Resolute reports $25M net income in Q2 2019
August 1, 2019 By Resolute Forest Products
Resolute Forest Products Inc. today reported net income for the quarter ended June 30, 2019, of $25 million, or $0.27 per diluted share, compared to $72 million, or $0.77 per diluted share, in the same period in 2018. Sales were $755 million in the quarter, a decrease of $221 million from the year-ago period. The second quarter of 2018 included sales from the Catawba (South Carolina) and Fairmont (West Virginia) facilities sold in the fourth quarter of 2018. Excluding special items, the company reported net income of $11 million, or $0.12 per diluted share, compared to $66 million, or $0.71 per diluted share, in the second quarter of 2018.
“This quarter’s results were most affected by lower pricing in all of our business segments, with the notable exception of tissue. Benefiting from higher pricing and improved productivity, our tissue segment generated marginally positive EBITDA this quarter,” said Yves Laflamme, president and chief executive officer. “Despite pricing challenges, our pulp and paper businesses continued to generate strong margins and attractive cash flows, mitigating cyclical headwinds in lumber, as our tissue business gains momentum. During the quarter, we further strengthened our balance sheet by extending our senior secured asset-based revolving credit facility for another five years. We also took advantage of recent stock price underperformance, returning $12 million of capital to our shareholders through the buyback of 1.8 million shares to date in 2019.”
Operating income variance against prior period
The company reported operating income of $40 million in the quarter, compared to $64 million in the first quarter. Lower selling prices across most products reduced operating income by $47 million, including a 9 per cent drop in average transaction price in the market pulp segment, 7 per cent in wood products, 6 per cent in newsprint and 2 per cent in specialty papers. This was only partially offset by a reduction in manufacturing costs ($19M), largely resulting from seasonally lower energy costs, a decrease in recovered paper prices and improved productivity.
The wood products segment reported an operating loss of $3 million in the quarter, compared to an operating income of $6 million in the first quarter, mainly due to weaker pricing. Following a rebound in the first quarter, the average transaction price dropped by $26 per thousand board feet this quarter, to $348, reflecting softer spring demand. Shipments, however, rose by 56 million board feet due to improved rail car availability and a modest increase in U.S. lumber consumption compared to the first quarter. Consequently, finished goods inventory fell to more normal levels of 122 million board feet at quarter-end. The delivered cost remained relatively unchanged, at $355 per thousand board feet. Higher shipments were not enough to outweigh the drop in pricing, and EBITDA decreased to $6 million for the quarter, compared to $14 million in the previous quarter.
Consolidated quarterly operating income variance against year-ago period
The company’s operating income was $81 million lower than the second quarter of 2018. Overall pricing had a $68 million unfavourable impact, as lumber prices decreased by 32 per cent, more than offsetting higher prices in the paper segments. The decline in operating income also reflects the increase in manufacturing costs of $31 million, mainly due to higher fibre costs and additional maintenance, as well as a decrease in sales volume of $13 million, given lower pulp and newsprint shipments. These unfavourable items were offset in part by the $15 million favourable impact of the weaker Canadian dollar and lower depreciation expense of $12 million due to divestitures and the full amortization of certain assets.
“Pricing for market pulp is expected to remain under pressure in the short term, given elevated global inventories. While lower price realization will weigh on our results in the third quarter, we expect to increase shipments. We continue to be positive on our pulp business, supported by favourable medium-term supply trends and growing demand. We expect to build on the marginally positive EBITDA in tissue with further sales growth and productivity gains in the third quarter. Although we are cautious in our outlook for lumber in the short term, we remain optimistic with the underlying market fundamentals. For paper, pricing headwinds, including recent protectionist measures in India, are expected to continue to affect results in the second half of the year, as the market adjusts to low operating rates. We are confident we have the right assets to compete in these conditions and defend our paper margins,” said Laflamme.
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