Resolute Forest Products reports preliminary first quarter 2017 results
By Resolute Forest Products Inc.
May 8, 2017 - Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) today reported a net loss for the quarter ended March 31, 2017, of $47 million, or $0.52 per share, compared to a net loss of $8 million, or $0.09 per share, in the same period in 2016. Sales were $872 million in the quarter, down $5 million, or 1%, from the first quarter of 2016. Excluding special items, the company reported a net loss of $30 million, or $0.33 per share, compared to a net loss, excluding special items, of $22 million, or $0.25 per share, in the first quarter of 2016.
"While we continued to face strong headwinds in our paper businesses this quarter, our three other segments (pulp, tissue and wood products) recorded stronger results than in the fourth quarter," said Richard Garneau, president and chief executive officer. "We saw key achievements in the quarter, particularly in our tissue segment. Our Calhoun tissue machine started-up one month ahead of schedule in structured mode, a first for this technology which allowed us to manufacture premium products right from the start. Those achievements were overshadowed by the imposition of countervailing duties on our softwood lumber exports from Canada to the United States. We firmly believe that central Canadian forestry regimes are market-based and we should expect nothing less than unencumbered and free access to the U.S. lumber market."
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 an operating loss of $6 million in the quarter, compared to an operating loss of $18 million in the fourth quarter of 2016. Compared to the same period, adjusted EBITDA declined by $2 million, to $61 million.
The company's operating results were positively impacted by a reduction in maintenance expenses mostly associated with reduced repairs when compared to the last quarter of 2016, as well as an overall increase in product pricing. Those improvements were offset by adjustments to selling, general and administrative expenses, seasonally higher energy costs and reductions in volumes, mainly newsprint.
As more fully described below, in the quarter the company changed its presentation of pension and OPEB costs to present the amortization of prior service credits component as a special item adjustment used in its non-GAAP performance measures, including adjusted EBITDA. As such, adjusted EBITDA in the first quarter of 2017 would have been $65 million without this change, compared to the $67 million previously disclosed for the fourth quarter of 2016. The amortization of prior service credits component of pension and OPEB costs is now allocated solely to "corporate and other" in its segment presentation of operating income.
Operating income in the market pulp segment was $7 million, $3 million more than the fourth quarter of the prior year. After falling during the fourth quarter of 2016, our realized pricing gradually increased during the quarter reaching an average of $593 per metric ton. Shipments to third parties fell by 15,000 metric tons compared to the fourth quarter, partly due to the planned annual outage at Catawba (South Carolina) at the end of March. The operating cost per unit (the "delivered cost"), was down by $4 per metric ton, falling to $575 per metric ton, resulting mostly from lower maintenance spending due to reduced repairs. EBITDA per unit was $42 per metric ton compared to $35 per metric ton in the fourth quarter of 2016. Finished goods inventory increased by 1,000 metric tons to 92,000 metric tons.
Our tissue segment reported a break-even position on operating income. The overall transaction price declined by $130 per short ton, as shipments of parent rolls rose by 2,000 short tons. The delivered cost increased by $68 per short ton, due to a favorable depreciation and amortization adjustment in the last quarter of 2016. EBITDA per unit increased to $71 per short ton, reaching $1 million for the segment. Finished goods inventory rose by 3,000 short tons to 8,000 short tons due to the start-up of the Calhoun (Tennessee) tissue machine.
The wood products segment recorded operating income of $20 million for the quarter, an improvement of $3 million against the previous quarter. Shipments rose, reaching 505 million board feet, despite adverse weather conditions causing logistical challenges during the quarter. Supported by better U.S. housing starts and market expectations on softwood lumber duties, the average transaction price rose by $23 per thousand board feet to $350. The delivered cost increased to $310 per thousand board feet, resulting from higher log costs and production curtailments. EBITDA for the segment was $29 million, a $4 million increase compared to the previous quarter and equivalent to $57 per thousand board feet, an increase of $7 per thousand board feet. Finished goods inventory rose by 19% to 147 million board feet, mostly as a result of this year's challenging winter conditions and market volatility caused by the anticipated U.S. trade barriers.
