VANCOUVER, BC, April 24 /PRNewswire-FirstCall/ -- Catalyst Paper recorded a net loss of $25.6 million or $0.12 per common share on sales of $478.1 million in the first quarter of 2007, the result of weaker paper prices, rising fibre prices, restructuring costs and higher planned major maintenance costs.
The net loss included $12.2 million or $0.06 per common share of after-tax costs associated with restructuring and change-of-control-related costs. These factors were partially offset by market pulp prices reaching their highest level since 1995 as well as weakening of the Canadian dollar.
The first-quarter results compare to a net loss of $37.2 million or $0.17 per common share on sales of $470.6 million in the fourth quarter of 2006. Earnings before interest, taxes, depreciation and amortization (EBITDA) totalled $14.1 million in the first quarter, down from $48.5 million in the fourth quarter.
The company posted an after-tax foreign exchange gain of $6.6 million or $0.03 per common share in the first quarter from the translation of US-dollar-denominated debt. This compares to an after-tax foreign exchange loss of $26.2 million or $0.12 per common share in the fourth quarter of 2006.
During the quarter, former president and chief executive officer Russell J. Horner and former vice-president finance and chief financial officer Ralph Leverton left the company. Richard Garneau was appointed president and chief executive officer on March 26, while David Smales was appointed acting vice-president finance and chief financial officer on March 29.
"Today, we are benefiting from the cyclical strength in pulp prices as we focus on streamlining and efficiency across all parts of the business. At the same time, we are managing our input costs tightly, with close attention to the upward trend in fibre prices as severe weather and sawmill curtailments continued into the first quarter," said Catalyst president and chief executive officer Richard Garneau.
Higher average transaction prices for directory paper and pulp, along with the positive effect of a weaker Canadian dollar, offset lower average transaction prices for the company's newsprint and coated mechanical and uncoated mechanical grades.
Markets for the company's specialty paper products were mixed in the first quarter as changes in the consumption and capacity of coated and uncoated mechanical grades resulted in weaker prices overall. Directory paper demand, however, remained solid and prices were up.
Newsprint consumption in the US dropped significantly in the first quarter and prices continued to weaken.
Benchmark prices for the company's market pulp products rose to their highest level since 1995 as inventories remained tight. Containerboard demand decreased because of weak box shipments, though prices remained firm due to balanced mill and box plant inventories.
The restructuring plan announced in February which will see the company shed approximately 350 positions during 2007 is underway and $10.8 million of costs were recorded in the first quarter.
The company spent $20.3 million on capital projects in the first quarter. Total planned maintenance costs are expected to be consistent with previous years with higher spending continuing into the second quarter before falling to lower levels for the remainder of the year.
Catalyst is a leading producer of mechanical printing papers in North America, headquartered in Vancouver, British Columbia. The company also produces market kraft pulp and owns Western Canada's largest paper recycling facility. With five mills employing 3,500 people at sites within a 160-kilometre radius on the south coast of BC, Catalyst has a combined annual capacity of 2.4 million tonnes of product. Catalyst's common shares trade on the Toronto Stock Exchange under the symbol CTL.
Forward-Looking Statements
Except for the historical information contained herein, the matters set forth in this report are forward-looking, including statements with respect to general economic conditions, assessment of market conditions, demand for products, pricing expectations, cash flow, anticipated savings and cost reductions, productivity, manning levels, capacity and capital expenditures. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ materially from those contained in these statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following management's discussion and analysis ("MD&A") should be read in conjunction with the unaudited interim consolidated financial statements for the three-month periods ended March 31, 2007 and March 31, 2006, and the audited annual consolidated financial statements for the year ended December 31, 2006.
Throughout the discussion, reference is made to EBITDA, which represents earnings before interest, taxes, depreciation and amortization and, before other non-operating income and expenses. EBITDA, as defined, equates to operating earnings (loss) plus amortization. As Canadian Generally Accepted Accounting Principles ("GAAP") do not define a method of calculating EBITDA, the measure as calculated by Catalyst Paper Corporation (the "Company") might not be comparable to similarly-titled measures reported by other entities. EBITDA is presented because the Company believes it is a useful indicator of a company's operating performance and subsequently, a company's ability to meet debt service and capital expenditure requirements. EBITDA should not be considered by an investor as an alternative to net earnings, an indicator of the financial performance of the Company, or an alternative to cash flows as a measure of liquidity. Refer to the "Non-GAAP Measures" section for a reconciliation of this non-GAAP measure to net earnings (loss).
In accordance with industry practice, in this MD&A, the term "ton" or the symbol "ST" refers to a short ton, an imperial unit of measurement equal to 0.9072 metric tonnes and the term "tonne" or the symbol "MT" refers to a metric tonne.
In this MD&A, unless otherwise indicated, all dollar amounts are expressed in Canadian dollars, as are the term "dollars" and the symbols "$" and "CDN$". The term "U.S. dollars" and the symbol "US$" refer to United States dollars.
The information in this report is as at April 24, 2007, which is the date of filing in conjunction with the Company's press release announcing its results for the first quarter of 2007. Disclosure contained in this document is current to that date, unless otherwise stated.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements. Forward-looking statements are statements, other than statements of historical fact, that address or discuss activities, events or developments that the Company expects or anticipates may occur in the future. These forward-looking statements can be identified by the use of words such as "anticipate", "could", "expect", "seek", "may", "likely", "intend", "will", "believe" and similar expressions or the negative thereof. These forward-looking statements reflect management's current views and are based on certain assumptions including assumptions as to future economic conditions and courses of action, as well as other factors management believes are appropriate in the circumstances. Such forward-looking statements are subject to risks and uncertainties and no assurance can be given that any of the events anticipated by such statements will occur or, if they do occur, what benefit the Company will derive from them. A number of factors could cause actual results, performance or developments to differ materially from those expressed or implied by such forward-looking statements, including the general economic conditions in the U.S., Canada and internationally, market conditions and demand for the Company's products, the outlook for inventories, production and pricing, the Company's ability to successfully obtain performance improvements and cost savings, expected cash flows, capital expenditures and completion of capital projects, shifts in industry capacity, fluctuations in foreign exchange and interest rates, fluctuations in availability and cost of raw materials or energy, the Company's ability to obtain financing and other factors beyond the Company's control. Additional information concerning these and other factors can be found in section 12 of this MD&A under the heading "Risks and Uncertainties". 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.
