St. Laurent Paperboard Inc.
Second Quarter
Report
for the period ending
June 30, 1999
To obtain a French version of this Report please contact:
Communication Department
630 Rene-Levesque Bvld. West, Suite 3000
Montreal (Quebec) H3B 5C7
Tel: (514) 861-4011, ext: 234
Fax: (514) 861-7003
Pour obtenir la version francaise de
ce rapport, veuillez communiquer avec le:
Service des communications
630, boul. Rene-Levesque ouest, bureau 3000
Montreal (Quebec) H3B 5C7
Tel : (514) 861-4011, poste 234
Telec. :(514) 861-7003
<PAGE>
MESSAGE TO SHAREHOLDERS
For the second quarter of 1999, St. Laurent Paperboard Inc. generated net
earnings of $6.8 million, or $0.13 per share, on net sales of $218.6 million,
compared to a net loss of $0.3 million, or $0.01 per share, on net sales of
$203.6 million for the same quarter in 1998.
For the first six months ended June 30, 1999, net earnings increased to $9.1
million or $0.18 per share, on net sales of $417.0 million, compared to $0.072
million on net sales of $409.9 million for the same period in 1998. This
increase in profitability in 1999 is mainly attributable to cost reductions and
revenue enhancement initiatives, the lower value of the Canadian dollar and a
higher volume of products sold.
NET SALES
Net sales in the second quarter of 1999 increased to $218.6 million compared to
$203.6 million for the same period in 1998. This improvement in net sales is
attributable to increased shipments of all our products. Shipments were up 10.3%
for corrugated products, 5.6% for paperboard products and 27.2% for liquid and
food products. Net price realizations, in the second quarter of 1999, were lower
for paperboard and liquid and food products by 1.5% and 1.4% respectively
compared to 1998. Net price realizations for corrugated products were 1.5%
higher, compared to the same period in 1998.
Shipments were higher for all paperboard products in the second quarter. White
top linerboard shipments increased by 19,200 tons, corrugating medium and kraft
linerboard shipments increased by 4,200 and 15,200 tons respectively, compared
to the 1998 corresponding period. Liquid and food shipments also went up by
3,679 tons in the second quarter, compared to 1998. No shipments of market pulp
were made in the second quarter, compared to 31,700 tons for the corresponding
quarter in 1998.
BUSINESS REVIEW
- - 8% reduction in primary mills' manufacturing costs
- - 8-day outage of the La Tuque bleached board machine for upgrade
- - Somewhat lower selling prices compared to the second quarter of 1998
- - Higher shipments for all products
- - Acquisition of Castle Rock Container increased the Company's integration
level to 48%
<PAGE>
Table 1 - Key Financial Results
(In millions of US dollars, except per share amounts)
1999 1998 1999
Second Quarter Second Quarter First Quarter
Net sales 218.6 203.6 198.4
EBITDA 33.9 24.4 21.1
EBITDA margin - % 15.5% 12.0% 10.7%
Operating earnings 17.3 8.2 4.7
Net earnings (losses) 6.8 (0.3) 2.3
Per share 0.13 (0.01) 0.05
Note: EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization.
EBITDA margin is the ratio of EBITDA divided by net sales.
Table 2 - Net Earnings (loss)
(In millions of US dollars)
1998 1998 1998 1999 1999
Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2
Before West Point Mill (0.3) (4.5) (10.6) 2.3 6.8
Restructuring
After West Point Mill (0.3) (12.8) (10.6) 2.3 6.8
Restructuring
<PAGE>
OPERATING EARNINGS
1999 2nd quarter vs 1998 2nd quarter
For the second quarter of 1999, operating earnings were $17.3 million compared
to $8.2 million, an increase of $9.2 million compared to 1998. The operating
earnings improvement is mainly attributable to paperboard cash manufacturing
costs which were 8% lower in the second quarter of 1999, compared to the same
quarter in 1998 due to lower fibre costs, the lower value of the Canadian dollar
and lower manufacturing costs at the West Point mill. As a result of the
decision to cease production of bleached hardwood market pulp; to close down a
chip mill and to downsize our marine operations, West Point manufacturing costs,
mostly labour, fibre and other material costs, went down 9% during the quarter,
compared to the corresponding 1998 period.
