MONTREAL, May 8 /PRNewswire-FirstCall/ -- Abitibi-Consolidated Inc. today reported a first quarter loss of $70 million, or 16 cents a share. This compares to a loss of $33 million, or 8 cents a share, recorded in the first quarter of 2006. The quarter's results include the following after-tax specific items: a gain of $29 million on the translation of foreign currencies mostly related to the Company's long-term debt denominated in U.S. dollars, an $8 million favourable tax adjustment and a charge of $8 million for merger and integration-related costs.
Although not a GAAP measure, the loss would have been $95 million, or 22 cents per share, before the impact of the above-noted and other specific items. This compares to a loss of $36 million, or 8 cents a share, in the first quarter of 2006 (see Table 3 of MD&A).
In the first quarter of 2007, the Company posted an operating loss of $39 million before specific items, compared to an operating profit of $52 million in the first quarter of 2006. The Newsprint segment achieved an operating profit of $5 million, while the Commercial Printing Papers and Wood Products segments had operating losses of $9 million and $35 million respectively. The Wood Products segment includes a $7 million charge relating to inventory devaluation.
Before specific items, the $91 million reduction in operating results in the first quarter of 2007 is mainly attributable to lower prices in the Company's Newsprint and Wood Products business segments, higher cost of products sold and lower sales volume for all segments.
------------------------------------------------------------------------- Q1 2007 Highlights ------------------------------------------------------------------------- - Sales of $1.07 billion ($1.24 billion in Q1 2006) - EBITDA of $70 million ($162 million in Q1 2006) - Decrease in average newsprint prices in the United States by approximately US$30 per tonne compared to the previous quarter - Positive demand outlook for uncoated groundwood papers - Decrease in wood products sales volume driven by a reduction in U.S. housing starts - Indefinite idling on February 25, 2007, of the Company's Fort William, Ontario, paper mill due to market conditions and high production costs ------------------------------------------------------------------------- Proposed Merger with Bowater
On January 29, 2007, Abitibi-Consolidated Inc. and Bowater Incorporated (Bowater) announced a definitive agreement to combine in an all-stock merger of equals. The combination will create a new leader in publication papers, the third largest publicly traded paper and forest products company in North America and the eighth largest in the world. The combination is subject to approval by the shareholders of both companies, regulatory approvals and customary closing conditions. Abitibi-Consolidated and Bowater continue to operate separately until the transaction closes.
Fort Frances Biomass Energy Generator
On March 8, 2007, Abitibi-Consolidated announced an investment of $84.3 million in a new biomass energy generator to be located at its Fort Frances, Ontario, pulp and paper mill. The Company's net contribution to this project will be $61.8 million. Construction is scheduled to begin in the summer of 2007, and the generator is anticipated to be in operation during the fall of 2008. The equipment will use renewable, cost-effective fuel from wood waste to generate steam and 45.5 MW of electricity for the mill, which should reduce costs by approximately $26 million annually and eliminate about 90% of the mill's current greenhouse gas emissions.
Comments by the CEO
"Deteriorating conditions in most markets provided significant challenges for the Company during the quarter. The situation does, however, underscore the strategic rationale and timing for our merger with Bowater. Together, our two companies will be stronger and better equipped to compete in the fiercely competitive global marketplace," said John Weaver, Abitibi-Consolidated President and Chief Executive Officer.
Investor Call
FORWARD-LOOKING STATEMENTS
This disclosure contains certain forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond the Company's control, including: the impact of general economic conditions in the U.S. and Canada and in countries in which the Company and its subsidiaries currently do business; industry conditions, the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced; fluctuations in the availability or costs of raw materials or electrical power; changes in existing forestry regulations or changes in how they are administered which could result in the loss of certain contractual or other rights or permits which are material to the Company's business; increased competition; the lack of availability of qualified personnel or management; the outcome of certain litigation; labour unrest; and fluctuation in foreign exchange or interest rates. The Company's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds, that the Company will derive there from.
The following factors, among others, relating to the proposed combination with Bowater could cause actual results to differ materially from those set forth in the forward-looking statements: the ability to obtain required governmental or third party approvals of the combination on the proposed terms and schedule and without material concessions; the failure of Abitibi-Consolidated or Bowater shareholders to approve the combination; the exercise by a material percentage of Abitibi-Consolidated shareholders of their dissent rights; the risk that the businesses will not be integrated successfully; the risk that the cost savings and other expected synergies from the combination may not be fully realized or may take longer to realize than expected; and disruption from the combination making it more difficult to maintain relationships with customers, employees or suppliers.
Abitibi-Consolidated Inc. Management's Discussion and Analysis (MD&A) First Quarter Report to Shareholders May 8, 2007 KEY EVENT --------- Abitibi-Consolidated Inc. and Bowater Incorporated to merge -----------------------------------------------------------
On January 29, 2007, Abitibi-Consolidated Inc. and Bowater Incorporated (Bowater) announced a definitive agreement to combine in an all-stock merger of equals. The combination will create a new leader in publication papers. The combined company, which will be called AbitibiBowater Inc., will have pro forma annual revenues of approximately US$7.8 billion ($8.8 billion), making it the 3rd largest publicly traded paper and forest products company in North America and the 8th largest in the world.