Investors are cautioned not to place undue reliance on these forward-looking statements. No forward-looking statement is a guarantee of future results.
1.0 CORPORATE OVERVIEW AND HIGHLIGHTS 1.1 First quarter overview ---------------------- The Company experienced a challenging first quarter ("Q1"). The Company's margins were put under pressure mainly as a result of weaker paper prices, higher fibre costs and an increase in maintenance costs due to higher planned maintenance shutdowns in Q1. These were partially offset by stronger pulp prices, which hit their highest level since 1995, and a weaker average Canadian dollar. In addition to these factors, costs relating to the Company's restructuring program and change-of-control related packages for two senior executives reduced operating results further in Q1. During Q1, the Company announced a $21.2 million restructuring plan, which includes workforce reductions of approximately 350 positions across the Company that is expected to be completed during 2007. The Company recorded $10.8 million of restructuring costs related to this program in Q1. In addition, the Company transitioned two senior executives in Q1. The President and Chief Executive Officer, Russell J. Horner, and the Vice-President, Finance and Chief Financial Officer, Ralph Leverton, exercised change-of-control agreements and resigned in Q1. As a result, the Company recorded $7.7 million in change-of-control, pension benefits and stock compensation related expense. Late in Q1, Richard Garneau joined the Company as the President and Chief Executive Officer and David Smales, the Company's Vice-President, Strategy, was appointed Acting Vice-President, Finance and Chief Financial Officer. Higher pulp prices and regional supply limitations led to increased fibre prices in Q1. The continuation of poor West Coast weather conditions and curtailed sawmill activity were the primary causes of the constrained fibre situation in Q1. Markets for the Company's specialty paper products were mixed in Q1. Coated mechanical demand and prices weakened overall. Uncoated mechanical demand was up in Q1 due to strong high gloss demand, but was not sufficient to prevent average prices weakening. Directory paper demand was solid and prices were up. U.S. consumption of newsprint decreased significantly in Q1 leading to significant increases in mill inventories, which negatively impacted prices. The Company ran their paper machines at full capacity and did not take any market related downtime in Q1. Northern bleached softwood kraft ("NBSK") pulp remained strong in Q1 due in part to the closure of several North American pulp mills since 2005. NBSK pulp prices climbed to their highest level since 1995. The previously announced price increases of US$30 per tonne in Europe and US$20 per tonne in North America for NBSK pulp were implemented in Q1. Further price increases of US$20 per tonne in Europe and the United States and US$10 per tonne in China were announced for NBSK pulp, effective April 1, 2007. Demand for containerboard decreased in Q1 due to weak box shipments; however, prices remained firm due to balanced mill and box plant inventories. The previously announced price increase of US$40 per tonne for containerboard and white-top linerboard for effect on January 1, 2007 was not implemented in Q1. 1.2 Selected financial information ------------------------------ ------------------------------------------------------------------------- (In millions of dollars, except where otherwise stated) ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Q1 Q1 Q2 Q3 Q4 TOTAL ------------------------------------------------------------------------- Sales $ 478.1 $ 456.3 $ 469.6 $ 486.0 $ 470.6 $1,882.5 Operating earnings (loss) (30.7) (15.9) 6.1 17.0 (3.3) 3.9 EBITDA(1) 14.1 47.3 52.4 62.8 48.5 211.0 Net earnings (loss) (25.6) (23.6) 42.4 2.5 (37.2) (15.9) EBITDA margin(1),(2) 2.9% 10.4% 11.2% 12.9% 10.3% 11.2% Net earnings (loss) per share (in dollars) - basic and diluted $ (0.12) $ (0.11) $ 0.20 $ 0.01 $ (0.17) $ (0.07) ------------------------------------------------------------------------- Sales (000 tonnes) Specialty papers 255.2 235.1 237.8 264.6 252.7 990.2 Newsprint 148.7 181.1 178.4 169.5 170.1 699.1 ------------------------------------------------------------ Total paper 403.9 416.2 416.2 434.1 422.8 1,689.3 Pulp 167.9 153.4 171.4 155.9 145.5 626.2 ------------------------------------------------------------ Total sales 571.8 569.6 587.6 590.0 568.3 2,315.5 Production (000 tonnes) Specialty papers 256.6 235.7 244.2 254.8 249.0 983.7 Newsprint 152.1 183.9 179.6 170.0 170.2 703.7 ------------------------------------------------------------ Total paper 408.7 419.6 423.8 424.8 419.2 1,687.4 Pulp 156.8 153.1 155.6 162.8 152.8 624.3 ------------------------------------------------------------ Total production 565.5 572.7 579.4 587.6 572.0 2,311.7 ------------------------------------------------------------------------- Average spot foreign exchange rate C$/US$(3) 1.172 1.155 1.121 1.121 1.139 1.134 Period-end spot foreign exchange rate C$/US$(4) 1.153 1.167 1.115 1.115 1.165 1.165 Effective foreign exchange rate C$/US$(5) 1.162 1.172 1.147 1.129 1.139 1.146 ------------------------------------------------------------------------- Common shares (millions) At period-end 214.6 214.6 214.6 214.6 214.6 214.6 Weighted average 214.6 214.6 214.6 214.6 214.6 214.6 ------------------------------------------------------------------------- (1) EBITDA is a non-GAAP measure. Refer to the "Non-GAAP Measures" section for further details. (2) EBITDA margin is defined as EBITDA as a percentage of sales. (3) Average spot foreign exchange rate is the average Bank of Canada noon spot rate over the reporting period. (4) Period-end spot foreign exchange rate is the Bank of Canada noon spot rate. (5) Effective foreign exchange rate represents a blended rate which takes account of the applicable spot rates and the Company's revenue hedging program in the period. 