Consumables

Catalyst Paper Q3 results strengthen on paper price and operational improvement

Wednesday 03. November 2010 - Catalyst Paper (TSX:CTL) posted net earnings of $6.0 million ($0.02 per common share) on sales of $322.3 million during the third quarter of 2010. This contrasts with a net loss of $368.4 million ($0.96 per common share) on sales of $299.4 million in the prior quarter. While second quarter results were significantly impacted by impairment, severances and other closure costs of $302.0 million, improvement in the most recent quarter also reflects better paper market conditions and operational performance.

Before specific items, Catalyst recorded a net loss of $9.6 million ($0.03 per common share), improved from a net loss before specific items of $43.9 million ($0.11 per common share) in the second quarter. Specific items in the third quarter included a foreign exchange gain of $16.3 million on the translation of U.S. dollar denominated debt. EBITDA in the third quarter was $34.2 million and EBITDA before specific items was $34.5 million, in contrast to negative $0.4 million and positive $10.5 million respectively in the second quarter.
“Business conditions are tough but showing signs of improvement,” said President and CEO Kevin J. Clarke. “Sales volumes and prices were up as North American paper demand stabilized. Our mills and machines ran well enabling us to get the most out of the modest market recovery. And we’re beginning to realize the fixed cost savings from the permanent closures of the Elk Falls and Paper Recycling facilities. In addition, we made significant progress in expanding existing customer commitments and have successfully sold into new markets.”
Market Conditions
North American demand for coated mechanical, high gloss and standard uncoated paper grades was up over both the prior quarter and the same quarter of 2009. Higher operating rates and low inventories drove benchmark price increases across these products. Directory benchmark prices increased and shipments were up quarter-over-quarter, but remained below Q3 2009 levels. North American newsprint demand was down year-over-year, but declined less than in prior quarters while Canadian demand and benchmark prices rose.
Markets for Northern Bleached Softwood Kraft pulp softened, in response to capacity restarts and demand declines, although benchmark prices remained significantly higher than a year ago.
Catalyst announced further price increases in September while previously announced increases for specialty papers and newsprint were largely implemented by quarter end.
Production curtailments were limited to the newsprint segment and the Crofton # 1 paper machine which represents 23 per cent of Catalyst newsprint capacity, remained indefinitely idled.
Key Developments
The previously announced permanent closures of two BC facilities – the Elk Falls paper mill at Campbell River and the Paper Recycling Division at Coquitlam – were completed as scheduled. The Elk Falls closure removed 526,000 tonnes of newsprint and specialty paper capacity. Annualized fixed cost savings of approximately $13.0 million are expected in 2011 with further savings realized as site assets are disposed.
During the quarter, Catalyst purchased US$9.5 million of its 8.625 per cent senior notes, due June 2011, for US$8.9 million. At $183.9 million, liquidity was down from $208.3 million in the prior quarter, largely due to the purchase of the notes, as well as property tax and severance payments in the quarter.
Catalyst continues to seek fair and sustainable municipal tax treatment for its BC mills. The company filed for leave to appeal to the Supreme Court of Canada in connection with the challenge of the District of North Cowichan’s 2009 tax and was granted leave to appeal on October 28, 2010. The appeal to the Supreme Court of Canada is expected to be heard in mid to late 2011. The company also filed legal challenges relating to the District of North Cowichan’s 2010 major industry tax levy on the Crofton mill, and the regional district portion of the City of Campbell River’s 2010 assessment. All other assessed property taxes have been paid in full.
Outlook
Further improvement in benchmark prices across all Catalyst paper products is expected in the fourth quarter with directory improvements taking effect with new contracts in 2011. Pulp prices, in contrast, are expected to decrease as Chinese demand weakens. Production curtailment is expected to be contained to the Crofton # 1 newsprint machine; however, rising input costs and the strong Canadian dollar will continue to put adverse pressure on results in the current and future quarters.