The combination has been approved unanimously by the Boards of Directors of both companies, which received fairness opinions from their respective financial advisors. The combination is subject to approval by the shareholders of both companies, regulatory approvals and customary closing conditions. It is expected to be completed in the third quarter of 2007. Abitibi-Consolidated and Bowater will continue to operate separately until the transaction closes.
HIGHLIGHTS ---------- $70 million loss in the first quarter of 2007 ---------------------------------------------
Abitibi-Consolidated reported a loss of $70 million, or 16 cents a share, in the first quarter ended March 31, 2007, compared to a loss of $33 million, or 8 cents a share, in the same quarter of 2006.
Sales were $1,068 million in the three-month period ending March 31, 2007, compared to $1,237 million in the same period last year. The Company recorded an operating loss of $47 million during the quarter, compared to an operating profit of $41 million for the first quarter of 2006.
SPECIFIC ITEMS IMPACTING RESULTS AND NON-GAAP MEASURES ------------------------------------------------------
The Company's operating results include specific items that are not related to normal operating activities and make the comparison of results difficult from period to period. Abitibi-Consolidated compares its performance as well as those of its business segments before specific items, based on EBITDA, operating profit (loss), net earnings (loss), net earnings (loss) per share and other such measures. Specific items include gain or loss on translation of foreign currencies, mill closure and other elements, asset write offs or write downs, income tax adjustments related to the finalization of prior-year audits, impact of changes in income tax legislation and other items that do not relate to normal operating activities. Operating profit (loss) before specific items, net earnings (loss) before specific items, net earnings (loss) per share before specific items and other such measures before specific items, such as EBITDA, are not measures prescribed by the Canadian Generally Accepted Accounting Principles (GAAP). The Company believes this is useful supplemental information, as it provides an indication of performance and comparative trends, excluding these specific items. However, readers should be cautioned that this information should not be confused with or used as an alternative to measures prescribed by Canadian GAAP.
Specific items impacting operating profit (loss) ------------------------------------------------
In the first quarter of 2007, specific items negatively impacted operating profit (loss) by $8 million, compared to $11 million in the same quarter last year.
First quarter 2007
In the first quarter of 2007, the Company recorded a $2 million credit related to adjustments to the settlement of the lumber dispute in December of 2006. An additional credit of $2 million was also recorded in the Company's selling, general and administrative (SG&A) expenses, due to a prior-year capital tax adjustment.
Mill closure and other elements include $11 million of expenses related to the merger with Bowater announced during the quarter. The merger expenses were allocated to the Company's Newsprint, Commercial Printing Papers and Wood Products segments for $6 million, $3 million and $2 million, respectively. Newsprint operating results were negatively impacted by $1 million of mill closure and other elements, mainly due to the recognition of a liability related to an early retirement program and labour force reductions. Commercial Printing Papers operating results were negatively impacted by $9 million of mill closure and other elements mainly due to the indefinite idling of the Company's Fort William paper mill located in Thunder Bay, Ontario. In the first quarter of 2007, the Company recorded in the Newsprint segment a gain of $9 million on the transfer of 55,000 acres of timberlands from Augusta Newsprint Company to Abitibi-Consolidated, representing the amount of the gain realized from the partner's 47.5% interest in Augusta Newsprint Company. An equivalent amount was recorded in the non-controlling interest line item on the Company's consolidated statements of earnings (loss) to offset the gain on the transfer of the timberlands.
First quarter 2006
Specific items for the first quarter of 2006 have been adjusted to take into consideration a $9 million countervailing duty (CVD) and anti-dumping duty (AD) credit related to the lumber dispute settlement reached in April of 2006 and finalized in the fourth quarter of 2006. In the first quarter of 2006, Newsprint operating results were negatively impacted by $3 million, mainly due to the recognition of a liability related to an early retirement program and labour force reductions. Also in the first quarter of 2006, operating results in the Wood Products segment were positively impacted by $1 million, mainly due to compensation for reduction of cutting rights in British Columbia.
Table 2 highlights the impact of the above specific items on operating results by segment.
Table 2: Operating profit (loss) (in millions of dollars) As per financial Before statements specific items(1) ------------------- -------------------- First Quarter First Quarter ------------------- -------------------- 2007 2006 2007 2006 --------- --------- --------- ---------- Newsprint $ 8 $ 42 $ 5 $ 45 Commercial Printing Papers (20) (6) (9) (6) Wood Products (35) 5 (35) 13 --------- --------- --------- ---------- ($ 47) $ 41 ($ 39) $ 52 Note (1) Non-GAAP measures Other specific items impacting net earnings (loss) --------------------------------------------------
Other than specific items covered in the previous section, in the first quarter of 2007, Abitibi-Consolidated recorded an after-tax gain on translation of foreign currencies of $29 million, mainly from the stronger Canadian currency at the end of the quarter, compared to the U.S. dollar, in which most of the Company's long-term debt is denominated, and a favourable income tax adjustment of $8 million, mainly due to the revision of prior-period tax provisions. The Company recorded $9 million, in the non-controlling interest line item, to offset, on a consolidated basis, the gain relating to the transfer of 55,000 acres of timberlands discussed in the previous section.