The Company actively manages its Canadian dollar exposure. Canadian dollar
forward contracts, averaging US $0.71, expired during the quarter, while the
actual rate during the quarter was US $0.68, resulting in an opportunity loss of
$0.5 million (including Canadian dollar denominated inventory translation),
compared to a loss of $3.1 million for the corresponding quarter in 1998.
<PAGE>
Table 3 - Operating earnings variances
1999 2nd quarter vs 1998 2nd quarter
(In millions of US dollars)
VARIANCE Positive (Negative)
Mill Converting Other Total
Net price realization on (4.3) 1.9 -- (2.4)
all products
Cost reduction 10.1 (1.1) (0.7) 8.3
Volume increase 0.9 1.2 -- 2.1
Foreign exchange opportunity loss 2.6 -- -- 2.6
Selling and administration (1.1) (1.9) 2.0 (1.0)
Depreciation (0.3) (0.1) -- (0.4)
Total 7.9 -- 1.3 9.2
1999 2nd quarter vs 1999 1st quarter
In the second quarter of 1999, operating earnings increased to $17.3 million
compared to $4.7 million in the first quarter, an increase of $12.6 million,
mainly resulting from higher net price realization for paperboard and converting
products totalling $12.0 million and $5.2 million respectively as well as lower
foreign exchange opportunity losses of $0.9 million (including Canadian dollar
denominated inventory translation). Selling and administrative expenses were
$1.4 million higher in the second quarter, mainly attributable to the Castle
Rock Container acquisition. Primary mill costs were down by $1.3 million in the
second quarter of 1999 when compared to the first quarter of 1999.
Table 4 - Operating earnings variances
1999 2nd quarter Vs 1999 1st quarter
(In millions of US dollars)
VARIANCE Positive (Negative)
Mill Converting Other Total
Net price realization on 12.0 5.2 -- 17.2
all products
Cost reduction 1.3 (6.0) 0.3 (4.4)
Volume increase (0.5) 0.9 -- 0.4
Foreign exchange opportunity loss 0.9 -- -- 0.9
Selling and administration (0.6) (0.8) -- (1.4)
Depreciation -- (0.1) -- (0.1)
Total 13.1 (0.8) 0.3 12.6
LIQUIDITY AND CAPITAL EXPENDITURES
During the second quarter, cash provided by operating activities was $30.9
million compared to $19.0 million for the corresponding quarter in 1998. The
$11.9 million increase is attributable to higher earnings and to a reduction of
12,700 tons of paperboard finished goods inventory during the quarter compared
to an inventory increase of 4,600 tons for the same quarter of 1998, which also
contributed to the improvement in liquidity. Capital expenditures were $11.9
million compared to $15.0 million for the second quarter of 1998. The decrease
in capital expenditures in the second quarter is part of the Company's program
to undertake only indispensable projects to maintain its facilities while
maintaining a conservative capital structure. The Company closed its $25.5
million acquisition of Castle Rock Container increasing its integration level by
about 3%.
<PAGE>
YEAR-2000 COMPLIANCE
Approach
St. Laurent Paperboard Inc. initiated its Year 2000 compliance program ("Y2K")
under the supervision of a centralized Y2K Project Management Organization (PMO)
in February 1998 with a focus of achieving Y2K readiness for all Information
Technology (IT) and computer controlled process technologies used in the
Company's business. The Company's Y2K compliance program also includes the
assessment of the Y2K readiness of its major suppliers and customers by
contacting them to evaluate their strategies and action plans for the Y2K
transition. To minimize the Y2K risk, contingency plans and rollover strategies
will be deployed as part of the program.
