Business News

Catalyst Paper Corporation – Q2 revenues show impact of further market declines

Friday 31. July 2009 - Catalyst Paper (TSX:CTL) recorded a net loss of $1.9 million ($0.01 per common share) on sales of $291.5 million for the second quarter of 2009. That contrasts with net earnings of $21.0 million ($0.06 per common share) on sales of $352.5 million in the first quarter.

Earnings were impacted by further deterioration in already extremely challenging market conditions across Catalyst’s product lines, as well as by a strengthening Canadian dollar.

Catalyst posted a net loss before specific items in the second quarter of $25.6 million ($0.06 per common share), compared to net earnings before specific items of $8.6 million in the first quarter ($0.02 per common share). Specific items in the second quarter were restructuring costs and a foreign exchange gain on the translation of long-term debt. The company had an operating loss during the second quarter of $29.7 million, in contrast to operating earnings of $24.2 million in the preceding quarter.

Earnings before interest, taxes, depreciation and amortization (EBITDA) for the second quarter were $6.1 million, down from $61.1 million in the first quarter; while EBITDA before specific items was $18.4 million, down from $65.3 million. Specific items consisted of restructuring costs, which were $12.3 million compared to $4.2 million in the first quarter. Free cash flow was negative $6.4 million compared to positive free cash flow of $35.9 million in the prior quarter.

“We are seeing a deep cyclical downturn in our industry as well as demand shifts and structural changes that will have a lasting impact on our business model,” said Richard Garneau, president and chief executive officer. “Cost management and cash conservation is the key in the short-term. At the same time, it is essential that we continue to take steps that will make us competitive in a leaner and more agile industry in the future.”

Catalyst curtailed 33 per cent of its paper and 100 per cent of its pulp production capacity in the quarter while leveraging machine flexibility to maximize returns on remaining production. All three paper machines at Elk Falls and NBSK pulp production at Crofton remained indefinitely idled throughout the second quarter and the Snowflake mill continued to take significant periods of curtailment. However the Crofton # 1 paper machine was restarted in late May to match production with customer orders.

Newsprint demand was impacted by weak advertising and circulation, and saw a 29 per cent year-over-year decline. Catalyst’s specialty printing paper business was also impacted as weak retail advertising in particular resulted in reduced demand. Year-over-year demand declines amounted to 27 per cent for coated mechanical, 24 per cent for high-gloss, 17 per cent for standard-grade uncoated, and 24 per cent for directory. Oversupply in printing paper markets saw prices drop in the second quarter for all grades.

Demand for chemical pulp remained weak, although reduced inventories and continued purchases on the part of Chinese producers did result in a price improvement.

Responses to the liquidity pressures associated with lower production and declining prices included capital-spending restraint and pro-active cost management. Mill fixed costs were down $14.5 million from the previous quarter.

A combination of permanent reductions and indefinite layoffs – involving about 100 salaried positions – is in the process of being implemented at both the Richmond and Nanaimo offices, and at the Crofton and Elk Falls mills. Within the unionized workforce, implementation of plans aimed at achieving an $80/tonne benchmark continues at Powell River, Port Alberni and Crofton.

Catalyst also launched legal challenges in an effort to resolve the long-standing issue of unfair and excessive municipal property taxes. In light of this action, Catalyst made significantly reduced tax payments to the four municipalities involved. Based on the service consumption by class studies that have been completed for each mill community, the payment of $6 million is still 1.7 times higher than the cost to the municipality to provide services to those mills. The first of the court hearings on this matter is expected to proceed in early August.

Subsequent to quarter-end, Powell River Energy Inc., in which Catalyst is a 50 per cent joint venture partner with Great Lakes Hydro Income Fund, raised $95 million of first mortgage bonds maturing in July 2016 to refinance $75 million of debt due July 24, 2009. This debt is non-recourse to Catalyst. After fees and expenses, the additional $18 million in funds will be distributed equally to the partners.

Catalyst is currently assessing alternatives to address the 2011 and 2014 maturity of its senior unsecured notes, with a view to reducing debt levels, interest costs and extending maturity dates. Following the announcement of this review, and in light of pulp and paper market conditions, Catalyst’s credit ratings were adjusted downward by Standard Poor’s and Moody’s Investors Service.

No improvement in market conditions is expected through the remainder of 2009, although seasonal factors may diminish further demand erosion during the third quarter. A level of production curtailment consistent with that during the second quarter is foreseen for the third quarter.

Selected Financial Highlights

————————————————————————-
(In millions of dollars, except where otherwise stated)
————————————————————————-
2009 2008
————————————————————————-
YTD Q2 Q1 TOTAL
————————————————————————-
Sales $ 644.0 $ 291.5 $ 352.5 $ 1,849.4
Operating earnings (loss) (5.5) (29.7) 24.2 (157.4)
EBITDA(1) 67.2 6.1 61.1 159.4
– before specific items(1) 83.7 18.4 65.3 189.5
Net earnings (loss) 19.1 (1.9) 21.0 (221.1)
– before specific items(1) (17.0) (25.6) 8.6 (28.0)
EBITDA margin(1) 10.4% 2.1% 17.3% 8.6%
– before specific items(1) 13.0% 6.3% 18.5% 10.2%
————————————————————————-
Net earnings (loss) per share
(in dollars)
– basic and diluted $ 0.05 $ (0.01) $ 0.06 $ (0.66)
– before specific items
(in dollars)
– basic and diluted(1) (0.04) (0.06) 0.02 (0.08)
————————————————————————-


————————————————————————-
(In millions of dollars, except where otherwise stated)
————————————————————————-
2008
————————————————————————-
Q4 Q3 Q2 Q1
————————————————————————-
Sales $ 492.2 $ 504.8 $ 452.9 $ 399.5
Operating earnings (loss) 11.5 14.0 (153.3) (29.6)
EBITDA(1) 64.7 53.1 29.5 12.1
– before specific items(1) 65.9 66.2 30.7 26.7
Net earnings (loss) (48.5) (10.9) (124.3) (37.4)
– before specific items(1) 9.3 7.2 (22.7) (21.8)
EBITDA margin(1) 13.1% 10.5% 6.5% 3.0%
– before specific items(1) 13.4% 13.1% 6.8% 6.7%
————————————————————————-
Net earnings (loss) per share
(in dollars)
– basic and diluted $ (0.13) $ (0.03) $ (0.34) $ (0.17)
– before specific items
(in dollars)
– basic and diluted(1) 0.02 0.02 (0.06) (0.10)
————————————————————————-

(1) EBITDA, EBITDA before specific items, EBITDA margin, EBITDA margin
before specific items, net earnings (loss) before specific items, and
net earnings (loss) per share before specific items are non-GAAP
measures. EBITDA margin and EBITDA margin before specific items are
defined as EBITDA and EBITDA before specific items as a percentage of
sales. Refer to Q2, 2009 MD&A – Section 8, “Non-GAAP Measures” for
further details.

Further Quarterly Results Materials