter machine in a Boise Inc. mill in Jackson, Ala., was based on where a piece of equipment — an investment — would be most productive, Toeldte said.
Ward also said the decision on the sheeter was not based on labor costs. He pointed to a unique commitment offered by labor organizations in the state to neutralize any labor cost advantage Alabama had over Minnesota, if the company had chosen to put the sheeter at International Falls.
Ward said if money was not an issue, there are several very expensive projects that could help this mill.
“Very expensive projects are what it would really take to make a difference here,” he said, adding those projects are on the back burner until cash is available.
The company is talking with other parties about helping to finance expensive energy projects, but Ward said he was unsure how successful those talks will be.
An important issue to the company is to encourage governments to allow for the maximum harvest. It’s good forestry and good for the mill, Toeldte said.
He also pointed at subsidies for new bio-energy producers, which would be a disadvantage to Boise Inc. The company, he said, may already be the largest bio-energy producer in the nation. Subsidies would drive up costs of starch and fiber, which Boise uses in its process.
The carbon footprint left by the papermaking industry is light, he noted, because the process sequesters carbon.
Toeldte said he’s “of good spirits” about the International Falls mill in its current configuration. Paper machines I1, I2, I3, I4, are very different from one another, he said.
I4 is used for product development, in which teams are working toward breakthroughs in sales and development, said Toeldte. Ward said three new grades of paper for the I4 machine are in customer tests now. Should those tests be successful, “business will improve for I4,” Ward said.
I4 is being run on three shifts — one less than fully loaded because of the combination of demand and prices. If operated fully, it would bring cash losses; I4 employees are working elsewhere in the mill when I4 is not in use, but that can’t continue, Toeldte said.
I1 is being operated slower than it would be ideally, he said. Based on market demand, energy costs, input costs and pricing, it’s the right thing to do economically, Toeldte said.
“We cannot ever and don’t want to ever promise everlasting future here, but I think we’re doing a lot here to make the mill succeed in the future and to have enough flexibility to continue as a successful mill.”