Readiness
The Company's Y2K compliance process involves six steps: inventory, impact
assessment and plan formulation, communications with stakeholders, remediation,
integration testing and finally contingency planning. The first three phases of
this process are completed. The remediation phase is 95% completed and the
integration testing is almost completed and will continue until year end. For
the information technology used by the Company to control and optimize its
manufacturing processes, critical systems were tested or verified by their
manufacturers under the Company's supervision and, where required, corrective
action has been completed.The remediation of the remaining non-critical items is
progressing as planned, is fully funded and is expected to be completed within
the third quarter of 1999.
The Company initiated action under its Y2K program in early 1998 to replace the
order fulfillment, order tracking and invoicing software programs in four of its
converting plants. At this time the Company has successfully replaced three of
the non-compliant systems. The fourth system is scheduled to be operational in
the third quarter of 1999. Order fulfillment and production management systems
at the Company's seven other converting plants and at the four primary mills
have been upgraded to compliant software versions.
Risk to the Company
St. Laurent Paperboard's primary business consists of manufacturing and selling
paperboard products, and most of our systems are not date sensitive. For systems
where dates are critical, the Company could face localized interruptions if Y2K
issues are not properly resolved. Our main risk, therefore, would arise if we
were temporarily unable to produce and deliver our products due to interruption
of a production unit, the malfunction of a production management system, or an
interruption in delivery of raw material or services from a critical supplier.
To minimize any possible shutdown of production units, the Company's Y2K
compliance program will continue beyond the remedial phase of the program with
integrated system testing. In addition, critical suppliers of transportation,
raw materials, utilities, payment systems as well as financial services,
government agencies and other critical service providers, are currently being
surveyed by the Company to assess their Y2K readiness status. As the Company
assesses the replies of its suppliers, contingency plans will be prepared, as
required, to minimize the risk of business interruption to the Company. We
anticipate that the assessment of these suppliers will be completed by the end
of the third quarter of 1999. It is not possible however, to be certain that all
aspects of the Y2K issue affecting the Company, including those related to the
efforts of customers, suppliers, or other third parties, will be fully resolved.
<PAGE>
Contingency planning
Our contingency planning will focus on critical areas of potential business
disruption. Contingency plans are being developed on three levels: marketplace
risk and opportunities, production unit and supply chain risk, and finally on an
item-by-item level. The plans will include procedures to minimize disruption of
critical supply items as well as procedures to deal with possible production
unit failures. Critical suppliers will be assessed according to the anticipated
impact to the Company should such a supply failure occur and plans will be
developed, as required, to ensure that alternate sources of supply will be
readily available.
Costs
The Company's cost to achieve Y2K compliance is estimated at $6 million. Of that
amount, approximately $3.5 million will be capitalized. At the end of June,
about $2.3 million has been capitalized and $1.8 million has been expensed.
OUTLOOK
Both the US and Canadian economy continue to show strong growth and it is
expected that they will continue to perform strongly over the next two quarters.
A price increase for white top linerboard and corrugating medium of $40 and $50
per ton respectively is being implemented effective with July 1 shipments.
Concurrently, a box price increase of 10 to 12% has been announced and will be
gradually implemented in the third quarter.
