Abitibi-Consolidated Reports Improving Results in the First Quarter - Higher newsprint prices and lower overall costs help mitig
April 23 2004 - 8:05AM
PR Newswire (US)
Abitibi-Consolidated Reports Improving Results in the First Quarter
- Higher newsprint prices and lower overall costs help mitigate C$
strength Q1 2004 Highlights - Sales of $1.355 billion - EBITDA of
$142 million before closure costs - Newsprint costs down $23/tonne
- Value-added papers costs down $32/tonne - Lumber duties of $23
million MONTREAL, April 23 /PRNewswire-FirstCall/ -- Abitibi
Consolidated Inc. reported today a first quarter loss of $31
million compared to net earnings of $180 million recorded in the
first quarter of 2003 and a loss of $81 million in the fourth
quarter of 2003. Included in the quarter's results was an after-
tax loss of $35 million on the translation of foreign currencies,
mainly the Company's U.S. dollar-denominated debt (compared to an
after-tax gain of $239 million in the first quarter of 2003), and
an after-tax gain of $70 million from the sale of its remaining 25%
stake in SFK Pulp General Partnership. Although not a GAAP-measure,
the loss would have been $65 million, or 15 cents per share, before
the impact of foreign currency translation and other specific items
in the first quarter. This compares to a loss of $91 million, or 21
cents a share, in the first quarter of 2003. (see Table 1 of
MD&A) The operating loss from continuing operations in the
first quarter (which include $7 million of closure costs) was $17
million compared with $36 million in the same quarter of 2003. The
improvement year-over-year, despite a stronger Canadian dollar, is
mainly attributable to higher U.S. dollar selling prices and lower
operating costs in all segments. (see Table 2 of MD&A) "Prices
for all of our products continue to improve and, as a result, our
EBITDA before closure costs was up more than 40% from the fourth
quarter of 2003," said President and Chief Executive Officer, John
Weaver. "The recent newsprint price increase is evidence that the
supply and demand picture in North America has found balance. More
recently, market demand is improving and anecdotal evidence in the
publishing community as well as our own order book suggests that we
will continue to be sold out in Q2." Apart from what has already
been indefinitely idled, the Company operated its mills at full
capacity in the first quarter, taking no market-related downtime in
North America. The Company's newsprint inventories were flat at the
end of the quarter compared with year-end levels. Currency Compared
to the first quarter of 2003, the Canadian dollar was 15% stronger
against the U.S. dollar in the first three months of 2004. The
Company estimates the negative impact of this year-over-year
appreciation on its operating results to be approximately $69
million. PanAsia PanAsia, a 50-50 joint-venture, recorded net
earnings of US$10 million and EBITDA of US$31 million in the first
quarter of 2004, on sales of US$229 million. Construction at
PanAsia's new Hebei, China newsprint mill, got underway during the
quarter as well. Capex Capital expenditures during the quarter were
$69 million, as the project to convert the Alma, Quebec newsprint
mill to produce Equal Offset(R) (EO) nears its final stages. The
machine has been stopped for final construction changes and will
begin ramping up in the next couple of months towards its EO
capacity of 230,000 tonnes. The Company also continued its hydro
modernization project at Iroquois Falls, Ontario. Covenants The
Company met its original interest coverage covenant of 1.25x for
the first quarter, recording an interest-to-EBITDA coverage ratio
of 1.29x on a twelve-month rolling basis. However, early in the
quarter and as a measure of prudence, the Company requested, and
obtained, an amendment to its interest coverage covenant, which was
reset to 1.00x for both the first and second quarters of 2004. (see
Table 3 of MD&A) Labour Negotiations On January 22, 2004, the
Communications, Energy and Paperworkers Union of Canada (CEP)
selected Abitibi-Consolidated as the pattern-setting employer in
the upcoming negotiations in Eastern Canada for a new collective
agreement. Significant progress has been realized since
negotiations began. This collective agreement covering
approximately 4,800 workers in 12 mills of the Company's newsprint
and value-added divisions will expire on April 30, 2004. Local
issues and contract language are completed in eleven of the twelve
operating units covered by the 2004 negotiation and should be
completed in the coming weeks. Thereafter, negotiation on major
issues such as the duration of the collective agreement, wages,
benefits, pension plan and job security will start at the national
level. A conference call hosted by management to discuss quarterly
results will be held today at 9 a.m. (Eastern time). The call will
be webcast at http://www.abitibiconsolidated.com/, under the
"Investor Relations" section. A slide presentation to be referenced
on the call will also be made available in the same section prior
to the call. Participants not able to listen to the live call can
access a replay along with the slide presentation, both of which
will be archived online. Abitibi-Consolidated is a global leader in
newsprint and uncoated groundwood (value-added groundwood) papers
as well as a major producer of wood products, generating sales of
CAN$5.4 billion in 2003. With 15,000 employees, excluding PanAsia,
the Company does business in more than 70 countries. Responsible
for the forest management of 17.5 million hectares, Abitibi-
Consolidated is committed to the sustainability of the natural
resources in its care. The Company is also the world's largest
recycler of newspapers and magazines, serving 17 metropolitan areas
with more than 11,200 Paper Retriever(R) collection points and 14
recycling centres in Canada, the United States and the United
Kingdom. Abitibi-Consolidated owns or is a partner in 27 paper
mills, 21 sawmills, 4 remanufacturing facilities and 1 engineered
wood facility in Canada, the U.S., the UK, South Korea, China and
Thailand. 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 therefrom.
