Business Review Presented by: Kevin J. Clarke, President and CEO Brian Baarda, Vice-President Finance and CFO August, 2012
Forward-Looking Statements The presentation and answers to questions today contain forward-looking statements. Forward-looking statements are statements that address or discuss activities, events or developments that we expect or anticipate may occur in the future and can be identified by the use of words such as believe, expect, anticipate, intend, plan, likely, predict, estimate, forecast, and similar words or phrases or the negative of such words or phrases. These forward-looking statements reflect our current beliefs, intentions or expectations based on certain assumptions and estimates, which could prove to be significantly incorrect, including our ability to develop, manufacture and sell new products and services that meet the needs of our customers and gain commercial acceptance, our ability to continue to sell our products and services in the expected quantities at the expected prices and expected times, our ability to successfully obtain cost savings from our cost reduction initiatives, our ability to implement business strategies and pursue opportunities, expected cost of goods sold, expected component supply costs and constraints and expected foreign exchange and tax rates. While considered reasonable by management, these forward-looking statements are inherently subject to known and unknown risks and uncertainties and other factors that could cause actual results or events to differ from historical or anticipated results or events. These risks, uncertainties and other factors include the impact of general economic conditions in the countries in which we do business, conditions in the capital markets and our ability to obtain financing and refinance existing debt, market conditions and demand for our products (including declines in advertising and circulation), product selling prices, the implementation of trade restrictions in jurisdictions where our products are marketed, fluctuations in foreign exchange or interest rates, raw material prices (including wood fibre, chemicals and energy), our ability to successfully obtain cost savings from our cost reduction initiatives, the effect of, or change in, environmental and other governmental regulations, labour relations, the availability of qualified personnel, legal proceedings, the effects of competition from domestic and foreign producers, our ability to implement business strategies and pursue opportunities, the risk of natural disaster and other factors beyond our control, and risks and uncertainties relating to our creditor protection proceedings, including our ability to continue as a going concern and ability to implement a debt restructuring. As a result, no assurance can be given that any of the events or results anticipated by such forward-looking statements will occur or, if they do occur, what benefit they will have on our operations or financial condition. Readers are cautioned not to place undue reliance on these forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. 2
Non-GAAP Measures Except where otherwise indicated, the financial information in this presentation is determined on the basis of U.S. GAAP. EBITDA is a non-gaap measure, calculated as operating earnings (loss) plus depreciation and amortization and impairment. We focus on EBITDA as we believe this measure enables comparison of our results between periods without regard to debt service, income taxes, capital expenditure requirements, and impairment. EBITDA before restructuring costs, net earnings (loss) attributable to the Company before specific items, and net earnings (loss) per share attributable to the Company s common shareholders before specific items are non-gaap measures. We use measures excluding specific items in evaluating our results between periods without regard to specific items that adversely or positively affect our EBITDA and net earnings (loss). Free cash flow is a non-gaap measure, calculated as EBITDA after capital expenditures, interest and taxes paid, and adjustments to reflect employee future benefit payments. The closest GAAP measure is cash provided by operating activities less cash used by investing activities. We report free cash flow as we believe it is useful for investors and other users to be aware of this measure so they can better assess our operating performance. 3