In the first quarter of 2006, the Company recorded an after-tax loss on translation of foreign currencies of $12 million, mainly from the weaker Canadian currency at the end of the quarter compared to the U.S. dollar, in which most of the Company's long-term debt is denominated. Also, the Company recorded a positive income tax adjustment of $22 million, mainly related to the favourable settlement of a prior-year income tax issue.
Table 3: Impact of specific items on net earnings (loss) (in millions of dollars, except per share amounts) First Quarter ---------------------------------------- 2007 2006 ------------------- -------------------- Before After Before After Tax Tax Tax Tax --------- --------- --------- ---------- Net earnings (loss) as reported in the financial statements ($ 70) ($ 33) $ per share (0.16) (0.08) Specific items: Impacting operating profit (loss) (as per Table 2) 8 3 11 7 Loss (gain) on translation of foreign currencies (33) (29) 15 12 Transfer of Augusta timberlands (Minority interest) - 9 - - Income tax expense (recovery) (8) (22) --------- ---------- Net earnings (loss) excluding specific items(1) ($ 95) ($ 36) $ per share(1) (0.22) (0.08) Note (1) Non-GAAP measures RESULTS BEFORE SPECIFIC ITEMS -----------------------------
As specific items have been covered in the previous section, the following comparison and analysis will only focus on the Company's performance related to normal operating activities.
Consolidated results before specific items ------------------------------------------
Before specific items, the $91 million reduction in operating results in the first quarter of 2007 is mainly attributable to lower prices in the Company's Newsprint and Wood Products business segments, as well as higher cost of products sold and lower sales volume for all segments.
Table 4: Consolidated results before specific items(1) (in millions of dollars, except per share amounts) Fav/(unfav) variance due to First ------------------------------------ First Quarter Foreign Quarter 2007 Volume exchange Prices Costs 2006 -------- --------- --------- --------- --------- ----------- Sales $ 1,068 ($ 134) ($ 4) ($ 31) $ - $ 1,237 Cost of products sold 842 98 (7) - (27) 906 Distribution costs 116 13 (1) - 1 129 CVD, AD and other duties 4 - - - (4) - SG&A 36 - - - 4 40 -------- --------- --------- --------- --------- ----------- EBITDA(1) $ 70 ($ 23) ($ 12) ($ 31) ($ 26) $ 162 Amortization 109 - - - 1 110 -------- --------- --------- --------- --------- ----------- Operating profit (loss) ($ 39) ($ 23) ($ 12) ($ 31) ($ 25) $ 52 Financial expenses 85 83 Other expenses 6 7 Income tax expense (recovery) (40) (11) Share of earnings from investments subject to significant influence 1 - Non- controlling interests (6) (9) -------- --------- --------- --------- --------- ----------- -------- --------- --------- --------- --------- ----------- Net earnings (loss) ($ 95) ($ 36) $ per share (0.22) (0.08) Note (1) Non-GAAP measures
When comparing the average exchange rate in the first quarter of 2007 to the same period in 2006, the Canadian dollar weakened by 1.5% compared to the U.S. dollar. The Company estimates that this had a favourable impact of approximately $9 million on its operating results, compared to the same period last year. The Company's hedging program was, however, unfavourable by $24 million mainly due to a positive contribution of $22 million in the first quarter of 2006, compared to a negative contribution of $2 million in the first quarter of 2007. Other currency exchange rates had a positive impact of $3 million.
Financial expenses totalled $85 million in the first quarter of 2007, compared to $83 million in 2006. The increase is mainly due to the higher interest cost due to higher use of the Company's revolving credit facility.
Segmented results before specific items --------------------------------------- Newsprint
In the Newsprint segment, the $40 million reduction in operating profit before specific items is mainly due to lower sales volume, lower North American selling prices and higher cost of products sold.
The Company's newsprint shipments in the first quarter of 2007 were 779,000 tonnes, compared to 880,000 tonnes in the first quarter of 2006. The reduction in shipments was mainly attributable to lower sales in North America.
At the end of the first quarter of 2007, the Company's newsprint inventories were approximately 60,000 tonnes higher than both at the end of the first quarter 2006 and at the end of December 2006. The increase is mainly due to inventory build-up required for higher international sales.
Year-over-year, the first quarter of 2007 average price in the U.S. was US$30 per tonne lower. In most regions of the world, especially in Europe, newsprint prices have increased, compared to the same quarter last year. During the first quarter of 2007, average newsprint price in the U.S. also decreased by approximately US$30 per tonne, compared to the previous quarter as a result of the market softening in North America.
On a per tonne basis, cost of products sold for newsprint in the first quarter of 2007 was $24 higher than in the same quarter of 2006. The increase in costs was mainly due to higher recycled fibre prices and the weaker Canadian dollar increasing production costs in Canadian dollars of the Company's U.S. mills.
