Algoma Steel Inc. (TSX: AGA)
Age: 45 | Years at the company: 4
Denis Turcotte was in danger of losing his job–along with 1,200 of his colleagues. Barely 30 years old and fresh out of business school in 1990, Turcotte was working as a maintenance superintendent for the Spruce Falls Power and Paper Co., in Kapuskasing, Ont. The mill's owners, Kimberly-Clark, had been trying to sell the ailing facility for months, without success. The only option left was to slash the workforce down to 250 workers, a move that would devastate the economy of the small town that depended on the mill.
The massive restructuring had just been announced to employees at a special meeting, and Turcotte was milling around with a few co-workers. A secretary asked him, “You've got all this business training. Can't we buy this company?”
While the other employees chuckled, Turcotte returned to his office and started making phone calls. He got in touch with union representatives and soon convened a group that, a little over a year later, raised $15 million for an employee buyout of the mill. In the end, the buyout, in partnership with Quebec pulp-and-paper company Tembec, saved the jobs of 800 employees, along with Kapuskasing.
That was just the first time Turcotte proved instrumental in saving a company. The second time came as president and CEO of Algoma Steel Inc. The company, based in Sault Ste. Marie, Ont., had teetered on the edge of bankruptcy twice within 10 years, most recently in 2001. “It's been a bloodbath of an industry,” says Turcotte, who took the top Algoma job shortly after it emerged from bankruptcy protection, in September 2002. “This environment is not for the faint of heart.”
No kidding. Five years ago, more than 40 other steel companies in North America had filed for bankruptcy protection, and no one who'd been watching Algoma sink deeper into debt as steel prices plummeted could have been surprised when it followed suit. But what has been surprising is Algoma's return to profitability. Sure, most steel companies are swimming in cash these days, thanks to strong demand and record prices in 2004 (more than US$756 per net ton), but Algoma has far outperformed its peers. It was the most efficient steel producer in the world last year, earning US$131 on every ton sold, nearly twice as much as the No. 2 company, United States Steel Corp.
There's no question Turcotte, 45, has improved Algoma's standing by transforming it from a mismanaged hulk collapsing under its debt into a slim, efficient producer — one that has rewarded shareholders with more than $500 million in cash distributions since 2002. Turcotte has also better-insulated Algoma from the inevitable shocks that will come from dips in the steel market. The accomplishment is all the more remarkable given that Turcotte was a steel-industry rookie, and one whom Algoma board member Patrick Lavelle refers to as “Boy Scout” for his optimism and touch of naiveté. Counters Turcotte: “I always tell him I want to remain conveniently naive, because that's what drives people to do better and better and focus on achieving things that are ideal as opposed to compromising.”
He will certainly need to stay positive, since some of Algoma's biggest challenges lie ahead — mainly, what to do next. China, the biggest consumer of foreign steel in 2004, is turning into a significant producer, which could mean an influx of cheap steel to the market. Analysts say the current price of steel (US$600 per ton) isn't sustainable, but how much it will fall and when, no one can say. And with consolidation sweeping the industry, Canada's smallest integrated steelmaker can't remain a small player forever.
But the picture is much rosier now than it was five years ago. Algoma had already survived one bankruptcy scare, in 1991, and it emerged on shaky ground thanks to a $60-million bailout package from the Ontario government. In the years that followed, Algoma embarked on a program to bulk up operations and took on a mountain of debt in the process. The centrepiece of the strategy was a $440-million state-of-the-art mill, which the company financed with long-term, fixed-rate U.S. debt. The mill, called the Direct Strip Production Complex, was completed in 1997. But when the company flicked the switch, things didn't work out as planned. The DSPC was plagued with bottlenecks and breakouts (where liquid metal escapes from the machinery). Time and money was lost on repairs, and output was far lower than the company estimated. Those issues, combined with falling steel prices and hundreds of millions of dollars in debt, forced Algoma to declare bankruptcy once again. Dismissed by investors as a lost cause, its stock plummeted to less than $1 per share.
Into this bleak picture stepped Turcotte. Turcotte grew up in Thunder Bay, Ont., and says he comes from a “hardworking French-Canadian” family. His dad owned a trucking company and, as a kid, Turcotte spent weekends at the garage, changing tires and oil and generally getting dirty. He developed an interest in all things mechanical and later pursued a mechanical engineering degree at Lakehead University, followed by an MBA at the University of Western Ontario in London. After the buyout of Spruce Falls, Turcotte rose through the ranks at Tembec to become president of its paper group by the time he began interviewing with Algoma in 2002.
