Catalyst Paper records net quarterly loss of $368.4 million

Catalyst Paper has recorded a net loss of $368.4 million on sales of $299.4 million for the second quarter of 2010. Results were significantly impacted by after-tax impairment and closure costs of $302.0 million on the permanent closure of the Elk Falls and Paper Recycling Divisions.

"Product pricing and demand recovered slightly from recent troughs which nudged sales up and our EBITDA margin showed a resulting improvement," said Kevin J. Clarke, who was appointed president and CEO effective June 21. "However, modest market recovery will not be enough to stem our losses and we took the tough step to permanently close two high-cost operations in a continued effort to future-focus our business and strengthen cash and balance sheet fundamentals."

Paper markets improved overall as North American demand stabilized, exports stayed strong and inventories remained low. Demand for both coated and uncoated mechanical grades continued its year-over-year recovery, while demand for directory paper declined. Newsprint demand was flat, although Canadian demand was up year-over-year. Benchmark prices were stable for directory, and modestly improved from Q1 for all other paper grades.

The pulp market was strong, driven by North American and European demand, increased northern bleached softwood kraft pulp shipments, and inventories that remained relatively low due, in part, to Q1 supply interruptions. This resulted in further NBSK benchmark price increases during the quarter.

In keeping with market conditions, newsprint curtailment was at 52 per cent of newsprint capacity, inclusive of Elk Falls. The # 1 paper machine at Crofton remained indefinitely idled. Production on other machines was switched from newsprint to uncoated mechanical grades. The stronger pulp market supported the restart of the second line of pulp production at Crofton in late April.

Specialty papers price increases were announced for Q2 in lightweight coated and several uncoated products (soft calendered, super-brights and high-brights). The increases for uncoated super-brights and high-brights were largely in place by quarter-end, while lightweight coated and uncoated soft calendered price increases were partially implemented. These increases will continue to be implemented in the third quarter.

The Elk Falls mill will be permanently closed in September due to weak markets for commodity paper grades and an uncompetitive cost structure. Combined with the closure of the Paper Recycling Division, this is expected to result in fixed cost savings beginning in Q3, with annual savings of approximately $13.0 million in 2011. Asset impairment and other closure costs accounted for $292.3 million of the $302.0 million with severance accounting for $9.7 million of the total.

Catalyst continues to pursue fair and sustainable tax treatment for major industry in BC. During the quarter, an appeal relating to its 2009 assessment by the District of North Cowichan was dismissed by the BC Court of Appeal and the company is seeking leave to appeal this matter to the Supreme Court of Canada. The company also filed a new petition to the BC Supreme Court relating to the North Cowichan 2010 Class 4 tax levy and paid $1.5 million of the $5.5 million municipal tax bill. Property taxes were paid in full to the other three BC municipalities, however Catalyst is challenging the regional district portion of the 2010 assessment by the City of Campbell River.

Modest improvements in paper markets are expected to continue through the second half of 2010 with a seasonally strong third quarter. Nonetheless, Crofton is expected to continue to take significant newsprint curtailment. Pulp prices are expected to soften in the third quarter. With the Canadian dollar remaining strong, and fibre and other input costs rising, cash flows and net earnings will remain under pressure.

Source: Catalyst Paper