Consolidated sales for the three-month period ended June 28, 2008 were $609 million, down from $712 million in the comparable period of the prior year. The Company generated a net loss of $27 million or $0.27 per share in the June quarter compared to a net loss of $164 million or $1.91 per share in the comparable three-month period of the prior year. Earnings before unusual items, interest, income taxes, depreciation, amortization and other non-operating expenses (EBITDA) was
$9 million for the three-month period ended June 28, 2008, as compared to EBITDA of
$4 million a year ago and negative EBITDA of $1 million in the prior quarter.
At the Board of Directors meeting today, management presented an update of its selling, general and administrative (SG&A) expense reductions. Total consolidated SG&A expenses for fiscal 2008 are projected to decrease by $32 million from 2007 and $49 million from 2006. Corporate general and administrative expenses included in the above figures will have declined by $6 million and $24 million during the same period. Management also presented to the Board new cash generation goals based on working capital reductions and asset sales.
Business Segment Results
The Forest Products segment generated negative EBITDA of $10 million on sales of
$145 million. This compares to negative EBITDA of $31 million on sales of $153 million in the prior quarter. Sales declined by $8 million, with lower by-product sales offsetting higher prices and volumes for lumber and engineered wood. US $ reference prices for random lumber increased by approximately US $25 per mbf while stud lumber increased by US $29 per mbf. Currency did not affect pricing as the Canadian $ averaged US $0.991, a small decrease from US $0.997 in the prior quarter. The net price effect was an increase in EBITDA of $4 million or $16 per mbf. Operating costs were lower as the warmer spring and summer months have a positive effect on sawmill operating efficiencies. The current quarter also benefited from a $14 million favourable adjustment to the carrying values of log and lumber inventories as increasing lumber selling prices led to higher projected net realizable values. During the quarter, the Company incurred $3 million of lumber export taxes, up from $2 million in the prior quarter. Higher selling prices generated the higher export taxes. Lumber export taxes are payable based on the 2006 agreement between Canada and the United States. Applicable export tax rates vary based upon selling prices. During the June quarter, the Company incurred a tax of 5% on Eastern shipments and 15% on Western shipments, unchanged from the prior quarter. During the quarter, the Company announced the extension of lumber capacity curtailments and new curtailments amounting to 600 million board feet of annual production and affecting approximately
800 employees.
The Pulp segment generated EBITDA of $19 million on sales of $369 million for the quarter ended June 2008 compared to EBITDA of $42 million on sales of $369 million in the March 2008 quarter. Sales were unchanged, with higher selling prices being offset by lower shipments. US $ reference prices increased for most grades of pulp. Currency did not affect pricing as the Canadian $ averaged US $0.991, a small decrease from US $0.997 in the prior quarter. The total price effect was an increase of $35 per tonne, increasing EBITDA by $16 million. Mill level costs increased by $34 million, primarily due to significantly higher maintenance costs. In the prior quarter, the Company incurred only 200 tonnes of downtime. During the most recent quarter, total downtime was 26,400 tonnes as millwide maintenance shutdowns were taken at five pulp mills. The segment was also negatively impacted by higher fibre, energy, chemical and transportation costs. As well, the stronger Euro led to a $6 million increase in the reported costs of the three French pulp mills. Inventories were at 24 days of supply at the end of June, down from only 25 days at the end of March 2008. These are relatively low levels indicative of the strength of the current pulp market.
The Paper segment generated EBITDA of $3 million on sales of $112 million. This compares to negative EBITDA of $7 million on sales of $98 million in the prior quarter. The sales increase of $14 million was due to higher effective prices and shipments. The US $ reference price for newsprint increased by US $57 per tonne while the reference price for coated bleached board increased by US $30 per short ton. Currency did not affect pricing as the Canadian $ averaged US $0.991, a small decrease from US $0.997 in the prior quarter. The net price effect was an increase of $58 per tonne, increasing EBITDA by $8 million. During the June quarter, manufacturing costs were favourably impacted by a
$3 million incentive provided through the Manitoba Government’s Coal Reduction program for progress made at the Pine Falls newsprint facility. The Company incurred 35,100 tonnes of market related downtime and 1,000 tonnes of maintenance downtime in the June 2008 quarter compared to 17,100 tonnes of market related downtime and 500 tonnes of maintenance downtime in the prior quarter. One of the three newsprint machines at the Kapuskasing mill was idle for the entire June 2008 quarter and the coated board machine at the Temiscaming Complex was idled for three weeks to reduce inventory levels.
Outlook
Overall, the June quarterly operating results were an improvement over the previous quarter, but remained well below acceptable levels. The extremely low US $ lumber selling prices experienced over the last several quarters continues to depress earnings. Looking ahead, lumber markets will remain challenging as there are no clear signs of a U.S. housing recovery. Pulp markets are expected to remain stable. Newsprint prices increased in the June quarter and additional increases are anticipated during the September quarter, but at a reduced pace. As for the Company, it will continue to focus on controllable items such as costs and operating efficiency. However, the unprecedented increase in fossil fuel prices is negatively impacting the Company’s cost reduction efforts. While direct energy usage reductions are a priority item, approximately 75% of the impact of the higher fuel costs is related to purchased items, mainly wood deliveries, transportation and chemicals. The Company recently announced a US $100 per metric tonne energy related surcharge on its specialty dissolving pulps. If global energy prices remain at these lofty levels, manufacturers will have to increase selling prices well beyond normal historical levels to earn satisfactory margins. While the recent recapitalization transaction has significantly improved the Company’s liquidity, balance sheet leverage and debt service requirements, the Company is not yet cash flow positive and this continues to be an area of considerable focus. |
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