According to the Pulp and Paper Products Council (PPPC), total U.S. newsprint consumption was down by 12.2% in the first quarter of 2007, compared to the first quarter of 2006, as daily publishers' advertising volume and circulation continued on a downward trend. In the first quarter of 2007, total inventory increased by 197,000 tonnes, compared to an increase of 49,000 in the first quarter of 2006. North American newsprint production declined 4.5% in the first quarter of 2007, compared to the same period in 2006. In the first quarter of 2007, the operating rate of the North American industry was 94%, compared to 95% in the same period of 2006.
The Company expects 2007 worldwide newsprint demand to increase slightly. Specific regions should continue to deliver positive growth in demand, such as Eastern Europe, China, India, Turkey and, to a certain extent, Brazil. Nonetheless, whether impacted by a weakened advertising/circulation environment or inventory de-stocking, North American newsprint demand is expected to decrease by approximately 6% this year.
Commercial Printing Papers
In the Commercial Printing Papers segment, the $3 million reduction in operating results before specific items is mainly due to higher cost of products sold, partly offset by higher mill nets.
The Company's shipments of commercial printing papers totalled 401,000 tonnes in the first quarter of 2007, compared to 419,000 tonnes in the first quarter of 2006. On February 25, 2007, Abitibi-Consolidated idled its Fort William paper mill for an indefinite period, due to market conditions and high production costs. The mill has an annual production capacity of approximately 145,000 tonnes of commercial printing papers. In addition, the Company took market-related downtime at two of its commercial printing paper mills. In total, the Company removed 37,000 tonnes of production in the first quarter of 2007.
During the first quarter of 2007, the average price for commercial printing papers in the U.S. remained stable, compared to the previous quarter. Compared to the first quarter of 2006, the average price in the U.S. was 3% higher.
On a per tonne basis, cost of products sold for commercial printing papers in the first quarter of 2007 was $22 higher than in the same quarter of 2006. The cost increase was due to lower production volume as a result of market-related downtime, while furnish price increases were more than offset by better productivity.
According to the PPPC, North American demand for uncoated groundwood papers increased 1.4% in the first quarter of 2007, compared to the same period of 2006. This is the third consecutive quarter of growth for uncoated groundwood papers. The increase was driven by higher demand for hi-gloss and lightweight papers, partly offset by a weaker demand for standard grades.
The outlook for uncoated groundwood papers demand remains positive. Demand growth is expected to be driven largely by hi-gloss paper, which is rebounding from the previous-year decline, as well as increased demand for superbrite and lightweight papers.
Wood Products
In the Wood Products segment, the $48 million reduction in operating results before specific items is mainly due to lower selling prices and sales volume as well as higher cost of products sold per thousand board feet.
Sales volume in the first quarter of 2007 totalled 399 million board feet (MBf), compared to 499 MBf for the same period in 2006. Average selling prices in Canadian dollars for the first quarter of 2007 were 19% lower than in the same quarter of 2006, as a result of lower U.S. dollar lumber prices.
During the fourth quarter of 2006, the Company announced the idling of five Quebec sawmills, including a sawmill owned by Produits Forestiers Saguenay Inc., a subsidiary of Abitibi-Consolidated. The temporary closures were mainly attributable to deteriorating wood products market conditions as well as high production and fibre costs. At this time, two of the five sawmills are still idled. In addition to these temporary closures, the Company curtailed production in certain other sawmills.
On a per thousand board feet basis, cost of products sold for wood products in the first quarter of 2007 was $17 higher than in the first quarter of 2006. This was mainly due to lower production related to downtime and by the devaluation of finished goods inventory at realizable value for $7 million.
In the United States, housing starts decreased by 23% from an annual rate of 1.972 million units during March of 2006 to 1.518 million units in March of 2007. During the first quarter of 2007, average U.S. dollar lumber prices (f.o.b. Great Lakes) decreased by 19% for both 2x4 Stud and 2x4 Random Length, compared to the same period of 2006.
BALANCE SHEET -------------
As at March 31, 2007, total long-term debt amounted to $3,925 million for a ratio of net debt to total capitalization of 0.611, compared to $3,864 million for a net debt to total capitalization ratio of 0.592 as at December 31, 2006. The increase in the Company's long-term debt is mainly attributable to additional working capital requirements. As at March 31, 2007, cash and cash equivalents amounted to $132 million, a decrease of $71 million compared to December 31, 2006.
On March 23, 2007, Moody's Investors Service downgraded the Company's corporate rating from B1 to B2 and senior unsecured debt ratings from B2 to B3. At the same time, the liquidity rating was affirmed at SGL-2, indicating good liquidity.
Net funded debt to capitalization ratio, calculated as per the requirements of the Company's revolving credit facilities, amounted to 59.8% at the end of March 2007 and the interest coverage ratio was 2.3x for the twelve-month period ended March 31, 2007, both ratios being compliant with the covenants of the said facilities. At the end of March 2007, the Company had drawn $310 million on these credit facilities.