On behalf of the Board of Directors,
/s/ Raymond R. Pinard
- -----------------------------------
Raymond R. Pinard
Chairman of the Board
/s/ Jay J. Gurandiano
- -----------------------------------
Jay J. Gurandiano
President and Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
(unaudited)
(in thousands of US dollars, except per share amounts)
Second quarter ended First quarter ended 6 months ended
June 30 March 31 June 30
1999 1998 1999 1999 1998
- ---------------------------------------------------------------------- ------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 236,184 $ 220,636 $ 216,475 $ 452,659 $ 444,845
Cost of delivery 17,565 17,073 18,051 35,616 34,931
---------------------------- ------------------- -------------------------
Net sales 218,619 203,563 198,424 417,043 409,914
---------------------------- ------------------- -------------------------
Cost of sales 170,584 166,038 164,592 335,176 334,804
Selling and administrative expenses 14,092 13,082 12,687 26,779 25,560
Amortization 16,598 16,257 16,435 33,033 32,045
---------------------------- ------------------- -------------------------
201,274 195,377 193,714 394,988 392,409
---------------------------- ------------------- -------------------------
Operating earnings 17,345 8,186 4,710 22,055 17,505
Interest expense, net 6,517 7,168 7,057 13,574 14,937
Other expense (income) 630 3 (4,816) (4,186) (10)
---------------------------- ------------------- -------------------------
Earnings before income taxes 10,198 1,015 2,469 12,667 2,578
Provision for income taxes 3,550 1,294 479 4,029 2,506
---------------------------- ------------------- -------------------------
6,648 (279) 1,990 8,638 72
Earnings from equity investment 186 - 285 471 -
---------------------------- ------------------- -------------------------
Net earnings (loss) 6,834 (279) 2,275 9,109 72
---------------------------- ------------------- -------------------------
Net earnings (loss) per common share
Basic 0.13 (0.01) 0.05 0.18 0.00
---------------------------- ------------------- -------------------------
Fully diluted $ 0.13 $ fn1 $ 0.05 $ 0.18 $ 0.00
---------------------------- ------------------- -------------------------
Retained earnings at beginning of period $ 4,044 $ 25,383 $ 1,769 $ 1,769 $ 25,032
Net earnings (loss) 6,834 (279) 2,275 9,109 72
---------------------------- ------------------- -------------------------
Retained earnings at end of period $ 10,878 $ 25,104 $ 4,044 $ 10,878 $ 25,104
---------------------------- ------------------- -------------------------
Weighted average number of outstanding
common shares (in thousands) 49,310 49,081 49,264 49,287 49,056
---------------------------- ------------------- -------------------------
fn1 Anti-dilutive
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN CASH POSITION
(unaudited)
(in thousands of US dollars)
Second quarter ended First quarter ended 6 months ended
June 30 March 31 June 30
1999 1998 1999 1999 1998
- --------------------------------------------------------------------- ------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in)
Operating activities
Net earnings (loss) $ 6,834 $ (279) $ 2,275 $ 9,109 $ 72
Items not involving cash
Amortization of property, plant and
equipment, deferred costs and goodwill 16,598 16,257 16,435 33,033 32,045
Amortization of debt issue costs 311 379 399 710 605
Future income taxes 3,011 1,051 185 3,196 1,679
Gain on sale of property, plant and
equipment - - (4,553) (4,553) (235)
Other (64) (369) (222) (286) (649)
Start-up and other deferred costs incurred (587) 888 (691) (1,278) 841
Post retirement expense, net of funding 665 421 1,041 1,706 1,195
Earnings from equity investment (186) - (285) (471) -
--------------------- ------------------- -------------------------
26,582 18,348 14,584 41,166 35,553
Change in non-cash working capital
relating to operations
Accounts receivable (495) 5,299 (9,675) (10,170) 6,235
Inventory 2,419 (2,861) 8,346 10,765 (3,120)
Prepaid expenses (2,914) 806 1,465 (1,449) (4,491)