1.3 Overview of the business ------------------------ The Company is the fourth largest North America-based producer of newsprint and uncoated mechanical groundwood specialty papers, measured by production capacity. It is also the largest producer of newsprint and uncoated specialty papers and the only producer of lightweight coated ("LWC") paper on the West Coast of North America. The Company is the largest producer of directory paper in the world by capacity and operates the largest paper recycling operation in Western Canada. It also has a significant presence in most major international markets, serving customers around the world. The Company's business includes printing papers and market pulp, operating in three business segments: Specialty papers ---------------- The specialty papers segment consists of soft-calendered ("SC") and machine-finished ("MF") hi-brite uncoated, LWC and directory paper grades. These groundwood specialty paper grades are manufactured on 10(1) paper machines in British Columbia at Crofton, Elk Falls, Port Alberni and Powell River. The specialty papers business segment has a total production capacity of 1,100,000 tonnes. Specialty paper represents the Company's largest business segment, generating approximately 50% of consolidated sales revenue for the first three months of 2007. The Company's customer base consists primarily of retailers, magazine and catalogue publishers, commercial printers and telephone directory publishers. Specialty paper products are sold primarily through the Company's sales and marketing personnel in North America, and through distributors and agents in other geographic markets. In the three months ended March 31, 2007, approximately 92% of specialty paper sales volumes were with customers in North America. Specialty papers are shipped by ship, barge, rail or truck, or by a combination of some or all of these transportation modes. Newsprint --------- Newsprint is currently produced on five(1) paper machines at Crofton, Elk Falls and Powell River. The newsprint segment has a total annual production capacity of 617,000 tonnes. During Q1 of 2006, the Company permanently closed its Port Alberni # 3 ("A3") paper machine, representing 140,000 tonnes of equivalent newsprint production capacity. Newsprint sales represented approximately 23% of consolidated sales revenue for the first three months of 2007. The newsprint customer base consists primarily of newsprint publishers located in Western and Central North America and in Asia. In the three months ended March 31, 2007, approximately 82% of newsprint sales volumes were with customers in North America and Asia. Newsprint is shipped overseas by deep-sea vessel and inland by ship, barge, rail or truck, or a combination of some or all of these modes. (1) The Company has 11 paper machines. The number of machines noted in the segments above reflects the ability of the Company's machines to switch between newsprint and specialty paper grades. Pulp ---- The pulp segment includes sawdust-based pulp and containerboard manufactured at the Elk Falls mill, and NBSK pulp manufactured at the Crofton mill. The segment has a total market production capacity of 638,000 tonnes. Pulp and containerboard sales represented approximately 27% of consolidated sales revenue for the first three months of 2007. The pulp customer base is located primarily in Asia and Europe and includes producers of tissue, magazine papers, woodfree printing and writing papers and certain specialty paper products. The containerboard customer base consists primarily of corrugated box manufacturers. Pulp and containerboard products are sold primarily through sales and marketing personnel in Canada, and through a network of agents in locations throughout the world. In the three months ended March 31, 2007, approximately 73% of pulp and containerboard sales volumes were with customers in Europe, Asia and Australasia. The Crofton and Elk Falls pulp mills are located on tidewater and have deep-sea vessel loading facilities. Pulp and containerboard are shipped by both break-bulk and container deep-sea vessels. The Company also has the largest paper recycling operation in Western Canada. Operated in support of its business segments, the recycling facility has a production capacity of 148,000 air-dried equivalent tonnes of pulp per year, the majority of which is consumed internally. After a project planned for mid- 2007 is completed, this facility will increase production capacity to 160,000 air-dried equivalent tonnes of pulp per year. The chart below illustrates the Company's principal paper and pulp products, applications and annual 2007 capacity: ------------------------------------------------------------------------- PRODUCT PROFILE ------------------------------------------------------------------------- Specialty Paper Grades ------------------------------------------------------------------------- Coated Category Uncoated Papers Paper Directory ----------------------------------------------------------- Soft- Machine- Calendered Finished ------------------------------------------------------------------------- Brand Name Electrasoft Electrabrite Electracote Catalyst Electracal Electrastar Electraprime ------------------------------------------------------------------------- Basis Weight (g/m2) 36.6 - 52 45 - 66.5 44.4 - 63.6 28 - 40 ------------------------------------------------------------------------- Applications magazines, magazines, magazines, telephone supplements, supplements, catalogues, books, catalogues, inserts, inserts, airline inserts, flyers, flyers, schedules, flyers, direct mail, direct mail catalogues directories PR and corporate communication books/manuals ------------------------------------------------------------------------- Capacity (tonnes) 531,000(1) 231,000 338,000(1) ------------------------------------------------------------------------- % of total capacity 23% 10% 14% ------------------------------------------------------------------------- ------------------------------------------------------------- PRODUCT PROFILE ------------------------------------------------------------- Newsprint Pulp ------------------------------------------------------------- Category Newsprint Containerboard Market Pulp ------------------------------------------------------------- ------------------------------------------------------------- Brand Name Marathon Silverliner Elk Prime Platinumliner Crofton-Kraft Chromiumliner Bronzeliner ------------------------------------------------------------- Basis Weight (g/m2) 43 - 48.8 127 - 270 n/a ------------------------------------------------------------- Applications newspapers, packaging tissue, inserts, applications freesheet, flyers, specialty supplements, paper, directories, whitetop timetables linerboard ------------------------------------------------------------- Capacity 617,000(1) 127,000 511,000(2) (tonnes) ------------------------------------------------------------- % of total 26% 5% 22% capacity ------------------------------------------------------------- (1) Capacities expressed in the above table can vary as the Company is able to switch production between products, particularly newsprint, directory and machine-finished uncoated grades. (2) Market tonnes. 