As at March 31, 2007, the outstanding balance of the Company's securitization programs, in Canadian dollars, was $385 million, compared to $433 million as at December 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES -------------------------------
Cash used for operating activities totalled $170 million for the first quarter ended March 31, 2007, compared to $101 million in the corresponding period of 2006. The increase in cash used is mainly due to the lower operating results. This was partly offset by lower working capital requirements in the first quarter of 2007, compared with the same quarter last year.
Capital expenditures were $26 million for the three-month period ended March 31, 2007, compared to $37 million in the corresponding period last year. On March 8, 2007, Abitibi-Consolidated announced an investment of $84.3 million in a new biomass energy generator to be located at its Fort Frances, Ontario, pulp and paper mill. The Company's net contribution to this project will be $61.8 million. Construction is scheduled to begin in the summer of 2007, and the generator is anticipated to be in operation during the fall of 2008. The equipment will use renewable, cost-effective fuel from wood waste to generate steam and 45.5 Megawatts (MW) of electricity for the mill which should eliminate approximately 90% of its current greenhouse gas emission. The new biomass boiler will burn mill-generated wood waste and primary sludge, as well as harvest slash from woodlands operations and wood waste from area sawmills. This project is expected to reduce the mill's manufacturing costs by approximately $26 million annually. The Company intends to limit its capital expenditure program in 2007 to approximately $165 million.
SHARES OUTSTANDING ------------------
As at March 31, 2007, the number of shares outstanding remained constant at 440 million, compared to the end of the same period in 2006. There were 15.6 million options outstanding at the end of March 2007, compared to 14.5 million as at the end of December 2006.
OTHER NOTEWORTHY EVENTS -----------------------
On April 2, 2007, Abitibi-Consolidated closed the transaction with the Caisse de depot et placement du Quebec (Caisse) announced in January of 2007 to create a partnership for the Company's Ontario hydroelectric assets, consisting of approximately 137 MW of installed capacity. The Company has retained a 75% interest in the partnership, called ACH Limited Partnership, while the Caisse has acquired a 25% interest. The Caisse has also provided ACH Limited Partnership with a 10-year unsecured term loan of $250 million, non recourse to the Company, to partially fund the acquisition of the facilities. The transaction, on a consolidated basis, has yielded gross proceeds of $297.5 million to Abitibi-Consolidated. ACH Limited Partnership is intended to be Abitibi-Consolidated's growth vehicle in energy generation. The transaction will be accounted for in the second quarter of 2007.
With respect to the divestiture of 55,000 acres of timberlands located in Georgia and South Carolina, Abitibi-Consolidated and its partner have agreed that all proceeds from the sale of the timberlands would go to the Company. Therefore, Abitibi-Consolidated acquired the timberlands from Augusta Newsprint Company in February of 2007. The Company expects to sell the majority of the timberlands before the end of the third quarter and to complete the sale before the end of the year with proceeds expected to be in excess of US$100 million.
SELECTED QUARTERLY INFORMATION
Table 8: Summary of quarterly results (in millions of dollars, except otherwise noted)
2007 2006 -------------------------------------------------- Q-1 Q-4 Q-3 Q-2 Q-1 --------- --------- --------- --------- ----------- Sales $ 1,068 $ 1,180 $ 1,181 $ 1,253 $ 1,237 Operating profit (loss) from continuing operations (47) 236 2 48 41 Operating profit (loss) from continuing operations before specific items(1) (39) 17 10 57 52 Earnings (loss) from continuing operations (70) (22) (48) 157 (33) Earnings (loss) from continuing operations per share (0.16) (0.05) (0.11) 0.36 (0.08) Net earnings (loss) (70) (22) (48) 157 (33) Net earnings (loss) per share (0.16) (0.05) (0.11) 0.36 (0.08) Exchange rates (CDN$1= US$): Average noon rate 0.854 0.878 0.892 0.891 0.866 2005 ----------------------------------------- Q-4 Q-3 Q-2 Q-1 --------- --------- --------- ----------- Sales $ 1,310 $ 1,355 $ 1,354 $ 1,323 Operating profit (loss) from continuing operations (352) 8 57 11 Operating profit (loss) from continuing operations before specific items(1) 15 49 58 19 Earnings (loss) from continuing operations (345) 95 (49) (54) Earnings (loss) from continuing operations per share (0.79) 0.22 (0.11) (0.13) Net earnings (loss) (355) 99 (43) (51) Net earnings (loss) per share (0.81) 0.23 (0.10) (0.12) Exchange rates (CDN$1= US$): Average noon rate 0.852 0.832 0.804 0.815 Note (1) Non-GAAP measures CHANGES IN ACCOUNTING POLICIES ------------------------------ Financial instruments, hedges and comprehensive income ------------------------------------------------------
In January 2005, the CICA published the following three new sections of the CICA Handbook: Section 3855, Financial Instruments - Recognition and Measurement, Section 3865, Hedges, and Section 1530, Comprehensive Income. Together, these standards introduce new requirements for the recognition and measurement of financial instruments, hedge accounting and comprehensive income that are, for the most part, harmonized with standards issued by the U.S. Financial Accounting Standards Board. These new recommendations have been adopted by the Company for the fiscal year beginning on January 1, 2007.