Abitibi-Consolidated Inc. First Quarter Report to Shareholders
April 22, 2004 $31 Million Loss in First Quarter of 2004
Abitibi-Consolidated reported a loss of $31 million, or 7 cents a
share, in the first quarter ended March 31, 2004 compared to net
earnings of $180 million, or 41 cents a share, in the same quarter
of 2003. The weighted average number of shares outstanding remained
constant at 440 million during these periods. Sales were $1,355
million in the first quarter of 2004, compared to $1,352 million in
the first quarter of 2003. The operating loss from continuing
operations was $17 million in the first quarter of 2004, compared
to $36 million for the first quarter of 2003. The $19 million
improvement in operating results from continuing operations in the
first quarter of 2004 is mainly due to higher U.S. dollar selling
prices and lower cost of goods sold in the three business segments
of the Company. These factors were partially offset by the impact
of the stronger Canadian dollar and additional closure costs of $7
million related to the previously announced indefinite idling of
the Lufkin, Texas and Port-Alfred, Quebec mills. In the first
quarter, the Canadian dollar was an average of 15% stronger against
the U.S. dollar compared to the first quarter of 2003. The Company
estimates this unfavourable impact to be approximately $69 million
on its operating results compared to the same period last year. The
Company recorded in the quarter an after-tax loss of $35 million on
the translation of foreign currencies, derived primarily from its
U.S. dollar debt, compared to an after-tax gain of $239 million in
the same quarter of 2003. Results in the first quarter of 2004 also
included an after-tax gain of $70 million on the sale of the
Company's remaining interest in SFK Pulp General Partnership (SFK
GP). Financial expenses decreased by $9 million compared to the
first quarter of 2003, primarily because of lower interest rates
and the impact of a stronger Canadian dollar. Table 1 shows how
certain specific items have affected the Company's results in the
reporting periods. The Company believes that it is useful
supplemental information as it provides an indication of the
results excluding these specific items. Readers should be cautioned
however that this information should not be confused with or used
as an alternative for net earnings (loss) determined in accordance
with the Canadian Generally Accepted Accounting Principles (GAAP).