Changes in Accounting Policies There were no recent amendments by the Financial Accounting Standards Board (FASB) to the Accounting Standards Codification (ASC) that materially impacted the company s consolidated financial statements or disclosures. FASB ASC 852, Reorganizations, adopted as a result of the CCAA proceedings, was applied in Q2 2012 and will continue to be applied until the effective exit date from CCAA protection. This standard requires that financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Pre-petition obligations incurred prior to the Initial Order under CCAA that may be impaired by the reorganization process must be classified as Liabilities subject to compromise in the balance sheet at the amounts expected to be allowed as claims by the Court. 4
Business Overview and Outlook Financial Results 5
Highlights (Q2 2012) Creditor Protection and Restructuring Process Second amended plan of arrangement approved by creditors and the court Catalyst will emerge from CCAA protection with US$390.4 million less notes, US$33.9 million less annual cash interest expense on its notes (assuming cash interest election) and over C$35.0 million in other annual cash savings (in millions) Pre-restructuring Post-restructuring Change Debt notes (non-recourse) US$640.4 US$250.0 US$390.4 Annual cash interest expense* US$61.4 Cash: US$27.5 or PIK: US$18.8 Cash: US$33.9 or PIK: US$42.6 Annual property tax expense $18.3 $12.2 $6.1 Annual labour expense $158.0 $139.0 $19.0 Annual pension funding obligations $11.0 $4.0 $7.0 Annual retiree extended health benefits $2.4 $1.2 $1.2 Annual PRD lease savings $2.4 $0.0 $2.4 * Interest on the newly issued debt notes will be payable semi-annually in cash at an annual interest rate of 11% or, at the option of the company, interest may be partially paid in kind, at an annual rate of 13% with 7.5% being paid in cash and 5.5% being paid in kind through the issuance of additional secured notes. 6
Highlights (Q2 2012) Financials Achieved $14.6 million in EBITDA as a result of savings on new labour agreement, lower fibre prices and tight cost control in the quarter Total proceeds from the sale of non-core fixed assets for the six months ended June 30, 2012 was $7.9 million, with $7.4 million generated in the second quarter. Net reorganization credit of $6.0 million, including $15.5 million non-cash adjustments to the book values of compromised liabilities, partly offset by $9.3 million professional fees Sales and Marketing Continue to grow sales of book paper. Developed 40 gram newsprint product High bright expansion 7
North American Paper Demand and NBSK Pulp Shipments North American Paper Demand and NBSK Pulp Shipments (in thousands of metric tonnes) Source: PPPC 3,500 2,625 1,750 875 - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2009 2010 2011 2012 NEWSPRINT 1,418 1,395 1,431 1,522 1,343 1,328 1,336 1,405 1,263 1,222 1,249 1,280 1,230 1,214 COATED MECHANICAL 917 899 1,073 1,080 990 960 1,075 1,016 933 872 965 923 863 868 UNCOATED MECHANICAL* 1,006 1,036 1,110 1,121 1,045 1,086 1,129 1,129 1,042 1,028 1,073 989 841 878 LIGHTWEIGHT UNCOATED 170 171 200 181 170 154 171 166 135 130 130 129 112 107 NBSK PULP 2,574 2,768 2,751 2,751 2,911 3,020 2,917 3,204 3,254 3,117 3,071 2,954 3,335 3,055 * Uncoated mechanical is comprised of high-gloss and standard grades We are growing share in declining markets 8