1.4 2007 strategy update -------------------- The Company's long-term objective is to achieve higher, sustainable earnings and maximize cash flow by strengthening its position as a leading producer of value-added paper. The Company continues to focus on reducing manufacturing costs while maintaining or improving the quality of its products. The Company also continues to focus on optimizing its brands and customer base to take advantage of market conditions. 1.5 Consolidated results of operations ---------------------------------- Three months ended March 31, 2007 compared to three months ---------------------------------------------------------- ended December 31, 2006 ----------------------- Sales ----- Sales were $478.1 million in Q1, 2007, an increase of $7.5 million, or 1.6%, compared to $470.6 million in the fourth quarter ("Q4"), 2006. Higher average transaction prices for directory grades and pulp, together with the positive impact of the weakening Canadian dollar more than offset the negative impact of lower average transaction prices for the Company's newsprint, coated mechanical and uncoated mechanical grades. EBITDA ------ EBITDA was $14.1 million in Q1, 2007, a decrease of $34.4 million from $48.5 million in Q4, 2006. The impact of restructuring and change-of-control related costs, lower paper product prices, higher fibre prices, fewer operating days, and higher planned maintenance shuts, which directly impacted production volume, more than offset higher pulp prices, the positive impact of the weaker Canadian dollar and the absence of weather related downtime. The following table summarizes the key changes in EBITDA from Q4, 2006 to Q1, 2007: --------------------------------------------------------------- ($ millions) --------------------------------------------------------------- Q4, 2006 EBITDA $ 48.5 Improved pulp prices 3.9 Weaker paper prices (8.8) Impact of maintenance shutdowns (13.5) Increased fibre prices (5.7) Two fewer operating days (4.3) Absence of weather related downtime 2.7 Impact of weaker Canadian dollar, net of hedging program 3.6 Restructuring costs (9.3) Change-of-control related costs (7.7) Other, net 4.7 --------------------------------------------------------------- Q1, 2007 EBITDA $ 14.1 --------------------------------------------------------------- Operating earnings (loss) ------------------------- The Company recorded an operating loss of $30.7 million for Q1, compared to an operating loss of $3.3 million for Q4, 2006. The $27.4 million increase in operating loss was primarily related to the $34.4 million decrease in EBITDA noted above and the absence of the $5.8 million impairment loss recorded in Q4, 2006. Net earnings (loss) ------------------- Net loss in Q1, 2007 was $25.6 million ($0.12 per common share) compared to a net loss of $37.2 million ($0.17 per common share) in Q4, 2006. Q1, 2007 included a $6.6 million ($0.03 per common share) after-tax foreign exchange gain on the translation of U.S.-dollar-denominated debt, compared to a $26.2 million ($0.12 per common share) after-tax foreign exchange loss on the translation of U.S.-dollar-denominated debt in Q4, 2006. Net loss in Q1, 2007 also included $12.2 million ($0.06 per common share) of after-tax costs resulting from restructuring and change-of-control related expenses. Net loss in Q4, 2006 also included an after-tax impairment loss of $3.8 million ($0.02 per common share). Net loss before the abovementioned items in Q1, 2007 was $20.0 million ($0.09 per common share) compared to a net loss before the abovementioned items of $7.2 million ($0.03 per common share) in Q4, 2006. Three months ended March 31, 2007 compared to three months ---------------------------------------------------------- ended March 31, 2006 -------------------- Sales ----- Sales were $478.1 million in Q1, 2007, an increase of $21.8 million, or 4.8%, from sales of $456.3 million in Q1, 2006. Improved average transaction prices for the Company's pulp products and directory grades, and higher pulp and directory sales volumes offset the negative impact of the stronger Canadian dollar, weaker prices for newsprint and coated mechanical grades, and lower newsprint sales volumes. EBITDA ------ EBITDA was $14.1 million in Q1, 2007, a decrease of $33.2 million from $47.3 million in Q1, 2006. The negative impact of higher fibre prices, higher planned maintenance shuts, restructuring and change-of-control related costs, and lower paper prices more than offset higher pulp prices. The following table summarizes the key changes in EBITDA from Q1, 2006 to Q1, 2007: --------------------------------------------------------------- ($ millions) --------------------------------------------------------------- Q1, 2006 EBITDA $ 47.3 Improved pulp prices 24.9 Weaker paper prices (5.3) Increased fibre prices (20.4) Impact of maintenance shutdowns (12.8) Restructuring costs (10.8) Change-of-control related costs (7.7) Other, net (1.1) --------------------------------------------------------------- Q1, 2007 EBITDA $ 14.1 --------------------------------------------------------------- Operating earnings (loss) ------------------------- The Company recorded an operating loss of $30.7 million in Q1, 2007, compared to an operating loss of $15.9 million in Q1, 2006. The $14.8 million increase in operating loss was primarily related to the $33.2 million decrease in EBITDA noted above and the absence of the $17.6 million impairment loss related to the permanent closure of the A3 paper machine recorded in Q1, 2006. Net earnings (loss) ------------------- Net loss in Q1, 2007 was $25.6 million ($0.12 per common share) compared to a net loss of $23.6 million ($0.11 per common share) in Q1, 2006. Net loss in Q1, 2007 included a $6.6 million ($0.03 per common share) after-tax foreign exchange gain on the translation of U.S.