Accounts payable and accruals 5,605 (3,679) 11,091 16,696 167
Income and other taxes payable (306) 1,128 (42) (348) 615
--------------------- ------------------- -------------------------
4,309 693 11,185 15,494 (594)
--------------------- ------------------- -------------------------
Cash provided by operating activities 30,891 19,041 25,769 56,660 34,959
--------------------- ------------------- -------------------------
Investing activities
Equity investment - - (9,607) (9,607) -
Business acquisitions (25,483) - - (25,483) -
Additions to property, plant and equipment (11,930) (14,981) (6,204) (18,134) (27,952)
Proceeds from disposals of property,
plant and equipment - - 5,655 5,655 235
--------------------- ------------------- -------------------------
(37,413) (14,981) (10,156) (47,569) (27,717)
--------------------- ------------------- -------------------------
Financing activities
Issuance of common shares, net of expenses 390 789 333 723 1,269
Redemption of common shares - - - - (242)
Issuance of long-term debt 66 136 70 136 230,136
Repayment of long-term debt (22) (65) (24) (46) (241,486)
Debt issue costs (583) (763) (127) (710) (4,581)
Cash held in escrow - - - - 11,000
--------------------- ------------------- -------------------------
(149) 97 252 103 (3,904)
--------------------- ------------------- -------------------------
Increase (decrease) in cash (6,671) 4,157 15,865 9,194 3,338
Cash and cash equivalents at beginning of period 12,346 12,621 (3,519) (3,519) 13,440
--------------------- ------------------- -------------------------
Cash and cash equivalents at end of period $ 5,675 $ 16,778 $ 12,346 $ 5,675 $ 16,778
--------------------- ------------------- -------------------------
Cash and cash equivalents
Cash on hand (indebtedness) (475) 8,955 6,713 (475) 8,955
Temporary investments 6,150 7,823 5,633 6,150 7,823
--------------------- ------------------- -------------------------
$ 5,675 $ 16,778 $ 12,346 $ 5,675 $ 16,778
--------------------- ------------------- -------------------------
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEET
(unaudited)
(in thousands of US dollars)
June 30
1999 1998
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and temporary investments $ 5,675 $ 16,778
Accounts receivable 109,079 100,337
Income and other taxes receivable 5,218 4,378
Inventories 93,088 99,720
Prepaid expenses 15,281 10,170
-----------------------------
228,341 231,383
Property, plant and equipment 780,894 784,542
Future income taxes 7,890 1,632
Deferred charges and other assets 42,068 32,552
Goodwill 19,374 20,481
-----------------------------
$ 1,078,567 $ 1,070,590
-----------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 89,361 79,868
Current portion of long-term debt 17,427 294
-----------------------------
106,788 80,162
Long-term debt 345,204 362,298
Future income taxes 9,012 9,400
Other liabilities 31,620 20,031
SHAREHOLDERS' EQUITY
Common shares 572,657 571,187
Contributed surplus 2,408 2,408
Retained earnings 10,878 25,104
-----------------------------
585,943 598,699
-----------------------------
$ 1,078,567 $ 1,070,590
-----------------------------
<PAGE>
SEGMENTED INFORMATION
(unaudited)
(in thousands of US dollars) Second quarter ended 6 months ended
June 30 June 30
1999 1998 1999 1998
-------------------- ------------------------
Net sales to third parties
From Canada
Within Canada $ 34,231 $ 35,943 $ 61,469 $ 66,026
To the United States 52,818 36,267 98,343 75,452
Other 6,458 10,137 17,044 21,715
-------------------- ------------------------
$ 93,507 $ 82,347 $ 176,856 $ 163,193
From the United States 125,112 121,216 240,187 246,721
-------------------- ------------------------
$ 218,619 $ 203,563 $ 417,043 $ 409,914
-------------------- ------------------------
Intercompany sales between
geographic areas
From Canada $ 4,779 $ 2,711 $ 7,797 $ 4,475
From the United States 266 712 491 955
-------------------- ------------------------
$ 5,045 $ 3,423 $ 8,288 $ 5,430
-------------------- ------------------------
Operating earnings (loss)