These new recommendations did not have a significant impact on the Company's financial position, earnings or cash flows, but require presenting two new statements entitled "Comprehensive Income (Loss)" and "Changes in Shareholders' Equity". More information on the above changes is presented in Note 1 of the Company's interim consolidated financial statements.
Accounting changes ------------------
In 2006, the CICA issued Section 1506, Accounting Changes, of the Handbook. This standard establishes criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies and estimates, and correction of errors. The Company applied this standard as of January 1, 2007.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS --------------------------------------------------------
In the quarter ended March 31, 2007, the Company did not make any significant changes in, nor take any significant corrective actions regarding its internal controls or other factors that could significantly affect such internal controls. The Company's CEO and CFO periodically review the Company's disclosure controls and procedures for effectiveness and conduct an evaluation each quarter. As of the end of the first quarter, the Company's CEO and CFO were satisfied with the effectiveness of the Company's disclosure controls and procedures.
OVERSIGHT ROLE OF AUDIT COMMITTEE ---------------------------------
The Audit Committee reviews, with Management and the external auditor, the Company's quarterly MD&A, and related consolidated financial statements and approves the release to shareholders. Management and the internal auditor of the Company also periodically present to the Committee a report of their assessment of the Company's internal controls and procedures for financial reporting. The external auditor periodically prepares a report for Management on internal control weaknesses noted, if any, identified during the course of the auditor's annual audit, which is reviewed by the Audit Committee.
FORWARD-LOOKING STATEMENTS --------------------------
Certain statements contained in this MD&A and in particular the statements contained in various outlook sections, constitute forward-looking statements. These forward-looking statements relate to the future financial condition, results of operations or business of the Company. These statements may be current expectations and estimates about the markets in which Abitibi-Consolidated operates and management's beliefs and assumptions regarding these markets. These statements are subject to important risks and uncertainties, which are difficult to predict and assumptions, which may prove to be inaccurate. The results or events predicted in the forward-looking statements contained in this MD&A may differ materially from actual results or events. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In particular, forward-looking statements do not reflect the potential impact of any merger, acquisitions or other business combinations or divestitures that may be announced or completed after such statements are made.
Abitibi-Consolidated Inc. Consolidated Statements of Loss Three months ended (unaudited) March 31 March 31 (in millions of Canadian dollars, 2007 2006 unless otherwise noted) $ $ ------------------------------------------------------------------------- Sales 1,068 1,237 ------------------------------------------------------------------------- Cost of products sold, excluding amortization 842 906 Distribution costs 116 129 Countervailing, anti-dumping and other duties 2 9 Selling, general and administrative expenses 34 40 Mill closure and other elements (note 3) 12 2 Amortization of plant and equipment 105 106 Amortization of intangible assets 4 4 ------------------------------------------------------------------------- Operating profit (loss) (47) 41 Financial expenses (note 5) 85 83 Loss (gain) on translation of foreign currencies (33) 15 Other expenses 6 7 ------------------------------------------------------------------------- Loss before the following items (105) (64) Income tax recovery (note 6) (49) (40) Share of earnings from investments subject to significant influence 1 - Non-controlling interests (15) (9) ------------------------------------------------------------------------- Loss (70) (33) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Per common share (in dollars, basic and diluted) Loss (0.16) (0.08) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares outstanding (in millions) 440 440 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Comprehensive Loss Three months ended March 31 March 31 (unaudited) 2007 2006 (in millions of Canadian dollars) $ $ ------------------------------------------------------------------------- Loss (70) (33) Other comprehensive income (loss), net of income taxes Foreign currency translation adjustment (12) 2 Reclassification to earnings of losses on derivatives designated as cash flow hedges, net of taxes of $1 million (2006 - nil) (1) - Change in unrealized losses on derivatives designated as cash flow hedges, net of taxes of $2 million (2006 - nil) 5 - ------------------------------------------------------------------------- Comprehensive loss (78) (31) ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying Notes to consolidated financial statements Abitibi-Consolidated Inc. Consolidated Statements of Cash Flows Three months ended March 31 March 31 (unaudited) 2007 2006 (in millions of Canadian dollars) $ $ ------------------------------------------------------------------------- Operating activities Loss (70) (33) Amortization 109 110 Future income taxes (52) (38) Loss (gain) on translation of foreign currency long-term debt (40) 13 Employee future benefits, excess of funding over expense (25) (10) Non-cash mill closure elements and other elements (note 3) (9) - Non-controlling interests 15 9 Other non-cash items (5) (7) ------------------------------------------------------------------------- (77) 44 Changes in non-cash operating working capital components (93) (145) ------------------------------------------------------------------------- Cash flows used in operating activities (170) (101) ------------------------------------------------------------------------- Financing activities Increase in long-term debt 200 167 Repayment of long-term debt (70) (72) Dividends paid to shareholders - (11) Dividends and cash distributions paid to non-controlling interests (6) (8) Other - 1 ------------------------------------------------------------------------- Cash flows from financing activities 124 77 ------------------------------------------------------------------------- Investing activities Additions to property, plant and equipment (26) (37) Additions to intangible assets - (3) Other 1 1 ------------------------------------------------------------------------- Cash flows used in investing activities (25) (39) ------------------------------------------------------------------------- Decrease in cash and cash equivalents during the period (71) (63) Cash and cash equivalents, beginning of period 203 67 ------------------------------------------------------------------------- Cash and cash equivalents, end of period 132 