11/10/2011 04:32 EST | Updated 01/10/2012 05:12 EST

Cascades warns debt may rise as it invests to boost performance of core assets

MONTREAL - Tissue and cardboard maker Cascades Inc. said Thursday it may increase its debt again by investing in its most productive assets as part of further restructuring to boost the company's long-term profits.

The recent disposal of assets has bolstered the Quebec company's financial flexibility by cutting its long-term debt by $224 million to $1.17 billion in the last year.

The debt has fluctuated to a low of $960 million as of last December from $1.5 billion last year.

Cascades has sold and shut mills as part of an effort to reduce costs and increase efficiencies.

"We strongly believe we have to stay on this course in order to improve our competitiveness," chief operating officer Mario Plourde said Thursday during a conference call after the company posed a big quarterly loss.

He said Cascades will focus on accelerating the restructuring of lesser performing units, investing to modernize core operations and optimizing capital spending.

"We are focused on restructuring, modernizing and optimizing," he told analysts.

"We just can't continue to squeeze our capital expenditures to reduce debt as this would seriously weaken our competitiveness."

Cascades is hoping the lower Canadian dollar and easing recycled fibre costs will provide some relief to offset a deeper slowdown in the seasonally weak period of the year.

"Looking to the next quarter we anticipate that we will experience a slightly more important seasonal decline in demand because of the economic uncertainty," CEO Alain Lemaire added.

If lower fibre costs that recently began to decline are sustained, selling price increases put in place in recent months and the implementation of restructuring plans should help results in the fourth quarter, he told analysts.

In its latest quarter, Cascades (TSX:CAS) lost $19 million, or 20 cents per share, for the three months ended Sept. 30 after booking special charges for restructuring investment losses and other things.

That compared to a profit of $24 million, or 25 cents per share, in the same quarter last year.

Sales for the three months rose 14 per cent to $947 million from $832 million.

The company said it benefited from higher selling prices and the consolidation of Reno De Medici, the second largest European producer of coated recycled boxboard.

Cascades said its bottom line was hurt by a $14 million impairment loss related to restructuring as well as an $11 million unrealized loss on financial instruments.

The company also booked $1 million in closure and restructuring costs, a $5 million foreign exchange gain on long-term debt and a $4 million after-tax loss related to a divestiture.

Excluding the one time items, Cascades lost about $5 million or five cents a share in the latest quarter.

Cascades was expected to earn two cents per share in the third quarter, compared to 29 cents per share a year earlier, according to analysts polled by Thomson Reuters.

Despite the loss, Cascades said the third quarter was better than the second despite a five per cent increase in average raw material costs and a production interruption caused by a flood at one of its tissue mills.

Lemaire said three of the company's four operating segments posted improved results from the prior quarter.

Pre-tax operating income (EBITDA) increased 27 per cent to $79 million and cash flows from operations quadrupled to $62 million.

Pierre Lacroix of Desjardins Capital Markets said the results were mixed, with the outlook boosted by rapidly falling recycled fibre costs.

"If prolonged, the decline in recycled fibre costs should start to have a material positive impact on the first quarter of 2012, creating the beginning of significant positive year-over-year momentum in quarterly results," he wrote in a report.

"In the meantime, the company should continue to be positively affected by the ongoing implementation of price increases in the Tissue segment."

Founded in 1964, Cascades produces, converts and markets packaging and tissue products composed mainly of recycled fibres.

It employs nearly 11,000 people in more than 100 operating units in North America and Europe.

On the Toronto Stock Exchange, Cascades shares closed unchanged at $4.65 in Thursday trading.