The similarities between steel and forestry surprised him. Both are capital intensive, commodity-based industries sensitive to market conditions. Nevertheless, he spent the six-month-long interview process cramming about the steel industry. His inexperience made some people uneasy. “Among the management group, there was some skepticism. 'What does this guy from the paper industry know about steel?'” recalls Stephen Boniferro, Algoma's vice-president of human resources. “That didn't last long.”
Turcotte's outsider status allowed him a fresh perspective. Others looked at Algoma and saw little hope of salvation; Turcotte saw opportunity. He was particularly impressed by Algoma's $1 billion in assets, as well as its production technology and capacity. A lot of the company's problems were mechanical, stemming from the failure-prone DSPC. “I believe any technical problem can eventually be fixed if you get the right people focused in a tenacious way,” he says. The kinks in the DSPC were finally smoothed out by 2003, and it began producing at the levels for which it was designed.
That was no small victory, but there remained that $300-million-plus in debt, along with the troubling fact that Algoma was still a weak player in a market that was only just beginning to recover. “Probably the best luck we had was that things didn't turn around right away, so we were forced to do the things we had to do,” Turcotte says. One change was to reorganize the management structure, which was ill-defined and often had workers reporting to more than one senior employee. “Denis brought a focus to the organization that was missing,” Boniferro says. Turcotte implemented a company-wide restructuring, simplifying the chain of command and eliminating two layers of management between execs and the shop floor.
Regrettably, Turcotte says, there had to be layoffs. About 600 employees were let go in 2003. (A hundred or so have been hired back.) But Turcotte has also taken strides to cut costs without having to axe more jobs by enforcing a spirit of entrepreneurship on employees. Many CEOs promote that line, but few have been as successful as Turcotte. He's also the first to admit he can't take credit for the cost-savings–a whopping $180 million since 2003. “No one guy could have done what this company has done,” he says. “Any CEO that postures that way is full of BS.”
During the time Turcotte spent on the shop floor learning about the steel industry, he came to recognize the experience and knowledge of Algoma's employees as an untapped resource. He launched a plan to encourage them to suggest money-saving ideas — no matter how small. “You have to induce a culture where people value the input of the guys on the shop floor — who know more about running the business than anyone else,” he says. That kind of change takes time, especially in a 105-year-old company like Algoma; but as management began to act on some of the ideas, employees became more confident in offering suggestions. “No idea is a bad idea,” Turcotte says.
One of his favourite suggestions came from an operator who implemented a different method of making heat-treat plate. The operator talked with his foreman about reducing the time it took to heat-treat each piece of steel. After 14 months of trial and error, they found a formula that worked, resulting in the ability to produce an additional 85,000 tons of plate a year — nearly another $90 million in revenue for the company. “So we ruined a few batches of plate,” Turcotte says of the testing process, “but we need to try some creative things.”
Given the number of cost-saving suggestions, Turcotte expected to save $100 million within three years. Instead, it took only two. The savings and increased production from the DSPC, along with an improving steel market thanks to surging demand from China, made 2004 Algoma's most successful year ever, with $344 million in profit. Last year wasn't bad, either: the company earned $240 million.
One of the most important things Turcotte has been able to do with Algoma's new-found wealth is pay down nearly $350 million in debt, putting the company in a much stronger position to weather steel's ups and downs. Analysts are also impressed with his ability to handle cash. He's opted to stockpile it, spend it strategically or return it to shareholders, instead of blowing it all on expansion — Turcotte pulled out of the bidding for Stelco in 2005, for instance.
But not everyone has been impressed with Turcotte's fiscal management. New York-based hedge fund Paulson & Co. Inc., which held a 19% stake in Algoma, demanded more money from the company in October of last year. The hedge fund's founder, John Paulson, wanted Algoma to pay another $420 million to shareholders, insisting it didn't need that much cash and could afford to go $200 million in debt to make the distribution. Paulson was also peeved that U.S. shareholders incurred a 25% withholding tax on a previous special dividend payment of $238 million. So adamant was Paulson that he pushed for a shareholder vote that could have ousted Turcotte and his colleagues from the board.
Turcotte fought back. After working hard to save money and pay down debt, he wasn't about to jeopardize Algoma with a payout it couldn't afford. “I was put off at first because it was so irrational,” Turcotte says. The issue dragged on until this March, when Turcotte met with Paulson in New York. The company had been planning a $200-million share buyback at the end of the year, and Turcotte told Paulson that was all he was going to get: “He thought it was a negotiation, but I said this is what we were going to do.” Paulson eventually acquiesced, but he reduced his stake in Algoma to 5% afterward. The issue drew to a close late this September, when Algoma completed the share buyback.