4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying Notes to consolidated financial statements Components of the changes in non-cash operating working capital Accounts receivable 47 9 Inventories (101) (73) Prepaid expenses (2) (4) Accounts payable and accrued liabilities (37) (77) -------------------- (93) (145) -------------------- Cash outflows (inflows) during the period related to Interest on long-term debt 77 70 Income taxes 3 (2) -------------------- 80 68 -------------------- Abitibi-Consolidated Inc. Consolidated Balance Sheets March December 31 31 (unaudited) 2007 2006 (in millions of Canadian dollars) $ $ ------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents 132 203 Accounts receivable 316 362 Inventories 783 683 Prepaid expenses 55 53 Future income taxes 68 70 ------------------------------------------------------------------------- 1,354 1,371 Property, plant and equipment 3,860 3,984 Intangible assets 456 460 Employee future benefits 354 328 Future income taxes 315 322 Other assets 170 200 Goodwill 1,296 1,297 Timberlands held for sale (note 2) 42 - ------------------------------------------------------------------------- 7,847 7,962 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities (note 7) 775 785 Long-term debt due within one year 71 72 ------------------------------------------------------------------------- 846 857 Long-term debt 3,854 3,792 Employee future benefits 162 162 Future income taxes 572 629 Non-controlling interests 80 71 Shareholders' equity Capital stock 3,518 3,518 Contributed surplus 41 40 Deficit (947) (843) Accumulated other comprehensive loss (note 9) (279) (264) ------------------------------------------------------------------------- 2,333 2,451 ------------------------------------------------------------------------- 7,847 7,962 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying Notes to consolidated financial statements Abitibi-Consolidated Inc. Consolidated Statements of Changes in Shareholders' Equity Three months ended March 31 March 31 (unaudited) 2007 2006 (in millions of Canadian dollars) $ $ ------------------------------------------------------------------------- Capital stock ------------------------------------------------------------------------- Common shares, beginning and end of period 3,518 3,518 ------------------------------------------------------------------------- Contributed surplus Contributed surplus, beginning of period 40 34 Stock options 1 1 ------------------------------------------------------------------------- Contributed surplus, end of period 41 35 ------------------------------------------------------------------------- Deficit Deficit, beginning of period (843) (875) Transition adjustment on adoption of Financial Instruments standards, net of taxes (note 1) (34) - Loss (70) (33) Dividends declared - (11) ------------------------------------------------------------------------- Deficit, end of period (947) (919) ------------------------------------------------------------------------- Accumulated other comprehensive loss, net of taxes Accumulated other comprehensive loss, beginning of period (264) (276) Transition adjustment on adoption of Financial Instruments standards (note 1) (7) - Other comprehensive income (loss) for the period (8) 2 ------------------------------------------------------------------------- Accumulated other comprehensive loss, end of period (279) (274) ------------------------------------------------------------------------- Total shareholders' equity, end of period 2,333 2,360 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total of deficit and accumulated other comprehensive loss amounts to $1,226 million as of March 31, 2007 ($1,193 million as of March 31, 2006) See accompanying Notes to consolidated financial statements Abitibi-Consolidated Inc. Consolidated Business Segments (unaudited) (in millions of Canadian dollars, unless otherwise noted) Additions Operating to Three months ended Amor- profit capital Sales March 31, 2007 Sales tization (loss)(1) assets(2) volume ------------------------------------------------------------------------- $ $ $ $ Newsprint 576 59 8 17 779(a) Commercial printing papers 352 39 (20) 9 401(a) Wood products(3) 140 11 (35) - 399(b) ------------------------------------------------------------------------- 1,068 109 (47) 26 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended March 31, 2006 ------------------------------------------------------------------------- Newsprint 662 61 42 18 880(a) Commercial printing papers 360 38 (6) 17 419(a) Wood products (3) 215 11 5 5 499(b) ------------------------------------------------------------------------- 1,237 110 41 40 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Specific items affecting: Mill closure and other elements -------------------- Counter- vailing, anti- dumping Mill and SG&A Total Three months ended closure Other other ex- specific March 31, 2007 costs elements(4) duties(5) penses(6) items ------------------------------------------------------------------------- $ $ $ $ $ Newsprint - (2) - (1) (3) Commercial printing papers 8 4 - (1) 11 Wood products - 2 (2) - - ------------------------------------------------------------------------- 8 4 (2) (2) 8 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Three months ended March 31, 2006 ------------------------------------------------------------------------- Newsprint 1 2 - - 3 Commercial printing papers - - - - - Wood products - (1) 9 - 8 ------------------------------------------------------------------------- 1 1 9 - 11 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (2) Capital assets include property, plant and equipment and intangible assets. (3) Wood products sales exclude inter-segment sales of $40 million for the three months ended March 31, 2007 ($43 million for the three months ended March 31, 2006). (4) Other elements include early retirement program, gain on sale of timberlands and expenses related to the Abitibi-Consolidated and Bowater merger. (5) Credit related to adjustment to the settlement of the lumber dispute. (6) Related to prior year capital tax adjustment included in selling, general and administrative expenses. (a) in thousands of tonnes (b) in millions of board feet March December 31 31 2007 2006 Total assets $ $ ------------------------------------------------------------------------- Newsprint 4,291 4,358 Commercial printing papers 2,723 2,742 Wood products 833 862 ------------------------------------------------------------------------- 7,847 7,962 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Abitibi-Consolidated Inc. Notes to Consolidated Financial Statements March 31, 2007 (unaudited) (in millions of Canadian dollars, unless otherwise noted) 1. Summary of significant accounting policies
These interim consolidated financial statements of Abitibi-Consolidated Inc. (the "Company"), expressed in Canadian dollars, are prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"), with the exception that their disclosures do not conform in all material respects to the requirements of GAAP for annual financial statements. They should be read in conjunction with the latest annual financial statements.