-dollar-denominated debt, compared to an after-tax foreign exchange loss of $0.3 million (less than $0.01 per common share) in Q1, 2006. Net loss in Q1, 2007 also included $12.2 million ($0.06 per common share) of after-tax costs resulting from restructuring and change-of-control related expenses. Net loss in Q1, 2006 also included the $11.6 million ($0.05 per common share) after- tax impairment loss. Net loss before the abovementioned items in Q1, 2007 was $20.0 million ($0.09 per common share) compared to a net loss of $11.7 million ($0.05 per common share) before the abovementioned items in Q1, 2006. 2.0 SEGMENTED RESULTS OF OPERATIONS 2.1 Specialty papers ---------------- Summary of selected financial information ------------------------------------------------------------------------- (In millions of dollars, except where otherwise stated) ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Q1 Q1 Q2 Q3 Q4 TOTAL ------------------------------------------------------------------------- Sales $ 238.1 $ 220.8 $ 218.6 $ 245.0 $ 234.0 $ 918.4 EBITDA(1) 9.6 29.1 25.7 31.6 18.4 104.8 Operating earnings (loss) (14.2) 6.6 2.8 6.9 (6.6) 9.7 EBITDA margin(1,2) 4.0% 13.2% 11.8% 12.9% 7.9% 11.4% Sales (000 tonnes) 255.2 235.1 237.8 264.6 252.7 990.2 Production (000 tonnes) 256.6 235.7 244.2 254.8 249.0 983.7 Average sales revenue per tonne $ 933 $ 939 $ 920 $ 926 $ 927 $ 928 Average delivered cash costs per tonne(3) 896 815 811 806 853 822 SC-A paper, 35 lb. (US$/ton)(4) 752 780 785 800 787 788 LWC paper, # 5, 40 lb. (US$/ton)(4) 767 873 852 820 798 836 Telephone directory paper, 22.1 lb. (US$/ton)(4) 765 715 720 725 725 721 ------------------------------------------------------------------------- (1) EBITDA is a non-GAAP measure. Refer to the "Non-GAAP Measures" section for further details. (2) EBITDA margin is defined as EBITDA as a percentage of sales. (3) Average delivered cash costs per tonne for these purposes consist of cost of sales and selling, general and administration ("SG&A"). (4) Benchmark selling prices are sourced from Resource Information Systems, Inc. ("RISI"). 2.1.1 Segment overview ---------------- Overall, market conditions for specialty paper products were mixed in Q1, 2007. Coated mechanical demand was down 0.6% year-over-year mainly due to slowing catalogue and magazine demand and to customer switching to super-calendered grades. Weak demand and high North American mill inventories caused prices to continue to decrease during Q1. The Q1, 2007 average LWC benchmark price was US$767 per ton, a US$31 per ton, or 3.9%, decrease from Q4, 2006. Compared to Q1, 2006, the average benchmark price was down US$106 per ton, or 12.1%. Uncoated mechanical demand was up 1.4% year-over-year as a result of strong high gloss demand. High gloss demand was up 6.0% year-over-year due to grade switching from coated mechanical grades and lower gloss and non-gloss grades. However, high gloss prices weakened during Q1. Demand for standard uncoated mechanical grades was down 5.1% year-over- year and as a result prices weakened during Q1. The average benchmark price for SC-A in Q1, 2007 was US$752, a US$35 per ton, or 4.4%, decrease from Q4, 2006. Compared to Q1, 2006, the average benchmark price decreased US$28 per ton, or 3.6%. Demand for directory was solid in Q1, up 5.3% year-over-year as large and independent publishers printed more books and pages through February. Annual directory price increases were implemented at the beginning of Q1. The average benchmark price for Q1, 2007 was US$765 per ton, up US$40 per ton, or 5.5%, over Q4, 2006. Compared to Q1, 2006, the average benchmark price was up US$50 per ton, or 7.0%. Operational performance ----------------------- Three months ended March 31, 2007 compared to three months ---------------------------------------------------------- ended December 31, 2006 ----------------------- The specialty papers business recorded an operating loss of $14.2 million on sales of $238.1 million in Q1, 2007, compared to an operating loss of $6.6 million on sales of $234.0 million in Q4, 2006. EBITDA in Q1, 2007 was $9.6 million, an $8.8 million decrease from $18.4 million recorded in Q4, 2006. Sales volumes were 255,200 tonnes in Q1, 2007, which was consistent with Q4, 2006. Average sales revenue was $933 per tonne, an increase of $6 per tonne from Q4, 2006, as stronger directory prices and a weaker Canadian dollar more than offset weaker uncoated and coated mechanical grade prices. Average delivered cash costs in Q1, 2007 were $896 per tonne, an increase of $43 per tonne compared to Q4, 2006. Higher fibre prices, and restructuring and change-of-control related costs more than offset lower maintenance spending. Three months ended March 31, 2007 compared to three months ---------------------------------------------------------- ended March 31, 2006 -------------------- The specialty papers business recorded an operating loss of $14.2 million on sales of $238.1 million in Q1, 2007, compared to operating earnings of $6.6 million on sales of $220.8 million for Q1, 2006. EBITDA in Q1, 2007 was $9.6 million, a $19.5 million decrease from $29.1 million recorded in Q4, 2006. Sales volumes were 255,200 tonnes in Q1, 2007, an increase of 20,100 tonnes, or 8.5%, from Q1, 2006, primarily due to the flexibility to swing machine production to meet the higher demand for certain specialty grades. Average sales revenue was $933 per tonne in Q1, 2007, a decrease of $6 per tonne from Q1, 2006, as weaker coated paper prices and the stronger Canadian dollar more than offset higher prices for directory grades. Average delivered cash costs in Q1, 2007 were $896 per tonne, an increase of $81 per tonne, compared to Q1, 2006. This was due to higher planned maintenance spending, restructuring and change-of-control related costs, higher usage of fossil fuel due to a shortage of hog fuel, and increased fibre prices. 