PaperAge Magazine

Resolute Forest Products Reports Preliminary First Quarter 2016 Results

Richard Garneau "Even as pricing headwinds continue, we delivered a solid performance this quarter, by maintaining our focus on costs, with improvements coming largely from increased contributions from our cogeneration assets as well as lower natural gas and power prices. — Richard Garneau, President and CEO, Resolute.

May 5, 2016 - Resolute Forest Products Inc. (RFP) (RFP) today reported a net loss for the quarter ended March 31, 2016, excluding special items, of $18 million, or $0.20 per share, compared to a net loss, excluding special items, of $19 million, or $0.20 per share, in the same period in 2015. Sales were $877 million in the quarter, down $43 million, or 5%, from the first quarter of 2015. GAAP net loss was $8 million, or $0.09 per share, compared to a net loss of $33 million, or $0.35 per share, in the first quarter of 2015.

"Even as pricing headwinds continue, we delivered a solid performance this quarter, by maintaining our focus on costs, with improvements coming largely from increased contributions from our cogeneration assets as well as lower natural gas and power prices. Our new continuous pulp digester at the Calhoun, Tennessee facility was commissioned in January and the production continues to ramp-up," said Richard Garneau, president and chief executive officer. "We have also worked on the integration of the Atlas Paper tissue mills we purchased in late 2015, and focused on completing our Calhoun tissue project, which remains on time and on budget."

Today, the company is also announcing the permanent shutdown of one newsprint machine at its Augusta, Georgia facility. This decision is motivated by the ongoing structural challenges in the newsprint market and is necessary to avoid costly rotating downtime.

"Long-term market conditions remain challenging for newsprint, particularly for our U.S. mills, which are especially vulnerable in the present U.S. dollar environment. We never take such permanent closure decisions lightly and we understand the impacts this action will have on our employees, their families, and the community" added Garneau. As is customary, the company will work with employee and community representatives to mitigate the impacts of this decision.

Operating Income Variance Against Prior Period

Consolidated

The company broke even on operating income in the quarter, compared to a $226 million operating loss in the fourth quarter of 2015. Adjusted EBITDA was $18 million higher than the fourth quarter at $59 million. The company's operating results were positively impacted this quarter by a decline in the value of the Canadian dollar ( $12 million ) and net reductions in manufacturing costs of $35 million, which include a $22 million decline in total pension and other post-retirement benefits ("OPEB") expenses resulting mostly from the non-cash settlement charge of $14 million in the fourth quarter of 2015. The fourth quarter results also included a $176 million non-cash asset impairment charge at the Catawba, South Carolina mill. These items were partially offset by lower sales volumes ( $7 million ) and lower pricing ( $2 million ). During the quarter we have also concluded a periodic review of the estimated economic useful life of our machinery and equipment. The impact of this review was a reduction of $3 million in depreciation and amortization for the quarter. Depreciation and amortization was also favorably impacted by the impairment of the Catawba assets taken in the fourth quarter of 2015.

Market Pulp

Operating income in the market pulp segment was $20 million in the first quarter, $3 million higher than the fourth quarter of the prior year. The overall average transaction price slipped by $22 per metric ton, or 4%, as growing global capacity continued to mitigate any substantive pricing recovery, especially in softwood and fluff. Our shipments were up by 16,000 metric tons, or 5% higher in the quarter, mainly for softwood and recycled bleached kraft ("RBK"), due to productivity gains in some of our softwood mills and increased demand for RBK, despite a scheduled maintenance outage at our Catawba facility in March. The startup of the new Calhoun continuous digester did not increase external sales volumes, as the continuing ramp-up limited the full potential of the equipment during the quarter. The operating cost per unit (the "delivered cost") fell by 5%, most notably due to the higher production, a favorable foreign exchange impact, as well as a reduction in depreciation and amortization. EBITDA was $77 per metric ton compared to $89 in the previous quarter and a trailing twelve month average of $94 per metric ton. Finished goods inventory increased by 4,000 metric tons to 94,000 metric tons.

Tissue

Our tissue segment incurred an operating loss of $2 million for the quarter, $1 million more than the previous quarter. The overall transaction price declined by $17 per short ton. Our delivered cost increased by $104 per short ton compared to the last quarter of 2015, mostly owing to integration-related costs, unfavorable material usage and higher reliability-related maintenance. However, the integration of virgin pulp supply with our U.S. pulp network was completed during the quarter. As a result of cost increases, no EBITDA was generated by the segment this period, unchanged from the last quarter of 2015.

