Business News
Catalyst Paper Q1 results hurt by lower paper prices, cyclical price recovery emerging
Thursday 29. April 2010 - Catalyst Paper (TSX:CTL) has recorded a net loss attributable to the company of $44.1 million ($0.12 per common share) on sales of $273.3 million for the first quarter of 2010.
The net loss increased from $35.8 million in the preceding quarter ($0.09 per common share), due to declining specialty printing paper prices and additional production curtailment. Higher restructuring, input and maintenance costs further impacted Q1 results.
Before specific items, Catalyst posted a net loss attributable to the company of $37.6 million ($0.10 per common share), in contrast to $21.8 million in the fourth quarter of 2009 ($0.06 per common share). Specific items after-tax included restructuring costs of $10.1 million and bond exchange-related costs of $5.9 million, offset by a foreign exchange gain on long-term debt of $11.7 million.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the first quarter were negative $16.2 million, compared with positive EBITDA of $14.1 million in the preceding quarter. Before specific items, EBITDA deteriorated to negative $2.1 million from positive $15.5 million in the prior quarter. The Q1 operating loss of $48.9 million, compared to a $41.1 million loss in Q4, reflected lower EBITDA.
“We saw some recovery in print advertising from the very low levels of a year ago and as a consequence, paper demand is up slightly,” said President and CEO Richard Garneau. “Pulp strengthened as various events combined to drive price recovery and we could see a more extended pulp up-cycle. Markets for all products going forward will be influenced by industry re-start decisions and operating rates.”
Paper demand remained well below pre-recession levels, and benchmark prices dropped further for coated, uncoated and directory grades. North American newsprint consumption continued to decline, and although offshore exports helped boost the benchmark price over the preceding quarter, it remained well below the level of a year ago. Continued pulp price recovery was driven in part by production interruptions in Chile and other regions, and in late March the company announced it would restart the second pulp line at Crofton in the second quarter.
In light of weak paper markets, the three paper machines at the Elk Falls division remained indefinitely curtailed. The # 1 newsprint machine at Crofton, seasonally curtailed in December, was indefinitely idled in January, and as a result, the Paper Recycling division, which supplied de-inked pulp to Crofton, was curtailed in February. Total first-quarter production curtailments represented 14 per cent of specialty paper capacity, 52 per cent of newsprint capacity, and 36 per cent of market pulp capacity.
Restructuring costs during the quarter increased due to severance of some 300 employees who became eligible for and elected this option. Most had been laid off as a result of the Elk Falls curtailment. In light of some progress in tax-related discussions with Campbell River, Catalyst put forward a proposed restart plan for two specialty machines at Elk Falls to the hourly workforce based, in part, on achieving competitive labour costs at that mill.
Changes to post-retirement and benefit plans for salaried employees and retirees were implemented in the quarter, with expected annualized savings of $8 million.
Milestones reached in the company’s ongoing drive for more equitable and sustainable municipal tax treatment included an agreement in principle with the City of Powell River signed subsequent to quarter-end. The agreement entailed reduced taxation and pursuit of joint arrangements to meet municipal infrastructure needs that, when implemented, will bring the Powell River mill’s annual property tax cost down to $1.5 million. Catalyst is also seeking leave to appeal to the Supreme Court of Canada, following the April 22nd dismissal of its appeal concerning the North Cowichan 2009 tax bylaw by the Court of Appeal for British Columbia. In its decision, the court declined to strike down the tax bylaw, calling the “extreme imbalance” perpetuated by the District of North Cowichan a political problem requiring a policy decision by elected officials. The company accrued for this eventuality and has paid $15 million in outstanding 2009 property taxes, penalties and interest owing to the four municipalities where its mills are located.
“This appeal court decision, while disappointing, simply reinforces that solving the problem of unsustainable Class 4 tax rates rests with governments in BC. Until corrective steps are taken, major industry jobs and capital investments in this province will continue to be at risk,” said Mr. Garneau.
Catalyst completed the exchange of US$318.7 million of its 8.625 per cent senior notes due June 2011, for US$280.4 million of new 11 per cent senior secured notes due December 2016. As of quarter-end, US$35.5 million of the 2011 notes remained outstanding. Catalyst received credit-rating downgrades during the quarter from Moody’s and Standard and Poor’s.
Slow improvement in North American print advertising is expected over the balance of 2010, with minor recovery in coated and uncoated demand and pricing. Price increases to take effect April 1, May 15 and June 1, 2010 have been announced for coated, soft-calendared and high bright uncoated products. Price increases for pulp and newsprint have also been announced for Q2. Demand for directory is likely to contract though pricing is expected to be steady.
Catalyst expects to maintain capital spending, which was $3.2 million in the first quarter, at basic maintenance levels throughout 2010. However, $18 million in available Canadian federal government Green Transformation Program credits will be applied toward development of two capital-project proposals that deliver energy-efficiency and cost-reduction benefits.
Selected Financial Highlights
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2010 2009(1)
————————————————————————-
Q1 TOTAL Q4 Q3 Q2 Q1
————————————————————————-
Sales $ 273.3 $1,223.5 $ 295.0 $ 266.9 $ 300.7 $ 360.9
Operating earnings
(loss) (48.9) (40.8) (41.1) (10.0) (21.5) 31.8
EBITDA(2) (16.2) 123.2 14.1 25.9 14.3 68.9
– before specific
items(2) (2.1) 141.1 15.5 25.9 26.6 73.1
Net earnings (loss)
attributable to the
Company (44.1) (4.4) (35.8) 13.2 (1.9) 20.1
– before specific
items(2) (37.6) (58.8) (21.8) (19.8) (25.6) 8.4
EBITDA margin(2) (5.9%) 10.1% 4.8% 9.7% 4.8% 19.1%
– before specific
items(2) (0.8%) 11.5% 5.3% 9.7% 8.8% 20.3%
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Net earnings (loss)
per share attributable
to the Company’s
common shareholders
(in dollars)
– basic and
diluted (0.12) (0.01) (0.09) 0.03 (0.01) 0.06
– before
specific
items(2) (0.10) (0.15) (0.06) (0.05) (0.06) 0.02
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(1) Effective January 1, 2010, the Company changed its policy with
respect to certain of its derivative financial instruments and
translation of foreign currency-denominated working capital balances.
The new policies are considered preferable as they increase
transparency of the economic hedging activity. Prior period
comparative information has been restated to reflect this change of
policy. Refer to the Company’s interim consolidated financial
statements for the three month period ended March 31, 2010, Note 3,
“significant accounting policies” for further details.
(2) EBITDA, EBITDA before specific items, EBITDA margin, EBITDA margin
before specific items, net earnings (loss) attributable to the
Company before specific items, and net earnings (loss) per share
attributable to the Company’s common shareholders 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 and adjusted sales, respectively. Refer to
the Q1, 2010 Management Discussion and Analysis – Section 8, “Non-
GAAP Measures” for further details.
The search for a successor to President and CEO Richard Garneau, whose term will conclude at the end of May, 2010, remains underway.