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Abitibi says more cost cuts will boost profit in second half

AbitibiBowater head offices are seen in Montreal Thursday, April 16, 2009.


Just eight months after coming out of bankruptcy protection, a leaner AbitibiBowater Inc. is enjoying higher profits and a lower debt load, and the company expects profits will continue to grow in the second half of 2011.

That forecast is an impressive bet on the future for the forest products company, given declining demand for newsprint in North America and the continued volatility of global markets. The company's closest Canadian competitor, Catalyst Paper Corp., reported a $47.4-million net loss in the second quarter, citing reduced production and maintenance spending.

But AbitibiBowater, which has already made deep cuts, said it will continue to reduce costs in the months ahead while paying off more of its debt and rebranding itself with a new corporate name.

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AbitibiBowater, which reports in U.S. dollars, beat analysts' expectations Wednesday with a second-quarter profit of $61-million (U.S.), or 63 cents a share, the strongest indication yet of a turnaround following 20 months of court-supervised restructuring.

"Even though we continue to see inflationary pressures on the cost side and much uncertainty in the economy, we do expect to see improvement in our profitability in the second half of the year," president and chief executive officer Richard Garneau said Wednesday in a conference call.

The second-quarter gain compares with a loss of $297-million, or $5.15 a share, during the same quarter last year.

Revenue for the forest products company was up slightly, to $1.2-billion from $1.18-billion.

Paul Quinn, an analyst with RBC Dominion Securities, called the quarterly report better than expected in a note to investors Wednesday, adding "the [quarter-over-quarter]improvement in results [was]primarily due to higher product pricing and slightly lower unit costs."

AbitibiBowater, which still holds 37 per cent of the North American newsprint market, went into bankruptcy protection in April, 2009. The company was deep in debt after years of expansion, caught by the recession and a sudden decline in demand for newsprint as readers increasingly turned to the Internet.

Through 20 months of restructuring, the company cut its newsprint capacity by 40 per cent and eliminated $5.7-billion of its $6.8-billion debt. It renegotiated contracts and closed less profitable mills, cutting thousands of jobs.

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The company expanded its newsprint exports to growing markets, particularly in Asia and South America.

When AbitibiBowater emerged from bankruptcy protection in December, 2010, RBC Dominion Securities gave it a strong – if risky – rating, headlining a note to investors with the words, "This isn't your average newsprint company any more."

"After a 21-month hiatus in creditor protection, AbitibiBowater is back with a stronger balance sheet, lower-cost operations, and a more balanced and diverse product portfolio," RBC's Mr. Quinn and Claire Huxtable wrote at the time.

But the restructuring was painful, with 7,000 employees – about 40 per cent of the work force – losing their jobs and all employees taking significant wage cuts.

The Communications, Energy and Paperworkers Union of Canada worked with AbitibiBowater to come up with efficiencies and savings. "We paid a price for it. We lost members over it," union president David Coles said in an interview Wednesday.

But he added it was better for the union to work with the company than watch it fail.

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He said the pain for AbitibiBowater workers isn't over yet, as demand for pulp and paper products remains unstable.

"I'm hopeful that things will change, but the indicators are not good," he said. "We have some serious, serious hurdles to get over yet."

Mr. Coles said he wants to see the federal government develop a new industry-wide strategy for forest products, including pumping research and development money into companies such as AbitibiBowater.

Mr. Garneau took the company's helm just as it emerged from restructuring in December, 2010. A veteran of the forest products industry, he was head of Catalyst Paper from March, 2007, to May, 2010, where he had a strong reputation for reducing costs.

On Wednesday, he pledged to find even more savings for a company that has already seen deep cuts.

"I'm not going to tell you it's easy to implement the opportunities we have identified, but we are focused on cost reductions," he said.

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