Wood Products

The wood products segment recorded an operating loss of $4 million in the quarter, a $4 million improvement against the previous quarter. Shipments fell by 13%, to 390 million board feet, as production was curtailed in response to unfavorable pricing in eight-foot stud markets. The average transaction price rose by $10 per thousand board feet, or 3%, reflecting a slow but gradual recovery in the overall market for lumber. The delivered cost in the segment was 2% higher, to $317 per thousand board feet, with seasonally higher fiber usage and a lower internal chip transfer price offsetting favorable foreign exchange impacts as well as lower depreciation and amortization. EBITDA for the segment was $3 million, or $8 per thousand board feet, compared to $7 in the last quarter of 2015 and a trailing twelve month average of $17 per thousand board feet. Finished goods inventory was reduced by 3%.

Newsprint

The newsprint segment incurred an operating loss of $5 million in the quarter, compared to an operating loss of $13 million in the fourth quarter of 2015. Although export markets continue to be challenged by unfavorable demand and currency movements, capacity reductions in domestic markets and improvements in the adverse demand climate set the stage for industry price recovery in North America over the quarter. As such, the overall average transaction price for newsprint increased by $11 per metric ton, or 2%. Shipments declined by 32,000 metric tons, or 6%, reflecting seasonally lower demand compared to the last quarter of 2015. The delivered cost in the segment was lower by $5 per metric ton despite higher depreciation and amortization, which was offset by favorable currency impacts, lower energy costs, as well as increased contribution from cogeneration facilities. EBITDA was $15 million for the quarter, equivalent to $29 per metric ton, compared to $5 in the previous quarter and $20 per metric ton on average for the last twelve months. Seasonal effects and timing of shipments prompted an increase in finished goods inventory of 14%.

Specialty Papers

Operating income in the specialty papers segment was $7 million in the first quarter, up by $9 million from the fourth quarter of 2015. The average transaction price was lower by $11 per short ton, mainly in coated and supercalendered products. Shipments were relatively stable despite cyclically lower demand in the first quarter and fell only 2%. The delivered cost in the quarter improved by $35 per short ton, favorably affected by the weaker Canadian dollar, lower maintenance and increased output in cogeneration operations, as well as a decrease in depreciation and amortization owing to the impairment of the Catawba assets taken in the fourth quarter of 2015. EBITDA for the segment reached $20 million in the quarter, equivalent to $51 per short ton, up from $38 for the last quarter of 2015, but lower than the $62 average per short ton recorded over the last twelve months. Finished goods inventory was down by 11%.

Consolidated Quarterly Operating Income Variance Against Year-Ago Period

The company recorded no operating income for the first quarter, compared to an operating loss of $15 million in the year-ago period. Reductions in sales prompted by continued pressure on pricing were almost entirely offset by reductions in manufacturing costs and favorable effects of the weaker Canadian dollar.

The average transaction price for pulp fell by 10%, wood products by 13%, newsprint by 9%, and specialty papers by 5%, which resulted in a $77 million unfavorable variance, excluding foreign exchange, when compared to last year.

However, delivered cost also declined, by 14% for pulp, 7% for wood products, 9% for newsprint, and 5% for specialty papers, mainly due to lower natural gas and power costs, favorable foreign exchange as well as lower depreciation and amortization due to an aggregate increase in the estimated economic useful lives of our machinery and equipment and the asset impairment at our Catawba facility in the last quarter of 2015. Non-operating pension and OPEB expenses also went down by $8 million, the result of the lower balance sheet net pension and OPEB liability in 2015.

Shipments increased for market pulp and specialty papers by 7% and 3% respectively, while falling 3% in newsprint and remaining substantially unchanged in wood products. Overall inventories have declined in all segments compared to the year-ago period.

Corporate and Finance

During the quarter, the company invested $47 million in fixed assets, $32 million of which were dedicated to the Calhoun tissue project. An amount of $20 million was drawn on our asset-based credit facility in order to support the continuation of this project, which remains on time and on budget. Total liquidity remained healthy at $443 million.

Outlook

Mr. Garneau added: "Although we are cautious about prospects for later in the year, we expect a moderate improvement in pulp market dynamics in the short-term. The integration of our Atlas Paper acquisition will be a key focus over the next quarter, as we move past early challenges and fully implement Resolute operating practices. We expect that the slowly materializing recovery in the U.S. housing market will help us navigate through political uncertainty related to softwood lumber. Despite pricing improvements, we still believe that newsprint prices do not reflect current market conditions. To that effect, we recently announced price increases applicable to our newsprint sales in the United States . Nevertheless, our longer-term demand expectations in newsprint remain unchanged, thus our announcement for the Augusta newsprint machine closure today. Finally, we expect challenging market conditions across our specialty paper grades, where we are confident we can maintain good EBITDA results despite pricing headwinds."

Resolute Forest Products is a global leader in the forest products industry with a diverse range of products, including newsprint, specialty papers, tissue, market pulp and wood products. The company owns or operates over 40 pulp, paper, tissue and wood products facilities in the United States, Canada and South Korea, as well as power generation assets in Canada. To learn more, please visit: www.resolutefp.com

SOURCE: Resolute Forest Products Inc.