> As the above table indicates, at the end of the first quarter
of 2004, the Company recorded an after-tax loss on translation of
foreign currencies of $35 million mainly from the weaker
period-ending Canadian currency compared to the U.S. dollar in
which most of its long-term debt is denominated. Also in the first
quarter of 2004, the Company recorded an after-tax gain of $70
million from the sale of the remaining 25% of the Saint-Felicien,
Quebec pulp mill and recognized an after-tax favourable adjustment
of $3 million related to the initial Saint-Felicien transaction. As
well in the first quarter, the Company recorded additional closure
costs of $4 million after- tax, related to the previously announced
indefinite idling of the Lufkin and Port-Alfred mills. During the
first quarter of 2003, the Company recorded an after-tax gain on
translation of foreign currencies of $239 million. Also in the
first quarter of 2003, the Company settled favourably certain tax
litigation that had not been provided for in previous reporting
periods in an amount of $32 million. Overview of Results Operating
profit (loss) from continuing operations per business segment for
the periods ended March 31, was as follows: > In the first
quarter of 2004, Newsprint and Value-added Groundwood Papers
operating results were negatively impacted by additional closure
costs of $3 million and $4 million, respectively. Newsprint
According to the Pulp and Paper Products Council (PPPC),
consumption by U.S. daily newspapers was down 0.8% in the first
quarter of 2004, compared to the same period in 2003. Advertising
linage was up 2.6% in February and 3.3% in March 2004, compared to
the same periods of 2003. North American overall demand for
newsprint increased by 1.1% in the first quarter of 2004, compared
to the same period in 2003, due to increased inventory levels for
all users. Total U.S. consumption was down by 2.6% in the first
quarter of 2004, compared to the first quarter of 2003, as other
users, namely commercial printers, continued to favour other grades
of paper as pricing differences between newsprint and value-added
grades continued to diminish. According to the PPPC, at the end of
the first quarter of 2004, total producer and customer newsprint
inventories were higher by 135,000 tonnes, or 9.6%, compared to the
previous quarter and higher by 28,000 tonnes, or 1.9%, compared to
the end of the first quarter of 2003. U.S. daily newspaper
inventories increased from 38 days of supply at the end of the
first quarter of 2003 to 43 days of supply at the end of the first
quarter of 2004. At the end of the first quarter of 2004, the
Company's inventories destined for both international markets and
North American customers remained at low levels compared to the end
of 2003. The Company's newsprint shipments in the first quarter of
2004 were 1,140,000 tonnes compared to 1,116,000 tonnes in the
first quarter of 2003. Except for the previously announced
indefinitely idled mills and holiday season shutdowns, the Company
did not take any other market-related downtime in the first quarter
of 2004. Despite higher U.S. dollar selling prices, Canadian dollar
realization for newsprint in the first quarter of 2004 was $12 per
tonne lower than the corresponding period of 2003. During the first
quarter, the Company implemented US$50 per tonne price increases in
the U.S. and in key international markets including Latin America,
Asia and the Middle East. Such price increases were the main
element in the Company's average Canadian dollar realization which
increased by $22 per tonne compared to the fourth quarter of 2003.
The Company expects newsprint consumption to grow in line with
stronger economic growth in North America. Consumption is expected
to be flat in the first half of the year, with an approximate 2%
gain in the second half. The key risk factors to a consumption
recovery relate to the strength of the U.S. economy, specifically
with respect to job creation, and consequently in help wanted
advertising, as well as continued general strengthening in
advertising expenditures. Management expects 2004 consumption in
Europe to be flat or slightly up. The main risk factor remains the
extent of an economic recovery in continental Europe, particularly
in Germany. The Company believes that capacity reductions in North
America should lead to more balanced supply/demand conditions on
this continent, while conditions in Europe should remain under
pressure due to recent capacity increases. On a per tonne basis,
the Company's cost of goods sold in the first quarter of 2004 was
$23 lower than in the same quarter of 2003. This was mainly due to
the impact of the focused downtime announced at the end of 2003 and
a stronger Canadian dollar reflected in the costs of the Company's
U.S. mills. Value-added Groundwood Papers According to the PPPC,
North American demand for uncoated groundwood papers increased 6.1%
in the first two months of 2004 compared to the same period of
2003. This increase was due to growth in a number of individual
grades, with SCA alone contributing significantly. Demand for this
grade increased by 12.8% in the first two months of 2004. The
Company's shipments of value-added paper grades totalled 437,000
tonnes in the first quarter of 2004, compared to 434,000 tonnes in
the first quarter of 2003. The Company's uncoated freesheet
substitute grades, ABIoffset(TM), continue to be successful with
sales increasing 6.5% in the first quarter of 2004 compared to the
first quarter of 2003. The Company is on track to increase capacity
in these grades this year through its Alma, Quebec paper mill
investment. Despite slightly higher U.S. dollar selling prices,
Canadian dollar realization for value-added paper grades in the
first quarter of 2004 was lower than the corresponding period of
2003. During the first quarter of 2004, the Company announced price
increases of US$45 per short ton effective April 1, 2004 for its
ABIcal(TM), US$40 per short ton effective March 1, 2004 for its
ABIbrite(TM) and US$60 per short ton effective April 1, 2004 for
its ABIoffset(TM) grades. The Company expects uncoated groundwood
demand to continue to grow in 2004 along with an improved economy.