Challenges Weakness in market NBSK pulp markets remain weak due to excess inventory build-up in China Paper prices declined in Q2; coated and uncoated paper markets are expected to rebound in the second half of 2012 Potential start-up of Stadacona and Port Hawkesbury mills will negatively impact marketplace Creditor protection proceedings Significant reorganization costs incurred since entering the CCAA proceedings continue to put cash flow and liquidity under pressure Exit financing must be arranged as a condition to exit from CCAA protection Closure of Snowflake Despite extensive efforts to improve the financial performance of our Snowflake recycle paper mill in Arizona, the decision was announced on July 30, 2012 to permanently close the facility on September 30, 2012 The mill closure, which will result in certain initial cash costs of approximately US$5.0 million which we expect to recoup from working capital and the sale of mill assets in 2013, is expected to result in the elimination of future operating losses associated with the mill and savings of annualized selling, general and administrative expenses 9
Outlook Slowdown in China and high pulp inventories expected to put continued downward pressure on benchmark prices for NBSK pulp The market for coated and uncoated mechanical paper are expected to rebound in the second half of the year, with a US$40 per short ton price increase for NA implemented on August 1 for coated mechanical paper Currently negotiating with 3 rd party lenders for a new ABL Facility, and have negotiated up to an $80 million exit facility with certain 2016 noteholders Exit from CCAA anticipated in the 3 rd quarter under the second amended plan of arrangement We will adopt fresh start accounting on exit from CCAA; will determine new enterprise value and allocate this value to assets The Snowflake mill will be decommissioned, the equipment will be sold, and the site will be prepared for sale and repurposing; customer contracts will be fulfilled during the remaining 60 days before closure, including pre-running orders As per the terms of the approved plan we will sell our 50% interest in PREI Sales process in place to sell excess and discontinued assets such as the Elk Falls land All existing common shares, rights and options will be cancelled, a new Board of Directors will be appointed, and new common shares will be issued, on emergence from the CCAA process 10
Q2 2012 Financial Results ($millions, except per share amounts) Sales $ 340.3 $ 319.8 $ 315.8 $ 312.8 $ 1,288.7 EBITDA 26.8 2.8 18.1 14.6 62.3 Restructuring costs - 5.9 5.2 (0.1) 11.0 EBITDA before restructuring costs $ 26.8 $ 8.7 $ 23.3 $ 14.5 $ 73.3 EBITDA margin before restructuring costs 7.9% 2.7% 7.4% 4.6% 5.7% Net earnings (loss) attributable to the Company $ (205.7) $ (708.0) $ (25.6) $ (11.7) $ (951.0) Net earnings (loss) attributable to the Company before specific items Net earnings (loss) per share attributable to the Company s common shareholders Net earnings (loss) per share attributable to the Company s common shareholders before specific items 2011 2012 Q3 Q4 Q1 Q2 LTM $ (14.1) $ (41.7) $ (9.6) $ (5.0) $ (70.4) $ (0.54) $ (1.85) $ (0.07) $ (0.03) $ (2.49) $ (0.04) $ (0.11) $ (0.03) $ (0.01) $ (0.18) Average F/X spot rate (USD/CAD) 1.020 0.977 0.999 0.990 0.996 Average effective F/X rate (USD/CAD) 1.020 0.977 0.999 0.990 0.996 11
EBITDA Reconciliation Q2 2012 vs. Q1 2012 ($millions) EBITDA 1 Q1 2012 EBITDA 1 $ 18.1 Restructuring costs 5.2 Q1 2012 EBITDA before restructuring items 1 23.3 Paper prices (4.4) Pulp prices 0.5 Impact of CDN$ 2.0 Volume and mix 1.3 Distribution costs (0.5) Furnish mix and costs 2.0 Power and fuel costs 0.2 Labour costs 3.3 Maintenance costs (4.6) Property taxes, licenses and insurance 1.4 Selling, general and administrative 0.5 Lower of cost or market impact on inventory, net of inventory change (7.1) Other, net (3.4) Q2 2012 EBITDA before restructuring costs 1 14.5 Restructuring recovery 0.1 Q2 2012 EBITDA 1 $ 14.6 1 EBITDA and EBITDA before restructuring costs are non-gaap measures. 12