The newsprint segment incurred an operating loss of $4 million in the quarter, compared to operating income of $1 million in the fourth quarter of 2016. Pricing for our products fell only marginally to $510 per metric ton, pressured by continued weaknesses in export markets. Shipments decreased by 50,000 metric tons, resulting from the combination of the indefinite idling of our paper mill in Thorold (Ontario) and the permanent closure of our newsprint mill in Mokpo (South Korea) as well as continued structural demand decline. The delivered cost in the segment rose by $6 per metric ton compared to the previous quarter. This was mostly as a result of lower volumes and higher distribution and energy costs, which were partially offset by lower maintenance and a reduction in fixed costs. EBITDA was $12 million for the quarter, equivalent to $27 per metric ton, compared to $39 in the previous quarter. Finished goods inventory was substantially unchanged from the end of the fourth quarter at 107,000 metric tons.
Operating income in the specialty papers segment was $4 million in the first quarter, up by $1 million from the fourth quarter of 2016. The average transaction price was lower by $6 per short ton, mainly due to demand decreases in supercalendered and coated grades. Despite continuing structural market weakness, shipments increased by 9,000 short tons compared to the fourth quarter of 2016, rising to 364,000 short tons. The delivered cost in the quarter improved by $11 per short ton, supported by lower maintenance and chemical costs, partially offset by seasonally higher steam costs. EBITDA for the segment reached $16 million in the quarter, equivalent to $44 per short ton, up from $39 per short ton for the last quarter of 2016. Finished goods inventory rose to 100,000 short tons, a 9% increase compared to the fourth quarter of 2016.
Consolidated Quarterly Operating Income Variance Against Year-Ago Period
The company recorded an operating loss of $6 million for the first quarter, compared to a break-even position in the first quarter of 2016. The difference is mostly explained by closure costs associated with our newsprint mill in Mokpo, start-up costs related to the Calhoun tissue facility and the unfavorable impact of the stronger Canadian dollar. These elements were partially offset by improved pricing and reduced manufacturing costs, particularly due to our asset optimization initiatives.
Gains of $17 million in pricing, excluding impact from foreign exchange, are mostly the result of increases in our wood products and newsprint segments, which rose by 14% and 3% respectively. On the other hand, the average transaction price for tissue fell by 7%, specialty papers by 3%, and market pulp by 1%.
Changes in sales volumes had a minimal impact on results. Strong improvements in wood products shipments, which recorded an increase of 115 million board feet compared to the first quarter of 2016, were offset by declines in newsprint (15%), specialty papers (7%), and tissue (7%), while market pulp was substantially unchanged.
Corporate and Finance
The company invested $69 million in fixed assets during the quarter, $51 million of which was spent on the Calhoun tissue project. We anticipate that the total project cost will be about $295 million. A net amount of $118 million was drawn on our revolving credit facilities primarily to support the completion of the tissue project and an increase in inventories in our wood products segment. Total liquidity remained healthy at $380 million.
In the first quarter of 2017, we changed our presentation of segment operating income to reallocate the amortization of prior service credits component of pension and OPEB costs from the reportable segments to "corporate and other". Current service costs will continue to be allocated to the reportable segments. The company now also treats the amortization of prior service credits component of pension and OPEB costs as a special item to be adjusted for purposes of establishing its non-GAAP performance measures, such as adjusted EBITDA and adjustments to earnings for special items. The change was applied retroactively to comparative financial information, including the information presented in this earnings release.
During the first quarter, the company reached an agreement with the province of Ontario with respect to capacity reduction contributions under that province's special funding relief regulations. We are no longer required to make any further contributions in respect of capacity reductions that occurred after April 15, 2014. Consequently, contributions to the affected pension plans will be lower by approximately $12 million in 2017 and $6 million in 2018.
In addition, estimated contributions to our Quebec pension plans from 2017 to 2020 are expected to be lower than previously disclosed by approximately $30 million, including $6 million for this year, based on the exchange rate in effect on March 31, 2017.
Mr. Garneau added: "As our long-term strategy continues to unfold, we expect to gradually increase the relative contribution of our pulp, tissue and lumber segments to our overall results. However, we will continue to position our network to compete effectively. We believe that upward trends in pulp pricing will continue until at least mid-year, and possibly into the second half given the residual impact of already announced increases, including those of May. In wood products, we expect steady increases in housing starts for the foreseeable future. However, we anticipate short-term volatility in the market caused by U.S. trade barriers. In tissue, the key to our success will be in our marketing and sales efforts. We can now offer a full complement of our integrated tissue and towel products. We believe that customers will be increasingly receptive to our offering."