Resolute Forest Products Reports Preliminary Third Quarter 2014 Results

Oct. 30, 2014 - Resolute Forest Products Inc. today reported net income for the quarter ended September 30, 2014, excluding special items, of $17 million, or $0.18 per share, down from net income, excluding special items, of $29 million, or $0.31 per share, in the third quarter of 2013. Sales were $1.1 billion in the quarter, down $34 million, or 3%, from the third quarter of 2013.

GAAP net loss was $116 million, or $1.23 per share, compared to a net loss of $588 million, or $6.22 per share, in the third quarter of 2013 as last year's results were significantly affected by a $619 million non-recurring, non-cash income tax charge.

"Our adjusted EBITDA improved sequentially thanks to the best lumber quarter in recent history and continued strength of market pulp," said Richard Garneau, president and chief executive officer. "We're building momentum in the wood products business: the Thunder Bay pellet plant is starting its ramp-up, our Ignace sawmill is about to begin its own ramp-up, and we're on schedule with the construction of our Atikokan sawmill.

"Year-to-date shipments of newsprint and specialty papers outperformed industry trends, demonstrating the strength of our position, but we took some newsprint downtime in the quarter to reduce finished goods inventory. More broadly, we met our commitment to reduce finished goods inventory levels in a disciplined manner across all segments, especially pulp."

SEGMENT OPERATING INCOME VARIANCE AGAINST PRIOR QUARTER

Market Pulp
Operating income in the market pulp segment was $21 million, $3 million less than the second quarter. The average transaction price slipped by $24 per metric ton, or 3%, to $701, mostly because of lower average prices for hardwood grades, as the market absorbs major new eucalyptus capacity. Overall shipments significantly improved from the disappointing levels of the first two quarters, up by 29,000 metric tons, or 9%, compared to the second quarter. Finished goods inventory fell by 21,000 metric tons, or 18%. The operating cost per unit (the "delivered cost") dropped by $7 per metric ton, or 1%, despite higher maintenance costs.

Wood Products
The wood products segment generated operating income of $24 million in the quarter, a $9 million improvement over the second quarter, reaching its highest level since the 2007 start of the U.S. housing downturn. Shipments were unchanged, reflecting sustained demand despite the slow recovery in U.S. housing starts. Further to a 13% reduction in the second quarter, the company reduced finished goods inventory by an additional 19% this quarter. The average transaction price was $10 per thousand board feet higher, or 3%, reflecting an increase in market prices for both stud and random length lumber grades. The delivered cost fell by 4%, or $13 per thousand board feet, mostly because the company recognized additional tax credits in connection with infrastructure investments. The company started the ramp-up process at its new wood pellet plant in Thunder Bay in October. The facility will produce 45,000 metric tons annually under a ten-year agreement to supply Ontario Power Generation's Atikokan Generating Station, the largest capacity, 100% biomass-fueled, power plant in North America.

Newsprint
Operating income was $5 million in the newsprint segment this quarter, $13 million less than the second quarter. Shipments fell by 27,000 metric tons, or 4%, mostly because of market downtime and wood shortages in domestic-focused mills. Accordingly, domestic shipments represented 58% of total shipment volume, compared to 60% in the previous quarter. The average transaction price slipped by less than 1% as a result of continued price deterioration in certain export markets. The delivered cost increased by $14 per metric ton, or 2%, from the second quarter, due primarily to lower contribution from the Thunder Bay cogeneration facility as a result of a longer than expected annual outage, as well as turbine damage and lost production caused by multiple power transmission disruptions to the mill. This was partially offset by the recognition of an energy savings incentive in the U.S. southeast. Finished goods inventory fell by 19,000 metric tons, or 13%.

Specialty Papers
The specialty papers segment generated operating income of $6 million, a $9 million improvement over the second quarter. The average transaction price slipped less than 1%, which is largely due to erosion in higher-end white papers. Shipments rose by 2%, or 11,000 short tons, in this seasonally stronger quarter, especially on the higher end of the grade spectrum. The delivered cost in the quarter was $700 per short ton, down by $23 per ton, or 3%, from the previous quarter, mostly because of maintenance timing. Finished goods inventory closed the quarter up by 7% to meet the expected continuation in seasonal demand. The closure of the Laurentide mill in Shawinigan, Québec, as of mid-October will reduce annual production capacity for supercalender grades by 210,000 short tons.

CONSOLIDATED QUARTERLY OPERATING INCOME VARIANCE AGAINST YEAR-AGO PERIOD

The company recorded an operating loss of $40 million in the third quarter, compared to operating income of $36 million in the year-ago period. Overall pricing was higher as a result of a 13% increase in the average transaction price for wood products and 4% for market pulp, offset in part by 4% lower average pricing for specialty papers and 3% for newsprint. Shipments were 1% higher in both wood products and specialty papers, but they were 9% lower in market pulp, largely because of greater internal consumption of hardwood kraft pulp and market downtime in recycled bleach kraft pulp. Shipments were also 5% lower in newsprint, which reflects lower export volumes compared to the same period last year.

Overall manufacturing costs were essentially unchanged, due mainly to lower pension and other postretirement benefit expenses and the recognition of an energy savings incentive in the U.S. southeast, offset by higher natural gas prices, the write-off of stores in connection with the permanent closure of the Laurentide mill, higher wood costs and lower contribution from cogeneration facilities. The weaker Canadian dollar had a $15 million favorable effect on operating income.

The company incurred $85 million of accelerated depreciation and other closure-related costs, almost all of which are related to the Laurentide mill. It also recorded a $50 million write-down to the investment in Ponderay Newsprint Company, an unconsolidated partnership in which the company owns a 40% interest and acts as managing partner. Selling, general and administrative expenses were $3 million higher in the quarter, primarily because of allowances for doubtful accounts.

Outlook
Mr. Garneau added: "We expect our Ignace sawmill to begin ramp-up before year-end, to build its production and inventory gradually in the first quarter and to continue to improve production efficiency over the course of the year. The high capacity planer mill at our new Atikokan sawmill will start to dress Ignace's lumber in the first quarter, with the ramp-up of its own sawline scheduled to begin in the second quarter. We expect these sawmills to start generating positive earnings as early as the third quarter of next year. This is a great time to be building momentum in the wood products business, where we've seen sustained demand support in the market despite the slow recovery in U.S. housing starts.

The pulp market continues to adjust to major hardwood pulp capacity increases, but our outlook has turned to cautious optimism, based on the market's resilience this year. Turning to paper, the pace of price declines in coated mechanical and supercalender grades is leveling off; we're hopeful that recent industry capacity rationalization announcements will help to ease some of the pressure the industry experienced this year as a result of lower operating rates. In newsprint, recent demand trends are forcing us to respond with targeted market downtime initiatives, particularly at some of our Québec mills struggling with high wood costs and wood availability issues resulting from the implementation of the new forest tenure system. We remain confident that our operating platform has the scale, financial strength and cost advantage to withstand market challenges."

Resolute Forest Products produces 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.