Friday, May 11, 2007

Cascades withstands perfect storm of price increase and low fibre generation

Cascades withstands perfect storm of price increase and low fibre generation

MONTREAL (CP) - Packaging company Cascades Inc. (TSX:CAS) recorded a first quarter profit after surviving a "perfect storm" that saw Asian demand dramatically boost recycled fibre costs in light of a seasonal North American slowdown in material generation.

The price of recycled fibre, which represents 75 per cent of Cascades' fibre input, more than doubled after Christmas to US$150 a tonne. It has now settled at US$90.

"Old recycled fibre, whether it be corrugated cardboard or office paper, all categories skyrocketed," president and CEO Alain Lemaire told a news conference Thursday following the company's annual meeting.

The change cost Cascades $33 million in the quarter. Yet it earned $22 million, or 22 cents a share for the period ended March 31, thanks to special items such as proceeds from the sale of a U.S. boxboard plant.

That compared with seven cents a share when it made $6 million a year earlier.

Excluding one-time items, Cascades earned $5 million in the quarter, down $1 million from 2006. The five-cent earnings were below market expectations.

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The impact of the fibre cost increase was severe because the world's ninth largest user of recycled paper consumes 2.5 million tonnes of the waste per year.

Asian demand, particularly from China, surged when producers looked to build inventory before starting up large new mills.

Analyst Pierre Lacroix of Desjardins Securities called the confluence of Asian demand and weaker North American generation a perfect storm that will weaken in the coming months.

"The results in the first quarter were impacted by one-time items or temporary factors such as waste paper price surge," he said in an interview.

"At the same time product prices are going up in boxboard, container board and tissue, so the end products are healthy, prices are rising and you have a softening of the cost pressure."

Cascades' diversified portfolio should help it confront the pulp and paper industry's ongoing challenges of weaker demand, Lemaire said.

"We are lucky to be in different sectors that will be more equal," he told reporters.

Looking ahead, Lemaire said he expects continued challenges as the company moves ahead this year, but it will focus on growing its business and keeping costs under control.

"We intend to evaluate our assets and remain on the lookout for acquisitions that allow us to reinforce our position in our best sectors," he told shareholders.

"We clearly demonstrated in 2006 that we could adapt and excel in difficult business conditions and we will continue to do so."

Cascades said it had one-time gains in the quarter, notably a $25-million gain before taxes on the January sale of its 40 per cent interest in GSD Packaging to Rock-Tenn Co. for US$32 million.

The company also benefited from its move to acquire the other half of its former joint-venture unit Norampac, Canada's largest cardboard producer, from Domtar (TSX:DTC).

But it was also hit by a boiler failure that shut down production at its coated recycled boxboard mill in Toronto.

Quarterly revenues jumped to just over $1 billion for the first time, from $818 million.

Cascades' drive to be an industry leader on the environmental front was marked last quarter by the launch of a degradable polystyrene foam tray. Popular Quebec restaurant chain St. Hubert has become among its first customers for takeout containers.

Lemaire said the company continues to prove that pushing sustainable development can also be profitable.

"If some companies rush to adopt responsible behaviour, Cascades can boast to them that it has been green for more than 40 years," he told shareholders.

Founded in 1964, Cascades produces packaging and tissue products composed mainly of recycled fibres. The company employs nearly 14.000 people at 100 mills and production centres in North America and Europe.

The board of directors declared a four-cent quarterly dividend to be paid June 14.

On the Toronto Stock Exchange, Cascades shares gained 26 cents to $11.97 in Thursday trading.

© The Canadian Press, 2007

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