May 3, 2018
Resolute announces first-quarter results
By Resolute Forest Products
“We are pleased with our results, as we realized the best first quarter in terms of operating income since 2011. Price increases in the majority of our businesses supported our improved results,” Yves Laflamme, president and chief executive officer, said. “Pricing gains, however, were mitigated by transportation challenges impacting economic activity across North America, as well as the unusually cold temperatures early in the quarter, particularly in the southern United States.”
Resolute also announced on May 1, 2018 the ratification of a new four-year collective agreement with its largest Canadian union, Unifor, covering 1,100 employees at eight of the company’s Canadian pulp and paper mills.
Non-GAAP financial measures, such as adjustments for special items and adjusted EBITDA, are explained and reconciled below.
Operating Income Variance Against Prior Period
The company recorded operating income of $48 million in the quarter, compared to $53 million in the fourth quarter of 2017. Operating results benefitted from the continued positive price momentum across most of our product offerings ($37 million), a decrease in maintenance outages and lower share-based compensation expense. These favourable elements were not sufficient to offset the significant increase in freight costs, seasonally higher energy costs, aggravated by unusually cold weather conditions, an increase in market-based stumpage fees and a decrease in shipments. Sales volumes were lower due to transportation challenges, timing of export sales, seasonally lower demand for supercalendered papers and lower productivity. The operating results in the previous quarter also included a gain on the disposition of assets of our Mokpo (South Korea) paper mill ($13 million).
In the quarter, as required under recently updated accounting guidance, the company changed its presentation of operating income by presenting the service cost component of the net periodic benefit cost in operating expenses and the other components (the “non-operating pension and postretirement benefit cost”) outside of the operating income. The change was applied retroactively by adjusting comparative financial information and had no impact on reported adjusted EBITDA.
Operating income in the market pulp segment was $33 million, $4 million lower than the fourth quarter. Realized pricing continued to strengthen, reaching $710 per metric ton, an increase of $32 per metric ton, or 5 per cent, as the pulp market supply-demand balance was favorable. Shipments were down by 26,000 metric tons to 362,000, largely due to the timing of international fluff pulp shipments, and lower productivity in our U.S. mills, mainly impacted by unusually cold weather, offset in part by additional volume of recycled pulp. The operating cost per unit (the “delivered cost”) increased by $36 per metric ton, largely due to higher freight, fuel and fiber costs, offset in part by lower maintenance and a decrease in wood chip prices. Lower volumes and higher costs outweighed the pricing gains, resulting in EBITDA of $40 million in the quarter, or $110 per metric ton, down from $44 million.
Operating results of the tissue segment, which exclude our operations at Calhoun (Tennessee), improved marginally compared to the fourth quarter of 2017, mainly due to increased volumes. While pricing decreased by $62 per short ton, delivered cost also declined, both as a result of relatively higher parent roll sales. The results of our Calhoun tissue operations are expected to be recorded in our tissue segment sometime in the second quarter of 2018.
The wood products segment generated operating income of $53 million in the quarter, compared to $57 million in the previous quarter. The delivered cost in the segment rose by $24 to $342 per thousand board feet, as a result of lower internal wood chip selling prices, higher market-based stumpage fees, and an increase in transportation costs. Shipments were also lower by 11 million board feet, largely due to limited rail car availability, leading to a 16 million board feet increase in finished goods inventory, to 140 million board feet. These unfavorable elements were almost entirely offset by the continued increase in average transaction price, which rose another 5% this quarter, to $459 per thousand board feet. EBITDA for the segment was $61 million, or $134 per thousand board feet, compared to $65 million, or $139 per thousand board feet, in the fourth quarter.
The newsprint segment incurred an operating loss of $4 million in the quarter, compared to a loss of $6 million in the fourth quarter of 2017. Improving market conditions continued to push the average transaction price up to $558 per metric ton, an increase of $33 per metric ton in the quarter. The timing of export sales and transportation issues, however, significantly impacted shipments, which fell from 410,000 metric tons to 355,000 metric tons in the quarter. The delivered cost increased by $28 per metric ton, largely because of lower volumes, an increase in freight costs and seasonally higher energy costs. Favorable pricing outweighed the lower volumes and higher costs, resulting in a marginal improvement of $1 million in EBITDA, to $12 million for the quarter, equivalent to $34 per metric ton. Delays in shipments were the largest contributor to the 15,000 metric ton increase in finished goods inventory.
The specialty papers segment incurred an operating loss of $7 million in the first quarter, an improvement of $6 million compared to the prior quarter. The average transaction price rose by $15 per short ton, while the delivered cost decreased by $5 per short ton to $698. Lower maintenance costs, increased internal hydroelectric generation, and a decrease in wood chip prices more than compensated for the rise in freight and energy costs. Shipments, however, dropped by 18,000 short tons, or 6 per cent, reflecting seasonally higher demand in the fourth quarter. Overall, EBITDA improved by $25 per short ton, or $7 million, compared to the previous quarter, to $5 million.
Consolidated Quarterly Operating Income Variance Against Year-Ago Period
The company generated operating income of $48 million in the first quarter, compared to an operating loss of $9 million for the same period in 2017, reflecting the favorable market dynamics across most segments. Overall pricing added $114 million to our results compared to 2017, as the average transaction price increased by 31 per cent for wood products, 20 per cent for market pulp, 9 per cent for newsprint and 2 per cent for specialty papers. The improvement in operating income also included the elimination of fixed costs due to capacity closures in our newsprint and specialty papers segments ($22 million) in 2017. In addition, there were no closure-related costs in the quarter.
These favourable items were partially offset by an overall decrease in volume ($31 million), largely associated with the restructuring initiatives in our paper segments, the unfavorable impact of the stronger Canadian dollar ($17 million), as well as higher freight expenses ($18 million), and an increase in maintenance, energy and fiber costs ($24 million).
Corporate and Finance
During the quarter, $25 million was invested in capital expenditures and $21 million paid in cash duty deposits. Cumulative duty deposits recorded on our balance sheet totaled $96 million, $54 million attributable to supercalendered papers, $40 million to softwood lumber and $2 million to uncoated groundwood papers.
Total debt at the end of the quarter decreased by $10 million to $779 million, while liquidity rose by $34 million, to $452 million.
“We anticipate the supply and demand balance to remain favorable in our pulp, lumber, newsprint and specialty papers segments. Over the coming months, we also expect to benefit from increased sales momentum in our tissue business. Transportation headwinds, however, will continue to negatively impact profitability but to a lesser extent given the typical first quarter weather-related freight constraints,” added Mr. Laflamme.