2.2 Newsprint Summary of selected financial information ------------------------------------------------------------------------- (In millions of dollars, except where otherwise stated) ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Q1 Q1 Q2 Q3 Q4 TOTAL ------------------------------------------------------------------------- Sales $ 109.3 $ 137.2 $ 135.4 $ 128.8 $ 128.4 $ 529.8 EBITDA(1) (3.1) 19.8 19.3 18.2 14.5 71.8 Operating earnings (loss) (13.3) (9.9) 7.4 7.5 1.9 6.9 EBITDA margin(1,2) (2.8%) 14.4% 14.3% 14.1% 11.3% 13.6% Sales (000 tonnes) 148.7 181.1 178.4 169.5 170.1 699.1 Production (000 tonnes) 152.1 183.9 179.6 170.0 170.2 703.7 Average sales revenue per tonne $ 735 $ 758 $ 759 $ 761 $ 754 $ 758 Average delivered cash costs per tonne(3) 756 647 651 653 669 655 Newsprint 48.8 gsm, West Coast delivery (US$/tonne)(4) 606 640 651 658 649 649 ------------------------------------------------------------------------- (1) EBITDA is a non-GAAP measure. Refer to the "Non-GAAP Measures" section for further details. (2) EBITDA margin is defined as EBITDA as a percentage of sales. (3) Average delivered cash costs per tonne for these purposes consist of cost of sales and SG&A costs. (4) Benchmark selling prices are sourced from RISI. 2.2.1 Segment overview ---------------- Demand for newsprint continued its downward trend due to significant decreases in ad lineage, circulation and basis weights, and publisher conservation measures. Total U.S. consumption was down 12.2% through February, year-over-year, which negatively impacted prices. The average newsprint benchmark price in Q1, 2007 was US$606 per tonne, down US$43 per tonne, or 6.6%, over Q4, 2006. Compared to Q1, 2006, the average benchmark price has decreased US$34 per tonne, or 5.3%. 2.2.2 Operational performance ----------------------- Three months ended March 31, 2007 compared to three months ---------------------------------------------------------- ended December 31, 2006 ----------------------- The newsprint business recorded an operating loss of $13.3 million on sales of $109.3 million in Q1, 2007, compared to operating earnings of $1.9 million on sales of $128.4 million in Q4, 2006. Negative EBITDA in Q1, 2007 was $3.1 million, a $17.6 million decrease from EBITDA of $14.5 million recorded in Q4, 2006. Sales volumes were 148,700 tonnes in Q1, 2007, a decrease of 21,400 tonnes, or 12.6%, compared to Q4, 2006, primarily due to the flexibility to swing machine production to meet the higher demand for other grades. Average sales revenue was $735 per tonne in Q1, 2007, a decrease of $19 per tonne from Q4, 2006, with price decreases more than offsetting the favourable foreign exchange movements. Average delivered cash costs in Q1, 2007 were $756 per tonne, an increase of $87 per tonne from Q4, 2006. This was due to higher planned maintenance spending, restructuring and change- of-control related costs and higher fibre prices. Three months ended March 31, 2007 compared to three months ---------------------------------------------------------- ended March 31, 2006 -------------------- The newsprint business recorded an operating loss of $13.3 million on sales of $109.3 million for Q1, 2007, compared to an operating loss of $9.9 million on sales of $137.2 million for Q1, 2006. Negative EBITDA in Q1, 2007 was $3.1 million, down $22.9 million from EBITDA of $19.8 million recorded in Q1, 2006. Sales volumes were 148,700 tonnes in Q1, 2007, a decrease of 32,400 tonnes, or 17.9%, compared to Q1, 2006, primarily due to the flexibility to swing machine production to meet the higher demand for other grades. Average sales revenue was $735 per tonne in Q1, 2007, a decrease of $23 per tonne from Q1, 2006, mainly due to lower transaction prices and to a lesser extent, the impact of the stronger Canadian dollar. Average delivered cash costs in Q1, 2007 were $756 per tonne, an increase of $109 per tonne from Q1, 2006. Higher fibre prices, restructuring and change-of control related costs, higher planned maintenance spending, and higher usage of fossil fuel due to a shortage of hog fuel more than offset the savings from lower energy costs. 2.3 Pulp ---- Summary of selected financial information ------------------------------------------------------------------------- (In millions of dollars, except where otherwise stated) ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Q1 Q1 Q2 Q3 Q4 TOTAL ------------------------------------------------------------------------- Sales $ 130.7 $ 98.3 $ 115.6 $ 112.2 $ 108.2 $ 434.3 EBITDA(1) 7.6 (1.6) 7.4 13.0 15.6 34.4 Operating earnings (loss) (3.2) (12.6) (4.1) 2.6 1.4 (12.7) EBITDA margin (1,2) 5.8% (1.6%) 6.4% 11.6% 14.4% 7.9% Sales (000 tonnes) 167.9 153.4 171.4 155.9 145.5 626.2 Production (000 tonnes) 156.8 153.1 155.6 162.8 152.8 624.3 Average sales revenue per tonne $ 778 $ 641 $ 674 $ 720 $ 744 $ 693 Average delivered cash costs per tonne(3) 732 652 630 637 636 638 NBSK pulp, Northern Europe delivery (US$/tonne)(4) 757 618 665 710 737 681 White-top linerboard, 42 lb., Eastern U.S. delivery (US$/ton)(4) 680 650 680 680 680 673 ------------------------------------------------------------------------- (1) EBITDA is a non-GAAP measure. Refer to the "Non-GAAP Measures" section for further details. (2) EBITDA margin is defined as EBITDA as a percentage of sales. (3) Average delivered cash costs per tonne for these purposes consist of cost of sales and SG&A costs. (4) Benchmark selling prices are sourced from RISI. 2.3.1 Segment overview ---------------- Global NBSK pulp shipments were down 2.4% year-over-year; however, low inventories helped secure the previously announced price increases of US$30 per tonne in Europe and US$20 per tonne in North America during Q1 and pushed the European NBSK benchmark pulp price to a level last seen in 1995. The average Northern Europe NBSK benchmark price in Q1, 2007 was US$757 per tonne, up US$20 per tonne, or 2.7%, from Q4, 2006. Compared to Q1, 2006, the average benchmark price increased US$139 per tonne, or 22.5%. In addition, NBSK price increases of US$20 per tonne in Europe and the United States and US$10 per tonne in China were announced effective April 1, 2007. Containerboard demand decreased in Q1 due to weak box shipments; however, prices remained firm due to balanced mill and box plant inventories. The previously announced price increase of US$40 per ton for containerboard and white-top linerboard for effect on January 1, 2007 was not implemented in Q1. The average white-top linerboard benchmark price in Q1, 2007 was US$680 per ton, which was in line with Q4, 2006. Compared to Q1, 2006, the average benchmark price was up US$30 per ton, or 4.6%. 