Uncoated groundwood grades are expected to benefit from improvement
in advertising markets and continued grade substitution. Industry
forecasters are predicting demand growth for 2004 to be
approximately three to four percent. Regarding supply, a recent
reduction in uncoated groundwood capacity should lead to more
supply/demand balance in North America. Imports from Europe
continue to be a significant risk factor, but recent growth may be
tempered by the weak U.S. dollar and any improvement in European
markets. On a per tonne basis, the Company's cost of goods sold in
the first quarter of 2004 was $32 lower than in the first quarter
of 2003. This was mainly due to the impact of the focused downtime
announced at the end of 2003. Wood Products U.S. housing starts
increased by 15% from an annual rate of 1.742 million units during
March of 2003 to 2.007 million units during March of 2004. High
housing starts in March were a reflection of the low interest rate
environment and a recovering U.S. economy. During the first quarter
of 2004, average U.S. dollar lumber prices (f.o.b. Great Lakes)
increased between 17% for 2x4 Stud and 41% for 2x4 Random Length
compared to the same period last year. Sales volume in the first
quarter of 2004 totalled 488 million board feet (MBf) compared to
453 MBf for the same period in 2003. Average selling prices in
Canadian dollars for the first quarter of 2004 were 8% higher than
in the same quarter in 2003 as a result of higher U.S. dollar
lumber prices, partly offset by a stronger Canadian dollar. With
respect to the ongoing softwood lumber dispute, on March 22, 2004 a
World Trade Organization panel issued its final report on injury,
finding fault with the U.S. International Trade Commission's
original threat of injury determination. The U.S. Department of
Commerce (USDOC) issued a revised determination on October 15, 2003
which, once the appeal process is concluded, will lower the
Company's AD deposit rate from 12.44% to 11.85%. The North American
Free Trade Agreement (NAFTA) panel subsequently upheld challenges
by several other companies to their recalculated rates. On April
14, 2004, the USDOC issued a further revised determination
confirming the Company's revised rate of 11.85%. This revised rate
will likely take effect in the second quarter of 2004, provided
there are no further NAFTA challenges in the AD case. On January
13, 2004, the USDOC, following the NAFTA panel order dated August
13, 2003, released its revised countervailing duty rate of 13.23%
compared to the current rate of 18.79%. If this revised rate is
confirmed by the NAFTA panel, it would only take effect in the
second quarter of 2004 upon completion of the appeal mechanism.
Abitibi-Consolidated has expensed $23 million for countervailing
and anti-dumping duties during the first quarter of 2004. On a per
thousand board feet basis, the Company's cost of goods sold in the
first quarter of 2004 was $12 lower than in the first quarter of
2003. This was mainly due to higher wood chips revenue, which is
accounted for as a reduction in manufacturing costs, and better
operating efficiency. Other Noteworthy Events On April 15, 2004,
Boise Cascade Corporation (Boise) and its joint- venture partners
announced that they have reached an agreement with Ainsworth Lumber
Co. Ltd. for its purchase of Voyageur Panel for US$193 million,
plus as much as US$10 million based on oriented strand board (OSB)
prices between closing and year-end. Voyageur Panel is a joint
venture involving Boise (47%), Abitibi-Consolidated (21%),
Northwestern Mutual Life Insurance Company (17%) and Allstate
Insurance Company (15%). The transaction is expected to close in
the second quarter of 2004. On February 27, 2004,
Abitibi-Consolidated sold its remaining 25% interest in SFK GP for
gross proceeds of $118.5 million. Net proceeds of $112 million were
used for the repayment of certain outstanding debt and for general
corporate purposes. As a result, Abitibi-Consolidated no longer has
an interest in SFK GP. On January 22, 2004, the Communications,
Energy and Paperworkers Union of Canada (CEP) selected
Abitibi-Consolidated as the pattern-setting employer in the
upcoming negotiations in Eastern Canada for a new collective
agreement. Significant progress has been realized since the start
of the negotiation. This collective agreement covering
approximately 4,800 workers in 12 mills of the Company's newsprint
and value-added divisions will expire on April 30, 2004. Local
issues and contract language are completed in eleven of the twelve
operating units covered by the 2004 negotiation and should be
completed in the coming weeks. Thereafter, negotiation on major
issues such as the duration of the collective agreement, wages,
benefits, pension plan and job security will start at the national
level. On January 15, 2004, the Company announced that its
Quebec-West Woodlands Division has received certification under the
Sustainable Forest Management (SFM) Standard of the Canadian
Standards Association (CSA). This registration will certify 1.6
