Resolute Forest Products Reports Net Loss in First Quarter on Unusual Costs

"Operating costs ordinarily peak in winter, but this year has been extremely cold, and its effects weighed heavily on our quarterly results." – Richard Garneau, President and CEO, Resolute.

May 1, 2014 - Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) today reported a net loss for the quarter ended March 31, 2014, excluding special items, of $26 million, or $0.27 per share, down from net income, excluding special items, of $28 million, or $0.30 per share, in the first quarter of 2013. GAAP net loss was $50 million, or $0.53 per share, compared to $5 million, or $0.05 per share, in the first quarter of 2013. Sales were $1.0 billion in the quarter, down by $58 million from the first quarter of 2013.

"Operating costs ordinarily peak in winter, but this year has been extremely cold, and its effects weighed heavily on our quarterly results," said Richard Garneau, president and chief executive officer. "The abnormally cold winter caused a material increase in energy costs, production disruptions, equipment failures and distribution constraints. Though some of these effects will carry into the second quarter, we're focused on moving beyond this disappointing quarter, committed to maximize our competitive advantage in this challenging industry and improve our earnings power."

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

Consolidated Quarterly Operating Income Variance Against Year-Ago Period
The Company recorded an operating loss of $33 million in the first quarter, compared to $49 million in the year-ago period. The seasonal effect of winter was significantly more severe in 2014, adversely affecting operating income by $55 million, and outweighing the favorable effect of the weaker Canadian dollar ($32 million). The effects of the abnormally cold winter included:

  • higher steam costs because of higher fuel energy pricing throughout most of the network and an increase in usage, particularly at the U.S. southeast mills, which are not designed for sustained freezing conditions;
  • high electricity costs at the Ontario mills because of volatility and sharp increases in that province's market-based power rates;
  • approximately 30,000 metric tons of lost production due to natural gas curtailments, electricity costs or other process limitations and distribution constraints for lack of carrier availability; and
  • additional costs of freight, fiber in the U.S., labor, chemicals and maintenance.

The Company also experienced a greater than expected level of operational disruptions in the quarter, including mechanical failures in Catawba, the failure of the bleaching tower and a turbine valve at Saint-Félicien, and a failure in a machine's vacuum blower at Augusta. Operational disruptions accounted for approximately 25,000 metric tons of lost production in the quarter, and $7 million of additional costs.

Overall pricing was lower this quarter ($15 million) because of lower average transaction prices in newsprint, specialty papers and wood products, more than offsetting the 8% increase in market pulp prices. In a segment facing secular decline, newsprint shipments were 3% higher, despite the effects of the abnormal weather and operational disruptions. Wood products shipments also rose by 4%. But shipments fell by 7% in specialty papers due to the abnormal weather and operational disruptions, and by 10% in market pulp for the same reasons, plus an increase in inventory as a result of timing and distribution constraints for lack of carrier availability.

Manufacturing costs increased largely because of the effect of the abnormal winter and the operational disruptions, but also because of higher stumpage fees and other costs associated with the comprehensive modification of the forest tenure system in the province of Québec. These increases were only partly offset by the absence of start-up costs, lower pension and other postretirement benefit expenses, the addition of electricity cogeneration production at Thunder Bay and Gatineau, and lower labor costs from restructuring initiatives.

Selling, general and administrative expenses were $8 million lower in the quarter. Because of the timing of asset optimization and mill restructuring initiatives, closure costs, impairment and other related charges were $30 million lower in the first quarter of 2014.

SEGMENT OPERATING INCOME VARIANCE AGAINST PRIOR QUARTER

Newsprint
Newsprint generated an operating loss of $15 million in the first quarter, compared to $19 million of operating income in the fourth quarter of 2013. The weaker Canadian dollar as well as mix and price deterioration in certain export markets caused the average transaction price to slip by 2%. Shipments were 6% lower compared to the fourth quarter, largely as a result of weather-related production disruptions, a mechanical failure at the Augusta mill and shipment timing. Despite the favorable effect of the weaker Canadian dollar, operating cost per unit (the "delivered cost") rose by 8%, to $623 per metric ton, mostly due to the severe winter, particularly the cost of electricity at Ontario mills. Shipment timing was the largest contributor to the 26,000 metric ton increase in finished goods inventory.

Specialty Papers
Specialty papers generated an operating loss of $24 million in the quarter, compared to operating income of $11 million in the previous quarter. The average transaction price fell by 3%, led by sustained pressure in coated mechanical grades and, to a lesser degree, in supercalender grades. Overall shipments fell by 11%, reflecting seasonality in catalogue and retail end-uses, grade substitution, weather-related production disruptions and mechanical failures in Catawba. Despite the favorable effects of the weaker Canadian dollar and increased cogeneration production, the delivered cost rose by 8%, to $774 per short ton, mostly as a result of the severe winter, including a significant increase in steam costs, particularly at our U.S. southeast mills, and also additional costs following the mechanical failures at Catawba.

Market Pulp
Operating income was $8 million in the first quarter, compared to $16 million in the previous quarter. The average transaction price rose across all grades, by 3% overall, but shipments fell by 20%. In addition to the 23% increase in finished goods inventory, largely because of weather-related distribution constraints, vessel timing and one mill's pre-outage inventory build, the drop in shipments reflects an increase in internal consumption of hardwood kraft pulp, operational disruptions at Saint-Félicien and weather-related production disruptions. These factors also pushed the delivered cost up by 5%, to $674 per metric ton, despite a drop in general maintenance costs.

Wood Products
Compared to the fourth quarter, operating income in the wood products segment rose by $3 million, to $12 million. The average transaction price rose by 2% but shipments dropped by 7% and inventory rose significantly, mostly due to softer demand as a result of the abnormal winter and distribution constraints for lack of carrier availability. The delivered cost fell by 2%, reflecting the weaker Canadian dollar and the retroactive reversal of certain export duties, despite an increase in log costs.

OUTLOOK

Mr. Garneau added: "The costs of natural gas and Ontario power normalized through April, but distribution constraints will likely continue through the second quarter, which will weigh on shipments as well as freight and warehousing costs. Despite that, we expect to reduce inventory and increase shipment volumes across all segments. Recent industry conversion announcements suggest higher newsprint operating rates toward the later part of the year. The coated papers portion of our specialty papers segment is expected to remain under pressure as a result of lower demand. Market prices for lumber have been trending down until recently due to the cautious recovery in U.S. housing starts."

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 over 40 pulp and paper mills and wood products facilities in the United States, Canada and South Korea, and power generation assets in Canada. For additional information, visit: www.resolutefp.com

SOURCE: Resolute Forest Products Inc.