2.3.2 Operational performance ----------------------- Three months ended March 31, 2007 compared to three months ---------------------------------------------------------- ended December 31, 2006 ----------------------- The pulp and containerboard business recorded an operating loss of $3.2 million on sales of $130.7 million in Q1, 2007, compared to operating earnings of $1.4 million on sales of $108.2 million in Q4, 2006. EBITDA decreased by $8.0 million to $7.6 million in Q1, 2007 from EBITDA of $15.6 million in Q4, 2006. Sales volumes reached 167,900 tonnes in Q1, 2007, an increase of 22,400 tonnes, or 15.4%, from Q4, 2006, primarily due to higher pulp production and strong pulp shipments, especially to Asia, which resulted in low mill inventories at the end of Q1, 2007. Average sales revenue was $778 per tonne in Q1, 2007, an increase of $34 per tonne from Q4, 2006, with higher pricing and the impact of the weaker Canadian dollar being the primary factors for the increase. Average delivered cash costs in Q1, 2007 were $732 per tonne, an increase of $96 per tonne from Q4, 2006, with increased fibre costs, change-of-control related costs, and higher planned maintenance spending more than offsetting the impact of the nine-day curtailment taken at Elk Falls in Q4, 2006. Three months ended March 31, 2007 compared to three months ---------------------------------------------------------- ended March 31, 2006 -------------------- The pulp and containerboard business recorded an operating loss of $3.2 million on sales of $130.7 million in Q1, 2007, compared to an operating loss of $12.6 million on sales of $98.3 million in Q1, 2006. EBITDA of $7.6 million improved by $9.2 million from negative EBITDA of $1.6 million recorded in Q1, 2006. Sales volumes were 167,900 tonnes in Q1, 2007, an increase of 14,500 tonnes, or 9.5%, compared to Q1, 2006, primarily due to higher pulp production and strong pulp shipments, especially to Asia, which resulted in low mill inventories at the end of Q1, 2007. Average sales revenue was $778 per tonne in Q1, 2007, an increase of $137 per tonne from Q1, 2006, largely due to stronger transaction prices, which more than offset the stronger Canadian dollar. Average delivered cash costs in Q1, 2007 were $732 per tonne, an increase of $80 per tonne compared to Q1, 2006, due to increased fibre prices, higher planned maintenance spending, and change-of-control related costs. 3.0 LIQUIDITY AND CAPITAL RESOURCES Selected financial information ------------------------------------------------------------------------- (In millions of dollars, except where otherwise stated) ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Q1 Q1 Q2 Q3 Q4 TOTAL ------------------------------------------------------------------------- Cash flows provided by operations before changes in non-cash operating working capital $ 3.7 $ 43.3 $ 28.4 $ 48.6 $ 49.7 $ 170.0 Changes in non-cash working capital 9.6 (1.9) 18.2 (27.4) 2.5 (8.6) ------------------------------------------------------------------------- Cash flows provided by operations 13.3 41.4 46.6 21.2 52.2 161.4 Cash flows used by investing activities (20.0) (10.6) (16.8) (18.8) (39.6) (85.8) Cash flows used by financing activities (12.3) (15.2) (8.3) (8.4) (8.2) (40.1) Capital spending 20.3 11.8 17.5 22.9 41.0 93.2 Amortization(1) 44.8 63.2 46.3 45.8 51.8 207.1 Capital spending as % of amortization 45% 19% 38% 50% 79% 45% Total debt to total capitalization (2,3) 46% 46% 44% 44% 46% 46% Net debt to net capitalization (4,5) 46% 46% 43% 43% 45% 45% ------------------------------------------------------------------------- (1) Quarter 1, 2006 amortization expense includes a $17.6 million impairment loss related to the permanent closure of the A3 paper machine. Quarter 4, 2006 amortization expense includes a $1.5 million impairment loss related to the permanent closure of the A3 paper machine and $4.3 million in other asset impairments. (2) Total debt comprises long-term debt, including current portion. (3) Total capitalization comprises total debt and shareholders' equity. (4) Net debt comprises total debt, less cash on hand. (5) Net capitalization comprises net debt and shareholders' equity. The Company's principal cash requirements are for interest payments on its debt and for capital expenditures and working capital investments. Cash flows are funded through operations and, where necessary, through the revolving operating facility (the "Facility"). If necessary, liquidity requirements may be funded through the issuance of debt, equity or both. Access to current and alternative sources of financing at competitive cost is dependent upon the Company's credit ratings and capital market conditions. The Company believes that the cash flow from operations and the Facility will be sufficient to meet its anticipated capital expenditures and debt repayment obligations in the near and intermediate term. 3.1 Operating activities -------------------- Cash provided by operating activities in the current quarter was $13.3 million, compared to cash provided of $52.2 million in the previous quarter, and cash provided of $41.4 million in the same quarter last year. The decrease of $38.9 million from the previous quarter was mainly due to the $34.4 million decrease in EBITDA. Similarly, the decrease of $28.1 million from the same quarter last year was primarily due to the $33.2 million decrease in EBITDA. 