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Catalyst turns to innovation in difficult markets

Second quarter operating results for Catalyst Paper were negatively impacted by the stronger Canadian dollar, lower production and sales volumes, the continued impact of the countervailing duty (CVD) on exports to the United States of supercalendered paper, and higher maintenance and power costs for the Canadian operations.

The company recorded a net loss of $26.6 million and a net loss before specific items of $27.3 million in the second quarter. This compared to net earnings of $16.9 million and a net loss before specific items of $5.1 million in the previous quarter.

Adjusted earnings before interest tax depreciation and amortization (adjusted EBITDA) was negative $5.3 million and adjusted EBITDA before specific items was negative $1.1 million in the second quarter.

Lower production and unplanned maintenance was partially offset by cost savings from the company’s “Revitalization” program cost savings and revenue enhancement from product mix optimization.

“Although second quarter results were disappointing, operating results in the first half of 2016 were significantly better compared to the same period last year,” said Joe Nemeth, president and CEO. “Our progress demonstrates that we are effectively driving down costs and growing the top line – key strategies that are foundational to our company’s transformation.”

Markets continued to be difficult in the second quarter. Demand declined across all grades, although prices remained relatively stable, according to a company statement.

Catalyst offset the challenge of declining printing and writing paper markets by improving product mix and accelerating product innovation, the statement said. “A number of new grades and products are in development. Exemplifying the company’s progress is a recent announcement highlighting the availability of a new 7 point Orion matte paper that will meet a niche market need and provide customers with a reliable, one-stop supplier for No.3 coated free sheet.”

During the quarter, the United States Department of Commerce announced that it will extend the timeline of its expedited review of the countervailing duty on Canadian supercalendered paper grades. According to Catalyst, this decision means the Department of Commerce’s preliminary determination is now expected no later than November 7, 2016, with its final determination now delayed until at least the first quarter of 2017. Since the CVD was imposed on Catalyst in the second quarter of 2015, the company reports that it has incurred duties and associated legal costs of approximately $13.2 million, of which $2.2 million was incurred in the second quarter of 2016.

In the statement of Q2 results, the company reports progress in safety performance, reducing both its medical incident (MIR) and long-term incident (LTI) rates. In the second quarter, Catalyst Paper’s MIR was 1.51 and LTI was 0.60. Progress was due to a concerted effort to increase employee involvement in grassroots programs to strengthen personal accountability for safety.

Catalyst continued to see positive results with the Revitalization Program led by the U.S. mills, which are tracking ahead of schedule in realizing identified savings. “Employees are taking ownership by driving cost reductions with a strong sense of urgency,” says the Catalyst statement.

The papermaker also reports that planned and unplanned maintenance outages at Crofton drove increased maintenance costs and reduced production volumes. A total mill outage, recovery boiler and digester outage, and capital work on paper machine no. 3, resulted in lost production of 27,300 tonnes and total maintenance costs and lost contribution of approximately $13.8 million, which exceeded the planned financial impact by approximately $3.3 million.

Crofton was also impacted by a breach in the mill’s main water supply line in April 2016. The breach caused a mill-wide water outage that resulted in incremental costs and lost contribution of approximately $3.1 million, although the company has recorded insurance proceeds, estimated at $1.1 million, receivable as of June 30, 2016.