Free Cash Flow 2011 2012 ($millions) Q3 Q4 Q1 Q2 LTM EBITDA before restructuring costs $ 26.8 $ 8.7 $ 23.3 $ 14.5 $ 73.3 Restructuring costs - (5.9) (5.2) 0.1 (11.0) EBITDA 26.8 2.8 18.1 14.6 62.3 Interest expense, excluding amortization (19.0) (18.4) (3.3) (3.7) (44.4) Capital expenditures (5.6) (6.2) (1.9) (3.0) (16.7) Reorganization costs - - (13.5) (9.5) (23.0) Income taxes received (paid) 0.5 (0.2) - - 0.3 Employee future benefits, net of funding (1.3) (4.4) (2.9) (3.2) (11.8) Free cash flow $ 1.4 $ (26.4) $ (3.5) $ (4.8) $ (33.3) 13
Q2 2012 Liquidity 2011 Q2 Q3 Q4 Q1 2012 Q2 ($millions) Amended ABL Amended ABL Amended ABL DIP Facility DIP Facility Borrowing base $ 134.3 2 $ 167.3 2 $ 151.8 2 $ 142.1 1 $ 159.6 1 Letters of credit (28.1) (27.7) (32.2) (17.8) (19.6) Net amount drawn - (31.5) (48.0) (77.8) (70.5) Minimum excess availability - - - - (21.9) 3 Available to be drawn $ 106.2 4 $ 108.1 4 $ 71.6 4 $ 46.5 4 $ 47.6 Cash on hand 30.2 17.8 25.1 19.3 17.8 Restricted cash - - - 2.1 6.4 5 Total liquidity $ 136.4 $ 125.9 $ 96.7 $ 67.9 $ 71.8 1 Borrowing base for the DIP Facility includes reserves of $2.7 million for pension, $3.6 million for employees, $2.0 million for landlord waivers, $1.5 million for insured receivables dilution, $2.0 million for credit insurance deductibles, and $1.5 million for CCAA charges in priority to DIP charge. 2 Borrowing base for the ABL Facility included a reserve of $0.4 million at December 31, 2011 for unpaid property taxes and associated penalties (Q3 2011 - $0.4 million, Q2 2011 - $4.5 million). 3 The DIP Facility is subject to a new condition effective Q2 2012 related to excess availability as disclosed in our interim consolidated financial statements for the three and six months ended June 30, 2012 in note 14, Long-term debt. 4 The DIP Facility and ABL Facility in place prior to the CCAA proceedings are subject to certain financial covenants as disclosed in our interim consolidated financial statements for the three months ended March 31, 2012 in note 14, Long-term debt. 5 Restricted cash consists of $6.4 million in frozen proceeds on the sale of certain assets at our discontinued Elk Falls paper mill, our discontinued paper recycling operation, and poplar plantation land. 14
Liabilities Subject to Compromise (in $ millions) Liabilities subject to compromise on June 30, 2012: 2014 Notes (principal outstanding) 254.8 2016 Notes (principal outstanding) 397.9 Accrued interest (2014 Notes) 15.9 Accrued interest (2016 Notes) 51.1 Employee future benefits * 22.4 Other compromised claims (AP and accrued liabilities) 35.0 Repudiated contracts (PRD) 17.6 794.7 The classification of liabilities as subject to compromise versus non-subject to compromise is based on currently available information and analysis. The allowed claims amounts were confirmed by the Court sanction of the second amended plan of arrangement, and resulted in adjustments in the quarter to certain liabilities included in Liabilities subject to compromise to adjust these liability balances from historical book values to allowed claims amounts. It also resulted in the reclassification of pension and other postretirement projected benefit obligations, other than extended health benefits with an actuarial value of $22.4 million that were compromised by the second amended plan of arrangement, out of Liabilities subject to compromise as these obligations were not compromised by the second amended plan of arrangement. 15