Despite the experience, Turcotte is far from being anti-hedge fund, even though he's aware such similar strong-arm tactics could be used again. In fact, he credits some hedge funds with bringing discipline to CEOs and boards. “I've heard too many CEOs who only talk about what they're doing in the long-term,” he says. “But you also have to focus on short-term performance. Otherwise, there's no constructive tension. I think hedge funds bring a bit of that.” As for Algoma's long-term prospects, all of the company's successes lead to one thing for Turcotte: “Now we've earned the right to start thinking strategically.”
The next phase for Algoma is an important one. It is better positioned than it's been in a long time, but don't expect Turcotte to sit back and enjoy the good times. “Denis drives this home every day: the minute you think you're OK, you're in trouble,” Boniferro says.
The big question for Algoma is how it will fit in with the global steel giants who are leading consolidation in the industry. BMO Nesbitt Burns analyst Randy Cousins says it's likely Algoma will be bought up in the future, possibly by a foreign company using it as a beachhead in the North American market. Cousins breaks steel companies into three categories: global players, product-specific mills (Canada's IPSCO, for example, is a dominant producer of plate) and niche mills like Algoma. “These are low-cost producers that focus on being where the market needs them to be,” he says. “But the key is you have to be quick.” Cousins says Algoma's slimmed-down workforce (around 3,000 employees) and greater production efficiency give it an edge, and Turcotte is looking at ways to further exploit Algoma's niche status.
Soon after he started as CEO, Turcotte wanted to convene a meeting with Algoma's market development team. But the meeting never happened — Algoma didn't even have a market development team. So Turcotte created one. It explores new products based on market needs and tries to identify new customers. Exploring joint ventures is another option — Algoma recently entered into a partnership with Germany's Schaaf Industries Co. to build a wind-tower manufacturing plant in the Sault. Such proactive strategies mark a departure from the Algoma of old, which would discount its steel just to give itself a competitive edge, making it the “whipping boy” of the industry, according to one analyst.
As Algoma continues to explore its role in the marketplace, a more immediate issue is the negotiation of a new contract with the United Steelworkers next year. Labour relations have never been easy in steel, and with Algoma in possession of more cash than ever before, there's a possibility both sides could get greedy. But Turcotte will approach the issue with his typical boy scout optimism. “The company will be reasonable, and I'm expecting the employees will be reasonable,” he says. “I just gotta believe that people at Algoma today are much happier than they've been in years.”
Algoma's retreat from the brink
An $800-million debt sends Algoma into bankruptcy protection. NDP Premier Bob Rae (below) claims it's not “Bailout Bob time,” but promises to save Algoma. CEO Robert Swenor assesses Algoma's chances of surviving the crisis at 60/40 in the company's favour.
Algoma receives a $60-million bailout package. Participants include RBC, the Government of Ontario and Dofasco.
Algoma reveals its restructuring plan, which involves 60% employee ownership. Wages are reduced by $2.89 an hour and salaried employees take a 14.5% pay cut. Dofasco pulls out as an owner.
Algoma begins trials at its $440-million Direct Strip Production Complex. The new mill is supposed to improve the company's steel output but plagues Algoma with technical problems for years to come.
Algoma's debt stands at over $500 million, amid production setbacks, poor sales and low steel prices after “dumped” foreign steel floods the market.
Algoma is forced to file for bankruptcy protection for the second time in a decade. CEO Alexander (Sandy) Adam tries to remain optimistic, telling media, “This is a restructuring, not a bankruptcy.”
Federal Minister of Industry Brian Tobin (right) says there will be no federal bailout package for Algoma. Two weeks earlier, Ontario Minister of Economic Development and Trade Bob Runciman announced: “We're not fond of doing Bob Raes.” Hap Stephen, whose previous restructurings involved Eaton's and Beatrice Foods, signs on as chief restructuring officer.
After nine extensions from the Ontario Superior Court, Algoma emerges from creditor protection. Bondholders, mainly based in New York, receive a 75% equity stake, and workers accept a temporary 15% pay reduction and other pension and vacation cuts. CEO Adam tells media he feels secure in the CEO seat. A few days later, he's left off Algoma's new board of directors.
Adam announces his retirement. It's the second high-profile departure from the company in a few months; chairman Robert Milbourne left in March after only four weeks on the job.
High steel prices, cost-cutting and a fully functioning DSPC make 2004 one of the most profitable years in Algoma's history, with $1.8 billion in sales and nearly $350 million in profit. The influx of cash also means the company's profit-sharing program kicks in. Each employee receives an additional $17,000; the program has paid out $98.5 million to date.
Algoma's new-found wealth gives it the confidence to consider buying beleaguered Hamilton-based competitor Stelco, but it pulls out when the acquisition appears too risky. Analysts speculate Algoma is ripe for a takeover.
After a few months of looking for a buyer, Algoma is unable to find an acceptable bid and announces it's no longer for sale. Turcotte says the company will continue to look for ways to expand, including mergers, acquisitions and joint ventures.