Resolute Forest Products' 2Q Loss Narrows on Lower Operating Costs

Aug. 1, 2012 - Resolute Forest Products Inc. today reported a net loss of $20 million for the second quarter, or $(0.20) per share, on sales of $1.2 billion. This compares with net income of $61 million, or $0.63 per diluted share, on sales of $1.2 billion in the second quarter of 2011.

Excluding $50 million of special items described below, net income for the quarter was $30 million, or $0.30 per diluted share. Net income excluding special items for the second quarter of 2011 was $63 million, or $0.65 per diluted share, and included a $44 million income tax benefit from a tax reserve adjustment.

"Resolute's newsprint, specialty papers and wood products segments each delivered their strongest quarterly results in recent history, more than making up for headwinds in the pulp and coated papers segments" said Richard Garneau, president and chief executive officer. "Our cost-focused strategy positions us to continually optimize our diversified asset base and generate cash even in challenging environments."

DESCRIPTION OF SPECIAL ITEMS

Special items incurred in the second quarter of 2012, net of tax, included:

  • $45 million charge related to closure costs, impairment and other related charges on the indefinite idling of our Mersey, Nova Scotia, newsprint mill
  • $13 million non-cash gain related to reorganization tax adjustments
  • $10 million non-cash charge on translation of Canadian dollar net monetary assets
  • $4 million non-cash charge for inventory write-downs on the indefinite idling of our Mersey mill
  • $3 million of transaction costs related to the acquisition of Fibrek
  • A severance charge and post-emergence costs, offset by a gain on disposition of assets and other income

Special items incurred in the second quarter of 2011, net of tax, included:

  • $8 million charge for post-emergence costs
  • $7 million income, net, from a gain on disposition of assets and other income
  • $5 million charge related to closure costs and severance charges
  • $4 million non-cash gain on translation of Canadian dollar net monetary assets

Non-GAAP financial measures, such as adjusted EBITDA and special item adjustments, are reconciled below.

SEGMENT DETAILS

Newsprint
The newsprint segment generated operating income of $32 million, an $11 million increase over the first quarter of 2012, the result of seasonal improvements in power costs, various mill efficiency initiatives and a weaker Canadian dollar, as well as seasonally higher volume. The increase outweighed a modest decline in transaction price, which is attributable to declining prices in certain export markets, primarily as result of unfavorable currency fluctuations. The Company announced the indefinite idling of its export-focused mill in Nova Scotia in response to these conditions, which have negatively affected exports to these markets.

Coated Papers
Operating income in the coated papers segment was $5 million higher in the second quarter than in the first, at $4 million. Operating costs were down $40 per short ton, mainly because of the significant costs associated with an extended outage in the first quarter for maintenance and capital improvements. Shipments were down 5%, while average transaction price was down only 1%. In the quarter, as previously reported, the Company announced the idling, for an indeterminate period, of one paper machine at the Catawba mill, as it explores ways to further improve the mill's overall profitability.

Specialty Papers
The specialty papers segment generated operating income of $27 million, a $12 million increase over the previous quarter. Operating costs were $30 per short ton lower in the quarter, due to seasonal improvements in power costs, various mill efficiency initiatives and a weaker Canadian dollar, as well as seasonally higher volume.

Market Pulp
Operating loss in the market pulp segment was $7 million, a $14 million improvement from the $21 million operating loss in the previous quarter. Not including Fibrek, which contributed $2 million to operating income in the quarter, average transaction price rose 2% in the second quarter and shipments were up 6%. Shipments increased due in part to annual maintenance in the first quarter at the Coosa Pines and Catawba mills. As planned, the second quarter included major maintenance at two other mills, while the Company chose to delay the last outage to the third quarter. Inventory increased over 60,000 metric tons, reflecting the addition of Fibrek. Starting May 2, Fibrek's northern bleached softwood kraft pulp mill and its two recycled bleached kraft pulp mills have been consolidated within Resolute's market pulp segment.

Wood Products
The wood products segment reported operating income of $12 million in the second quarter, compared to a loss of $6 million in the first quarter. Improving North American housing starts led to a $39 per thousand board feet increase in average transaction price, a 5% increase in shipments and an 11% drop in inventory.

CORPORATE & FINANCE INITIATIVES

The Company used cash on hand to repurchase 1,054,267 shares of its common stock during the quarter, at a total cost of $12 million. With $510 million of cash, the Company ended the quarter with approximately $1 billion of available liquidity. Resolute continued to improve working capital, reducing it a further $33 million in the quarter, and also decreased restricted cash by $72 million on the release of a tax indemnity given in connection with the sale of Quebec hydroelectric assets in 2009. As of June 30, Resolute had acquired 74.6% of the outstanding shares of Fibrek Inc. (TSX: FBK), for aggregate consideration of approximately 2.8 million shares and $53 million. On July 31, the Company completed the second step transaction for the remaining 25.4% of Fibrek, pursuant to which it distributed aggregate additional consideration of approximately 940,000 shares and $18 million.

OUTLOOK

"We are encouraged by the positive momentum building in U.S. housing starts and pleased with the effect this gradual improvement is having on our wood products segment," said Mr. Garneau. "Despite challenging environments, the newsprint segment continues to generate consistent margins, including a noteworthy second quarter 12% EBITDA margin. Keeping with our optimization strategy, we will continue to manage our exposure to export markets where unfavorable currency fluctuations have created difficult conditions for North American producers. We expect a modest improvement in the coated, specialty and newsprint segments as a result of seasonal demand increases, but the impact of recent newsprint and specialty paper mill restart announcements is creating uncertainty. Based on current conditions, we do not see a meaningful improvement in the pulp segment for the balance of the year."

Resolute Forest Products is a global leader in the forest products industry with a diverse range of products, including newsprint, commercial printing papers, market pulp and wood products. The Company owns or operates 21 pulp and paper mills and 22 wood products facilities in the United States, Canada and South Korea. Marketing its products in more than 90 countries, Resolute has third-party certified 100% of its managed woodlands to sustainable forest management standards.

SOURCE: Resolute Forest Products Inc.