Symptoms of Network Marketing - Year End Performance

Transcription

1 Slide 1, Conference call operator: Good morning. My name is [ ] and I will be your conference operator today. At this time, I would like to welcome everyone to Catalyst Paper Corporation s Fourth Quarter and 2015 Year End Results. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I will now turn the conference call over to Eduarda Hodgins, Director, Organization Development & Communications. Eduarda: Thank you [ ] and welcome to our fourth quarter and year end webcast. This call will be hosted by Joe Nemeth, Catalyst Paper s President & CEO and Frank De Costanzo, Catalyst Paper s Senior Vice President and CFO. 1

2 Slide 2, Eduarda: Just a few important comments before Joe gets started. On slide 2 A reminder that our remarks today contain forward looking information based on assumptions and factors beyond our control and that could cause results to differ materially from what is reflected in our comments. These factors, assumptions, risks and uncertainties are detailed in the Management s Discussion & Analysis, which is filed with our financial statements with the Securities Commissions in Canada and the United States. 2

3 Slide 3, Eduarda: Turning to slide 3. We ll also discuss adjusted EBITDA, adjusted EBITDA before specific items, free cash flow and net earnings before specific items these are non GAAP measures. Please refer to our earnings release, MD&A, financial statements and related footnotes for GAAP information and reconciliation of GAAP to non GAAP information. A reminder that today s results, along with the financial statements and MD&A, are posted on our website at The slide presentation is also posted on our web site at: With that, please turn to slide 4 in our earnings presentation, and I will hand the call over to Joe. 3

4 Slide 4 Joe: Thanks Eduarda and good morning everyone. I will start the presentation with a high level summary of was a year of contrast although consistent with our expectations: The first half of the year was dominated by the integration of our newly acquired U.S. millions, completing major investments in business capability and developing a strategic plan for the future. As a result of these large one time investments along with market curtailment in May and the Crofton oxygen plant outage in June, first half adjusted EBITDA was negative $5.2 million In the second half of the year, Adjusted EBITDA increased to $53.9 million. This step change in financial performance was driven by the implementation of two major performance improvement initiatives: Mill Revitalization and our Opportunities for Improvement Program. 4

5 2015 Full year adjusted EBITDA was $48.7 million, relatively unchanged from the $47.6 million posted in However, when adjusted for specific items, EBITDA was $86.7 million in 2015, a significant improvement to the $51.2 million posted in

6 Slide 5 Joe: Turning to Slide 5, Let s now look at our Operational highlights for 2015: Starting with Safety: While several mills set records for number of days without a medical incident in 2015, safety performance as a whole was flat vs 2014 We ended the year with a Medical Incident Rate of 2.52 and a Long Term Incident Rate of 1.24 Although progress was made in 2015 in building improved programs and behaviours, this was overshadowed by the tragic fatality of a long term employee on Jan. 27, 2016 at the Crofton mill This tragedy has bolstered our efforts on improving our safety culture, processes and behaviours as we strive to achieve an injury free workplace 5

7 Let s now look at our Operational highlights for the year: As I shared earlier, the first half of the year was focused on integration and investment Key activities in the first half of 2015 included: Completing the integration of our U.S. mills. This went quicker than expected as our new US operations shared similar values including a real focus and sense of urgency on achieving performance improvement targets We invested considerable time & money working towards the separation of our information and order management systems from VERSO, a major and complex project we completed in the fourth quarter. And, we also integrated our sales, marketing and order management functions by establishing a regional office in Dayton, Ohio, which enhanced our customer service capabilities and provided continuity of service to key U.S. customers We completed the first half of 2015 with the finalization of our strategic plan which outlined the key performance improvement strategies to be implemented in the second half of the year. Second half highlights included: Launching Revitalization Programs at three of our mills, including both U.S. mills to achieve step change cost reductions. And we were very pleased with progress achieved: For example our U.S. mills moved from a combined EBITDA loss of $31.6 million in the first half of the year, to positive $14.3 million EBITDA in the second half of 2015 We also expanded the Opportunities for Improvement Program across the company to include our US operations who quickly embraced the program and made some improvements that we have taken back to our Canadian operations Finally, the strategic investments made in Energy generating capability began to bear fruit late in the second half of 2015 as a result of the start up of the G13 Turbine at Powell River and completion of a Power Boiler maintenance at Rumford. This work combined with the Recovery Boiler upgrade at Rumford in May will allow both mills to generate significantly more electricity and reduce our overall energy costs. 5

