Abitibi-Consolidated swings to loss in Q3; still aims to cut debt

By Paul Deckelman

New York, Oct. 25 - Abitibi-Consolidated Inc. fell into the red in the just-ended third-quarter, the Montreal-based forest products company said Wednesday, hurt by the general downturn among Canadian paper and lumber producers. The results contrasted with a year-ago profit and also reflected a sequential deterioration from its second-quarter gains.

But company executives told analysts and journalists on a conference call that they expect some of the conditions which hurt its bottom line in the latest period, such as the downturn in the housing industry in the United States, which cut lumber sales, to moderate somewhat.

And they said that Abitibi would continue several initiatives announced earlier in the year aimed at positioning the company for more profitability, including proceeding with a planned initial public offering relating to its hydroelectric assets in the province of Ontario, buying full ownership in a Georgia newsprint company in which it now holds a stake, selling some related woodland acreage, and continuing the suspension of its quarterly stock dividend.

Rebate to go to debt cut

The executives also noted that the company stands to receive some $235 million in tariff reimbursements as part of a long-awaited settlement of softwood lumber trade issues between Canada and the United States, and it intends to put that money, plus some of the proceeds from the four initiatives, into debt reduction.

As of the end of the second quarter on June 30, the most recent full quarter for which Abitibi-Consolidated submitted results to the Securities and Exchange Commission, the company's total long-term debt amounted to C$3.711 billion for a ratio of net debt-to-total capitalization of 0.593. The company's net funded debt-to-capitalization ratio, calculated as per the requirements of its revolving credit facilities, amounted to 58.4% at the end of June, with an interest coverage ratio of 1.9x for the 12-month period ended June 30. The company was in compliance with all of its financial covenants at that time, according to the filing.

The debt structure includes a $750 million bank debt facility - technically, "two facilities," said Abitibi's chief financial officer, Pierre Rougeau, "but it's really one facility, just one comes after the other" - as well as various senior unsecured bond issues totaling approximately $2.7 billion. Rougeau said that as of the end of the third quarter, the company had drawn some C$290 million from the credit facility, and additionally had about C$85 million to C$90 million of outstanding letters of credit against the facility, leaving availability of C$370 million to C$375 million.

No specific debt plans

Rougeau told an analyst during the question-and-answer portion of the conference call that followed the company's official presentation that while the $235 million the company will get from the U.S. lumber tariff refund is targeted towards debt reduction, when it comes to which specific debt may be paid down, "we'll see. We have not finalized a plan for that . . . Whether it goes one way or the other, that's something we need to determine in the coming months."

When an analyst asked whether the company would be able to stay in compliance with its interest coverage covenant, or whether that requirement might "get tight," the CFO reminded him that Abitibi stands to receive the $235 million tariff refund in the fourth quarter, "and most of it will be recorded in our EBITDA. That should fix the interest coverage for quite a while."

The company's president and chief executive officer, John W. Weaver, said "still our primary focus is to pay down the debt and so we have opportunities on some of these projects [the IPO and the Georgia woodlands sale] to generate additional cash, so we're going to be focused on trying to pay down debt."

Back in July, Abitibi announced its intent to proceed with an IPO of an income fund that would hold a minority interest in all of the company's Ontario hydroelectric assets, consisting of approximately 137MW of installed capacity. Abitibi intends the income fund to be its growth vehicle in energy generation. While Abitibi originally envisioned that the IPO transaction would close in the current fourth quarter, subject to receipt of the necessary licenses and approvals, Weaver said it now anticipates completion in the first quarter of 2007.

Around the same time, he said, the company expects to complete its previously announced exercise of its option to acquire the remaining 47.5% interest which it does not currently own in Augusta Newsprint Co., which operates a newsprint mill located in Augusta, Ga. That transaction would be subject to the closing of the Ontario hydroelectric IPO. Under the terms of its option, Abitibi expects to pay around $190 million to gain full ownership of Augusta, which generated EBITDA of $39 million in the first half of the year, with Abitibi receiving about half of that.

Concurrently with assuming full ownership of Augusta, Abitibi plans to proceed with the previously announced sale of 55,000 acres of woodlands in Georgia and South Carolina related to the Augusta operation.

Transactions to help 2007 cuts

Abitibi expects that those initiatives, and the previously announced suspension of the dividend on its common stock, will by themselves contribute to further reduce long-term debt starting in 2007, as well as improving its liquidity and profitability.

'Looking at everything'

Weaver was asked by an analyst whether Abitibi plans any other asset monetizations or other strategic moves, other than the ones previously outlined, and the CEO replied that "we're looking at everything" - but he said that while "there are still some strategic possibilities for the company, I think what we have on our plate is our main thrust right now."

For the third quarter ended Sept. 30, Abitibi recorded a net loss of C$48 million (11 cents per share) - a sharp reversal from the year-earlier profit of C$99 million (23 cents per share), as revenues fell to C$1.181 billion from C$1.355 billion a year ago. On an operating basis, the company made C$2 million in the latest quarter, down from C$8 million a year earlier.

The results were also a marked deterioration from the numbers posted for the second quarter, when Abitibi earned C$157 million (36 cents per share) on C$1.253 billion of revenues, with an operating profit of C$48 million.

Weaver said that the third-quarter results demonstrate "that we live in challenging times."

'Disappointed' with results

He declared that "we were disappointed with this quarter's results," but added that the 16% EBITDA margin seen in the company's newsprint segment - the largest of its three business units - is favorable compared to most other paper products. He noted a sequential improvement in prices, costs and segment results in its commercial paper products business, and said that the big downturn seen in its lumber segment's results "should be less severe in coming quarters.

Weaver said that the company had lowered its 2006 expectations for U.S. consumption of newsprint to a level about 6% below 2005 consumption. However, he said, "through the end of 2006, industry supply and demand should be relatively balanced in all markets, with operating rates near 95%."

Despite the drop in U.S. newsprint consumption, he said, global consumption rates are expected to remain in positive territory for the year, as demand in Europe continues to grow. Third-quarter EBITDA for the company's newsprint segment fell to C$99 million from C$121 million a year earlier

While EBITDA for the commercial printing papers segment fell to C$34 million in the quarter, a C$10 million drop from a year ago, the company is hopeful that a $40 per ton price increase that took effect on July 1 will help boost the segment's fortunes. However, Weaver expressed caution, noting that "this month, we have announced market-related downtime at three of our CPP mills, totaling approximately 20,000 tons of capacity, to balance inventories before year's end."

Lumber hurt by housing slowdown

The company's lumber segment saw EBITDA drop by C$31 million from a year earlier, to a level of negative C$20 million, and Abitibi was forced to idle five sawmills, representing fully 20% of its annual capacity. Weaver cited the decline in U.S. housing starts, since home construction in the States is a key market for Canadian lumber. Even so, he said that "we expect to restart some of these [closed] mills as demand recovers."

Weaver said that the company was "on track" toward realizing its year-end goal of C$175 million in cost and productivity improvements, detailed in an earlier operations review. He said that the full impact of plans to cut selling, general and administrative (SG&A) costs by C$35 million "should be seen by mid-2007". The plan calls for the elimination of some 200 jobs in the mills and at the Montreal headquarters.

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