million hectares of public forestlands in Quebec. Dividends On
January 28, 2004, the Company's Board of Directors declared a
dividend of $0.025 per share paid on March 2, 2004 to shareholders
of record as at February 6, 2004. Financial Position and Liquidity
Cash used by continuing operating activities totalled $97 million
for the first quarter ended March 31, 2004, compared to $154
million in the corresponding period of 2003. The reduction in cash
flows used for operating activities is mainly due to a lower
increase in operating working capital components. The increase in
operating working capital is mainly due to accounts payable partly
offset by an increase in accounts receivable, and improvement in
operating results from continuing operations. Capital expenditures
were $69 million for the three-month period ended March 31, 2004
compared to $42 million in the corresponding period last year
mainly due to higher spending for the Alma project. This $181
million project is on schedule for a start-up in May ramping up to
Equal Offset(R) in the second half of 2004. While on schedule, the
project cost is now expected to be approximately $10 to $15 million
higher than the original budget. The modernization of
Abitibi-Consolidated's hydroelectric generating facilities at
Iroquois Falls, Ontario is progressing both on budget and on
schedule for completion in November 2004. The Hebei project in
China to build a new machine is progressing both on budget and on
schedule. The paper machine building is under construction and
major equipments has been ordered. Total long-term debt amounted to
$5,124 million for a ratio of net debt to total capitalization of
0.624, as at March 31, 2004, compared to $4,958 million or a net
debt to total capitalization ratio of 0.618 at December 31, 2003.
Going forward, the Company remains committed to applying free cash
flows to the reduction of long-term debt. On February 20, 2004,
Moody's lowered its rating of the Company's debt instrument from
Ba1 with a stable outlook to Ba2 with a negative outlook. On March
4, 2004, Standard & Poor's also lowered its rating from BB+
with a negative outlook to BB with a negative outlook. The Company
does not expect a significant increase in its interest expense as a
result of these rating changes. In February 2004, in order to
increase its financial flexibility on its revolving credit
facilities and manage its liquidity prudently, the Company
requested and obtained from its banking syndicate an amendment to
its covenant regarding interest coverage, which was reset to 1.0x
for the first and second quarters of 2004, compared to 1.25x
before, as shown in Table 3. The required interest coverage ratio
is essentially EBITDA to net interest charges on a trailing
twelve-month basis. The net funded debt to capitalization covenant
remained unchanged. > For the twelve-month period ended March
31, 2004, the Company achieved an interest coverage ratio of 1.29x
and met its covenant before amendment. The Company has ongoing
programs to sell up to US$500 million of accounts receivable, with
minimal recourse, to major financial institutions. Under these
programs, the outstanding balance in Canadian dollars, as at March
31, 2004 was $461 million compared to $504 million at December 31,
2003. Changes in Accounting Policies adopted during the first
quarter of 2004 Effective January 1, 2004, the Company adopted two
new recommendations that have a significant impact on the
presentation of its consolidated financial statements. These
recommendations were adopted retroactively with restatement. The
new CICA Handbook section 1100, Generally Accepted Accounting
Principles, has been issued, effective for fiscal years beginning
on or after October 1, 2003. The new section establishes standards
for financial reporting in accordance with GAAP. It clarifies the
relative authority of various accounting pronouncements and other
sources of guidance within GAAP, complementing section 1000,
Financial Statement Concepts. The application of the new standard
eliminates the notion of "net sales" and requires the presentation
of sales separate from distribution costs and CVD/AD expenses,
resulting in higher sales amounts with no impact on net earnings
and on cash flows. The CICA has issued new recommendations relative
to Handbook section 3870, "Stock-based compensation and other
stock-based payments", which is effective for fiscal years
beginning on or after January 1, 2004. The recommendation states
that the fair value-based method must be used, with the intrinsic
value method being no longer acceptable. The impact on the
Company's Sales, General and Administrative expenses is $1 million
in the first quarter of 2004 and $1 million in the first quarter of
2003. Disclosure Controls and Procedures and Internal Controls In
the quarter ended March 31, 2004, 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, 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 other business combinations or divestitures
that may be announced or completed after such statements are made.