8 Slide 6 Joe: Turning to Slide 6, I ll now briefly touch upon our sales and marketing highlights during 2015: North American demand for all paper grades decreased approximately 10% in 2015 Against this challenging context, Catalyst paper increased sales volumes and established ourselves as a preferred supplier of our new coated grade portfolio. This was accomplished by delivering superior customer service, establishing a number of long term, value added customer partnerships and the relaunch of a set of coated paper brand names that have strong market reputation for quality and consistency. It s worth noting that Catalyst offers customers a unique feature the ability to supply from the West, Midwest and East, which provides both security of supply and agile, cost competitive service. We also made good progress developing new products an important element of our strategy: In 2015, we commercialized a number of new products thanks to the effectiveness of our integrated sales, marketing and technical teams in identifying niche opportunities and matching these with each mill s unique capabilities. And finally on the market side some further good news we are pleased to share: 6

9 With regards to sustainable business practices, we are particularly proud to be a key partner in the development of an ecosystem based management plan in the Great Bear Rainforest of British Columbia. With this milestone reached, 85 per cent of the forest in this globally unique, 6.4 million hectare coastal area will be protected for the next 250 years. We were also proud to be named one of Canada s best corporate citizens by Corporate Knights for the 9 th year in a row. This recognition is based on an assessment of key performance outcomes and transparency. I m proud to say that our Sustainability Report is one of the most detailed and transparent publications available. Finally, we learned in February 2016 that Catalyst has been grated an expedited review of the countervailing duty Final Order imposed by the U.S. Department of Commerce in December 2015, which confirmed an all others duty rate of per cent on the company s exports of supercalendered paper to the U.S. This rate was imposed upon Catalyst without any investigation of the company. We look forward to a fair, efficient and complete investigation of Catalyst by the Commerce Department. I ll now turn it over to Frank to walk you through our financials in detail. Frank. 6

10 Slide 7 Frank: Q4 & 2015 FINANCIAL OVERVIEW (Q4) Thanks Joe. Let s look at our fourth quarter results and how they compare to the previous quarter Fourth quarter adjusted EBITDA was $15.1 million and EBITDA before specific items was $19.8 million This compares to adjusted EBITDA of $38.8 million and adjusted EBITDA before specific times of $41.2 million in the previous quarter In the fourth quarter, the company incurred a net loss of $26.3 million and a net loss before specific items of $10 million This compares to a net loss of $12.9 million and earnings of $8.4 million before specific items in the third quarter of 2015 An important point to note is that: 2015 Q3 results were stronger given no major maintenance in the period and reflect the strongest sales quarter of the year 2015 Fourth quarter results were impacted by: The completion of major planned maintenance outages that drove quarter over quarter maintenance costs $17.4 million higher The imposition of countervailing duties on supercalendered paper exported to the U.S. (which cost the company $4.5 million in the quarter, $2.4M higher than Q3) And lower NBSK pulp prices As a result of these significant expenditures, free cash flow in the fourth quarter was negative $11.4 7

11 million Let s now have a closer look at our year end results 7

12 Slide 8 Frank: Q4 & 2015 FINANCIAL OVERVIEW (FY 2015) As Joe said, we moved from integration and investment in the first half of 2015 to execution in the second half of the year In the first half of 2015, we reported an EBITDA of negative $5.2 million, as compared to an EBITDA of positive $53.9 million in the second half of Stronger second half results led to adjusted EBITDA of $48.7 million for FY 2015 as compared to $47.6 million for FY Full year 2015 adjusted EBITDA before specific items was $86.7 million, as compared to adjusted EBITDA before specific items of $51.2 million in Adjusted EBITDA in 2015 was negatively impacted by specific items of approximately $38 million. These included: The Rumford recovery boiler upgrade The significant second quarter market curtailments at our Rumford, Port Alberni and Powell River mills And costs associated with the imposition of the CVD The company recorded a net loss of $49.4 million and a net loss before specific items of $28.0 million for FY 2015 Turning to the next slide. 8

13 Slide 9 Frank: Q4 & 2015 FINANCIAL OVERVIEW (CA & US) This slide shows the EBITDA breakdown between our Canadian and U.S. operations. As the table illustrates, our Canadian operations reported positive EBITDA in both halves of The solid results of our Canadian operations reflects the implementation of performance improvement initiatives that date back to 2014 when the company sharpened its focus on operational excellence programs. Our U.S. operations, which were acquired in January 2015, recorded a negative EBITDA of $31.6 million in the first half of the year, but improved significantly in the second half, reporting an EBITDA of positive $14.3 million. The significant improvement in the second half of 2015 reflects the U.S. mills implementation of the proven performance strategies that have already been implemented at our Canadian operations. This includes the implementation of our Opportunities for Improvement Program. Turning to the next slide. 9