These consolidated financial statements are prepared using the same accounting principles and application thereof as the consolidated financial statements for the year ended December 31, 2006, except for the following:
Accounting changes
On January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1506, Accounting Changes. This standard establishes criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies and estimates, and correction of errors.
Financial instruments
On January 1, 2007, the Company adopted CICA Handbook Section 1530, Comprehensive Income; Section 3855, Financial Instruments - Recognition and Measurement and Section 3865, Hedges. These standards provide accounting guidelines for recognition and measurement of financial assets, financial liabilities and non-financial derivatives, and describe when and how hedge accounting may be applied.
The Company's adoption of these new Financial Instruments standards resulted in changes in the accounting for financial instruments and hedges, as well as the recognition of certain transition adjustments that have been recorded in opening deficit or opening accumulated other comprehensive loss as described below. The comparative interim consolidated financial statements have not been restated other than for the foreign currency translation adjustment, which is now disclosed within accumulated other comprehensive loss. The principal changes in the accounting for financial instruments and hedges due to the adoption of these accounting standards are described below.
(a) Comprehensive income (loss)
Comprehensive income (loss), established under CICA Section 1530, is defined as the change in equity, from transactions and other events and circumstances from non-owner sources, and is composed of the Company's net earnings (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are recognized in comprehensive income (loss), but excluded from net earnings (loss), and include foreign currency translation gains and losses on the net investment in self-sustaining operations and changes in the fair market value of derivative instruments designated as cash flow hedges, all net of income taxes. The components of comprehensive income (loss) are disclosed in the interim consolidated statements of comprehensive income (loss).
(b) Financial assets and financial liabilities
Under the new standards, financial assets and financial liabilities are initially recognized at fair value and are classified into one of these five categories: held-for-trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. They are subsequently accounted for based on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition.
Held-for-trading Financial instruments classified as held-for-trading are carried at fair value at each balance sheet date with the changes in fair value recorded in net earnings (loss) in the period in which these changes arise. Held-to-maturity investments, loans and receivables and other financial liabilities Financial instruments classified as loans and receivables, held-to- maturity investments and other financial liabilities are carried at amortized cost using the effective interest method. The interest income or expense is included in net earnings (loss) over the expected life of the instrument. Available-for-sale Financial instruments classified as available-for-sale are carried at fair value at each balance sheet date with the changes in fair value recorded in other comprehensive income (loss) in the period in which the change arise. Securities that are classified as available-for-sale and do not have a readily available market value are recorded at cost. Available-for-sale securities are written down to fair value through earnings (loss) whenever it is necessary to reflect other-than-temporary impairment. Upon derecognition, all cumulative gain or loss is then recognized in net earnings (loss).
As a result of the adoption of these new standards, the Company has classified its cash and cash equivalents as held-for-trading. Accounts receivable are classified as loans and receivables. The Company's investments consist of equity accounted for investments which are excluded from the scope of this standard. Accounts payable and accrued liabilities and long-term debt, including interest payable are classified as other liabilities, all of which are measured at amortized cost.
(c) Derivatives and hedge accounting Embedded derivatives All derivative instruments are recorded in the consolidated balance sheets at fair value at each balance sheet date. Derivatives may be embedded in other financial instruments (the "host instrument"). Prior to the adoption of the new standards, such embedded derivatives were not accounted for separately from the host instrument. Under the new standards, embedded derivatives are treated as separate derivatives if their economic characteristics and risks are not clearly and closely related to those of the host instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value at each balance sheet date with subsequent changes recognized in net earnings (loss) in the period in which the changes arise. The Company selected January 1, 2003 as its transition date for embedded derivatives, which is the latest date that could be selected according to the accounting standard. Hedge accounting At the inception of a hedging relationship, the Company documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. The Company also requires a documented assessment, both at hedge inception and on an ongoing basis, of whether or not the derivatives that are used in hedging transactions are effective in offsetting the changes attributable to the hedged risks in the fair values or cash flows of the hedged items. Under the new standards, all derivatives are recorded at fair value. These derivatives are recorded in accounts receivable