Capitalization ($millions, except where otherwise stated) 2011 2012 Total debt Dec 31 Proforma 11.0% senior secured notes, due October 31, 2017 (1) $ $ $ 250 7.375% senior notes, due March 2014 (2) 256 255 11.0% senior secured notes, due December 2016 (3) 285 286 11.0% Class B senior secured notes, due December 2016 (4) 99 112 Modification difference in carrying value of 8.625% and 11.0% senior secured notes on exchange (5) 31 Revolving asset based loan 48 70 Debtor-in-possession loan facility 70 Capital lease obligation 9 9 9 Other non-recourse (PREI) 114 114 114 Total 842 846 443 Shareholders equity attributable to the Company (594) (629) Total capitalization attributable to the Company $ 248 $ 217 Cash $ 25 $ 18 Net debt ratio (6) 366% 417% (1) (2) (3) (4) (5) (6) US$250 million; assumes CAD USD parity on exit date from CCAA proceedings US$250 million US$280 million US$110 million unamortized discount on Class B notes recognized as reorganization credit in Q2 2012 US$38 million unamortized modification recognized as reorganization credit in Q2 2012 Net debt ratio equals net debt (i.e., total debt less cash), divided by net capitalization (i.e., shareholders equity attributable to the Company and total debt less cash) 16
EBITDA Sensitivities ($millions) EBITDA (1), (2) Product prices Impact of US$10/t change in price of Specialty printing papers $ 9 Newsprint 5 Pulp 3 $ 17 Foreign exchange (3) Impact of $0.01 change in US$ 6 (1), (4) Energy cost sensitivity Impact of 5% change in price of Natural gas and oil direct purchases 1 Electricity direct purchases 7 Coal 1 Freight cost sensitivity Impact of US$5/bbl change in price of West Texas Int. (WTI) Oil 3 (1), (4) Fibre sensitivity Impact of US$5/unit change Wood chips (Bdt) 8 ONP (ST) 2 (1) Based on a foreign exchange rate of US$0.99 (2) Based on annualized sales of Q2 2012 (3) Based on Q2 2012 annualized net cash flows and a foreign exchange movement to US$1.00 from US$0.99 and excluding our hedging program and the impact of the translation of U.S. dollar denominated debt (4) Based on annualized Q2 2012 consumption levels 17
Appendix
Summary of Segmented Financial Information ($millions, except where otherwise stated) Sales (000 MT) Specialty printing papers 229.8 239.3 203.8 216.3 889.2 Newsprint 117.8 105.7 130.2 128.2 481.9 Pulp 92.2 61.6 93.1 76.5 323.4 439.8 406.6 427.1 421.0 1,694.5 Sales Specialty printing papers $ 187.9 $ 202.8 $ 169.9 $ 179.1 $ 739.7 Newsprint 77.0 70.9 85.5 83.2 316.6 Pulp 75.4 46.1 60.4 50.5 232.4 $ 340.3 $ 319.8 315.8 312.8 $ 1,288.7 EBITDA Specialty printing papers $ 12.6 $ 10.8 $ 11.3 $ 13.9 $ 48.6 Newsprint (1.4) (2.6) 2.9 3.1 2.0 Pulp 15.6 (5.4) 3.9 (2.4) 11.7 $ 26.8 $ 2.8 18.1 14.6 $ 62.3 EBITDA before restructuring costs Specialty printing papers $ 12.6 $ 14.3 $ 13.7 $ 13.8 $ 54.4 Newsprint (1.4) (1.1) 4.4 3.1 5.0 Pulp 15.6 (4.5) 5.2 (2.4) 13.9 Operating earnings (loss) 2011 $ 26.8 $ 8.7 $ 23.3 $ 14.5 $ 73.3 Specialty printing papers $ (26.7) $ (522.5) $ 5.1 $ 7.7 $ (536.4) Newsprint (136.4) (86.3) 1.7 2.3 (218.7) Pulp 11.5 (92.5) 3.4 (3.0) (80.6) 2012 Q3 Q4 Q1 Q2 LTM $ (151.6) $ (701.3) $ 10.2 $ 7.0 $ (835.7) 19
Impact of Specific Items on Net Earnings (Loss) Attributable to the Company 2011 2012 ($millions, except per share amounts) Q3 Q4 Q1 Q2 LTM Net earnings (loss) attributable to the Company as reported $ (205.7) $ (708.0) $ (25.6) $ (11.7) $ (951.0) Specific items, after taxes: Foreign exchange loss (gain) on long-term debt 41.0 (14.0) (11.6) 12.8 28.2 Loss on Snowflake fire - 0.3 - - 0.3 Loss on Powell River fire - 0.8 - - 0.8 Impairment (recovery) and other closure costs 150.6 673.3 - - 823.9 Restructuring costs - 5.9 5.2 (0.1) 11.0 Reorganization items, net - - 22.4 (6.0) 16.4 Net earnings (loss) attributable to the Company before specific items $ (14.1) $ (41.7) $ (9.6) $ (5.0) $ (70.4) Net earnings (loss) per share attributable to the Company s common shareholders before specific items $ (0.04) $ (0.11) $ (0.03) $ (0.01) $ (0.18) 20