14 Slide 10 Frank: ADJUSTED EBITDA RECONCILIATION The fundamental change to the company s product volumes and mix that resulted from the January 7, 2015 acquisition of the U.S. mills reduces the value of comparisons to prior year results, and therefore, I will restrict my comments to comparisons to the prior quarter The favourable impact of the weaker Canadian dollar on EBITDA of $3.2M was more than offset by lower pulp and paper pricing of $16.7M, which included the impact of the CVD on SC paper and lower NBSK pulp pricing Volume and mix, which had a negative variance of $4.8M, was lower on lost production and sales volumes related to Crofton s recovery boiler shut in October and the slowdown in sales from the third quarter peak Distribution costs showed a favourable variance of $2.1M due to improved destination mix and the lower oil price Maintenance costs were $17.4M higher due to the Crofton boiler shut, a power boiler shut at Rumford, and a number of unforeseen maintenance events in the quarter The SG&A negative variance costs of $4.6M reflects the legal fees related to the CVD duty, along with IT and Finance systems fees related to the mid November separation of information systems and infrastructure from the Verso Corporation. 10

15 The $9.0M inventory valuation adjustment reflects higher finished goods inventory valuation per tonne due to higher mill cost and lower sales volume in the quarter. The lower of cost or market write down on inventory was driven primarily by the imposition of the 18.85% CVD duty. The $4.1M positive power generation variance reflects Powell River s power sales program, now including G13. I will now discuss free cash flow 10

16 Slide 11 Frank: FREE CASH FLOW Free cash flow was negative $11.4 million in Q4 and negative $37.6 million for FY Free cash flow has trended positively in the second half of 2015 at $12.0 million as compared to negative $49.6 million in the first half of the year, in line with EBITDA performance. I will now take a closer look at our liquidity at the end of the quarter. 11

17 Slide 12 Frank: LIQUIDITY In Q4, liquidity of $93.8M increased from the prior quarter by $7.6M due to a change in net working capital of $21.6M, partially offset by negative Q4 FCF of $11.4M. As compared to the prior year, liquidity decreased by $8.9M due to negative FCF of $37.6M and the foreign exchange exposure of the US$ portion of our ABL Facility borrowings. This was partially offset by an increase of $50 million to the maximum borrowing base of our ABL Facility from $175M to $225M to accommodate the increase of our net working capital that qualifies as collateral. With that, I will turn the presentation back to Joe. 12

18 Slide 13 Joe: Thanks Frank. Turning to Slide 13, we provide guidance on major maintenance shutdown plans for 2016 In 2016, we have a major planned maintenance outage scheduled in the 2nd quarter at Crofton, including an upgrade of Recovery Boiler 4 s Economizer [at a cost of $5.1 million]. We also have major planned maintenance in the 4th quarter at Rumford at our Pulp mill and power island. Capital spending on both our Canadian and U.S. operations is expected to not exceed $35 million and will be managed to balance cash flow. 13

19 Turning to Slide 14 Joe: To close, I d like to provide you with an Outlook for Let me start with a look at Markets: North American paper markets are expected to remain challenging in 2016 with the continued migration to electronic media. We expect that coated and uncoated paper demand will decline in the first half of 2016 before rebounding in the seasonally stronger second half of the year. NBSK pulp will trade in a narrow range, with Chinese buying patterns and requirements expected to continue to drive the market in On the operation side: Our strategy is clear and focused. First, improve safety performance. We need to do better and we will Second, continue to drive down costs quickly and significantly through the expansion of our Revitalization Program to all of our mills Finally, drive the top line. This includes: Optimizing existing product portfolio through: Freight synergies Lighter basis weights and Strategic partnerships with large printers Commercializing new products to growing, value added niches that are outside 14

20 of printing and writing sectors We will also continue to capitalize on synergistic business opportunities, including green energy generation I ll now hand it back to Eduarda to start our question period. 14

21 Eduarda: Thanks, Joe. A quick note before we begin the question and answer portion of the conference call, our call is scheduled for a hard stop at 11:30 p.m. in the east, 8:30 a.m. here on the West Coast. I ll now turn the call back to [ ] to conduct the Q&A portion of our call. Please go ahead, [ ]. To close, Eduarda: Thanks [ ]. Thanks to those who joined us today on our 2015 second quarter earnings call. We appreciate your interest in Catalyst Paper. Have a good day. And make it a safe one. 15