3.2 Investing activities -------------------- Cash used for investing activities in the current quarter totalled $20.0 million, which was a decrease from cash used of $39.6 million in the previous quarter, and an increase from cash used of $10.6 million in the same quarter last year. Investing activities are largely comprised of capital spending. Consequently, movements in cash flows are primarily due to changes in capital spending. The current quarter's capital spending was $20.3 million and was comprised of various small high-return capital projects, including a number of projects for the purposes of increasing product quality. Capital expenditures are expected to approximate $100 million for the year. 3.3 Financing activities -------------------- Cash used by financing activities was $12.3 million in the current quarter, compared to cash used of $8.2 million in the previous quarter and cash used of $15.2 million in the same quarter last year. The increase of $4.1 million from the previous quarter was primarily due to additional pension payments upon change-of-control. The primary reason for the $2.9 million decrease from the same quarter last year was the absence of drawings on the revolving loan. 3.3.1 Debt ---- As of March 31, 2007, the Company's $350.0 million Facility was undrawn. After outstanding letters of credit of $22.8 million, $327.2 million was available to be drawn at the end of the quarter. Total long-term debt outstanding as at March 31, 2007 was $833.0 million. The Company's net debt to net capitalization ratio as at March 31, 2007, was 46%, or 1%, higher than the previous quarter. The Company is in compliance with the covenants under its Facility and senior notes indentures. The Company's Consolidated Fixed Charge Coverage Ratio ("CFCC Ratio") under the senior note indentures calculated on a 12-month trailing average was 2.5:1 as at March 31, 2007 (3.0:1 as at December 31, 2006). In the event that the CFCC Ratio is below 2.0:1, the Company is limited in the amount of additional debt it may incur beyond drawings under the Facility or other debt as permitted under the senior notes. Also, the Company's restricted payments baskets under the 8.625% and 7.375% senior notes were negative $108.1 million and negative $83.1 million, respectively, as at March 31, 2007 (negative $72.5 million and negative $47.5 million, respectively, as at December 31, 2006), as a result of the accumulation of losses in recent years. Under the senior note covenants, the Company is restricted from making certain payments, including the payment of dividends, unless the balances in these baskets are positive. In January 2007, Dominion Bond Rating Service changed its outlook on the Company's debt ratings to stable from negative. 3.3.2 Financial instruments --------------------- In the normal course of business, the Company is exposed to foreign currency and price risk associated with revenues, which are predominately in U.S. dollars, and to energy costs and long-term debt. In accordance with its foreign exchange risk management program, the Company manages its exposure to these risks through the use of financial instruments. The Company also uses interest rate swaps to reduce its exposure to long- term fixed interest rates associated with its senior notes. The Company does not enter into financial instruments for speculative purposes. On January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3855, Financial Instruments - Recognition and Measurement, and Section 3865, Hedges. Under these new guidelines the Company records all derivatives in its balance sheet at fair value. Revenue risk management instruments ----------------------------------- In respect of revenues, the Company uses foreign currency options and forward contracts to sell U.S. dollars. At March 31, 2007, the Company had foreign currency options and forward contracts with a notional principal of $578 million with major financial institutions. At March 31, 2007, 68% of the options and contracts were designated as hedging instruments. Changes in the fair values of derivatives that qualify and are designated as cash flow hedges are deferred and recorded as a component of "Accumulated other comprehensive income" ("AOCI") until the underlying transaction is recorded in earnings. When the hedged item affects earnings, the gain or loss is reclassified from "AOCI" to "Sales". Any ineffective portion of a hedging derivative's change in fair value and the portion that is excluded from the assessment of hedge effectiveness is recognized immediately in "Sales". At March 31, 2007, instruments having a notional principal of US$393 million are designated as hedging instruments. At period-end exchange rates, the net amount the Company would receive to settle the above contracts and options is $3.3 million, of which $1.8 million is included in "Prepaids and other" and $1.5 million in "Other assets". At March 31, 2007, commodity swap agreements were outstanding to fix the sales price on NBSK pulp for 6,250 metric tonnes within the next nine months at a weighted average PIX price of US$702 per tonne. These contracts are not designated as hedging instruments for accounting purposes and are reported at their fair value, which was negative $0.4 million at the end of the first quarter of 2007. Long-term debt risk management instruments ------------------------------------------ In respect of long-term debt, the Company is party to US$19.0 million in forward foreign exchange contracts and options to acquire U.S. dollars over a five-year period. These instruments are not designated as hedging instruments for accounting purposes, and are included in "Other long-term obligations" on the balance sheet at their fair value. Settlements and changes in fair value are recognized in earnings as "Foreign exchange gain (loss) on translation of long-term debt". At period-end exchange rates, the net amount the Company would pay to settle these contracts is $3.4 million. Cost risk management instruments -------------------------------- To hedge against the effect of energy cost fluctuations, the Company enters into contracts to fix the price of a portion of the Company's oil and gas requirements. The contracts are not designated as