Canada $ 9,844 $ 986 $ 12,493 $ 5,137
United States 7,501 7,200 9,562 12,368
-------------------- ------------------------
$ 17,345 $ 8,186 $ 22,055 $ 17,505
-------------------- ------------------------
Identifiable assets
Canada $ 443,325 $ 441,110
United States 635,242 629,480
------------------------
$ 1,078,567 $ 1,070,590
------------------------
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS
(unaudited)
(in thousands of US dollars, except for units)
Woodlands,
Solid Wood
Primary and unallocated
Second Quarter ended June 30, 1999 mills Converting amounts Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales to third parties $ 128,003 $ 85,941 $ 4,675 $ 218,619
Inter-segment sales 19,441 - - 19,441
----------------------------------------------------------
Total $ 147,444 $ 85,941 $ 4,675 $ 238,060
EBITDA 29,180 5,008 (245) 33,943
Amortization 14,035 2,162 401 16,598
Operating earnings (loss) 15,145 2,846 (646) 17,345
Identifiable assets 766,532 232,083 79,952 $ 1,078,567
Additions to property, plant and equipment 7,278 4,644 8 11,930
Sales to third parties (short tons) 337,229 - -
Sales to third parties - corrugated containers (MMSF) - 1,304 -
Sales to third parties - liquid and food (short tons) - 17,183 -
Inter-segment sales (short tons) 49,822 - -
Woodlands,
Solid Wood
Primary and unallocated
Second Quarter ended June 30, 1998 mills Converting amounts Total
- ----------------------------------------------------------------------------------------------------------------
Net sales to third parties $ 123,721 $ 75,411 $ 4,431 $ 203,563
Inter-segment sales 22,400 - - 22,400
----------------------------------------------------------
Total $ 146,121 $ 75,411 $ 4,431 $ 225,963
EBITDA 20,984 4,989 (1,530) 24,443
Amortization 13,715 2,100 442 16,257
Operating earnings (loss) 7,269 2,889 (1,972) 8,186
Identifiable assets 825,205 186,364 59,021 1,070,590
Additions to property, plant and equipment 11,498 2,681 802 14,981
Sales to third parties (short tons) 319,367 - -
Sales to third parties - corrugated containers (MMSF) - 1,182 -
Sales to third parties - liquid and food (short tons) - 13,504 -
Inter-segment sales (short tons) 59,542 - -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS - YEAR TO DATE
(unaudited)
(in thousands of US dollars, except for units)
Woodlands,
Solid Wood
Primary and unallocated
Six months ended June 30, 1999 mills Converting amounts Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales to third parties $ 247,524 $ 161,212 $ 8,307 $ 417,043
Inter-segment sales 37,779 - - 37,779
----------------------------------------------------------
Total $ 285,303 $ 161,212 $ 8,307 $ 454,822
EBITDA 45,232 10,637 (781) 55,088
Amortization 28,029 4,196 808 33,033
Operating earnings (loss) 17,203 6,441 (1,589) 22,055
Identifiable assets 766,532 232,083 79,952 1,078,567
Additions to property, plant and equipment 11,061 6,890 183 18,134
Sales to third parties (short tons) 686,726 - -
Sales to third parties - corrugated containers (MMSF) - 2,570 -
Sales to third parties - liquid and food (short tons) - 33,367 -
Inter-segment sales (short tons) 101,176 - -
Woodlands,
Solid Wood
Primary and unallocated
Six months ended June 30, 1998 mills Converting amounts Total
- ----------------------------------------------------------------------------------------------------------------
Net sales to third parties $ 252,484 $ 147,725 $ 9,705 $ 409,914
Inter-segment sales 42,555 - - 42,555
----------------------------------------------------------
Total $ 295,039 $ 147,725 $ 9,705 $ 452,469
EBITDA 42,700 8,936 (2,086) 49,550
Amortization 27,261 3,905 879 32,045
Operating earnings (loss) 15,439 5,031 (2,965) 17,505
Identifiable assets 825,205 186,364 59,021 1,070,590
Additions to property, plant and equipment 19,171 7,848 933 27,952
Sales to third parties (short tons) 644,398 - -
Sales to third parties - corrugated containers (MMSF) - 2,276 -
Sales to third parties - liquid and food (short tons) - 27,375 -
Inter-segment sales (short tons) 110,618 - -
</TABLE>
