Wood Business

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Resolute reports drop in operating income in Q4 2018


February 1, 2019
By Resolute Forest Products

Resolute Forest Products Inc. has reported an operating income of $75 million for the quarter ended Dec. 31, 2018, compared to $135 million in the third quarter of 2018. Overall pricing had an unfavourable impact of $33 million because of the $110 per thousand board feet drop in the average transaction price for wood products, which more than offset the increase in market pulp and paper prices. Manufacturing costs were also higher in the quarter, by $45 million, mostly due to production disruptions, planned maintenance, seasonally higher energy costs, as well as higher wood costs attributable to extremely wet weather, mainly in the U.S. Southeast.

Resolute also reported net income for the quarter of $36 million, or $0.38 per diluted share, compared to $13 million, or $0.14 per diluted share, in the same period in 2017. Sales were $932 million in the quarter, an increase of $34 million from the year-ago period. Excluding special items, the company reported net income of $4 million, or $0.04 per diluted share, compared to $14 million, or $0.15 per diluted share, in the fourth quarter of 2017.

For the year, the company reported GAAP net income of $235 million, or $2.52 per diluted share, compared to a net loss of $84 million, or $0.93 per share, in 2017. Sales were $3.8 billion, up 7 per cent, from the previous year. Excluding special items, the company reported net income of $183 million, or $1.96 per diluted share, compared to $12 million, or $0.13 per diluted share, in 2017.

“With our optimized asset base, we were able to deliver strong annual performance with the positive market dynamics in the year, despite cost headwinds and a soft lumber market in the fourth quarter,” said Yves Laflamme, president and CEO. “We experienced significantly weaker pricing for lumber in the quarter, unforeseen operational disruptions, planned maintenance, as well as higher energy and wood costs. Despite these challenges, we generated $435 million of cash from operations in 2018, monetized the Catawba and Fairmont assets at attractive valuations, returned $136 million of capital to shareholders through a special dividend and further reduced our leverage shortly after year-end. Our stronger balance sheet improves our financial strength and flexibility and positions us well for future growth opportunities.”

Consolidated

In the fourth quarter, the company recorded a non-cash impairment charge of $120 million against the goodwill and long-lived assets originally recorded at the time of the acquisition of Atlas Paper Holdings Inc. in 2015, to reduce the carrying value of these assets to their estimated fair value. We also recorded a $141 million gain on disposition of assets in the quarter, following the sale of the Fairmont (West Virginia) and Catawba (South Carolina) facilities.

The company generated $379 million of operating income in 2018, compared to $42 million in 2017, mostly due to higher average transaction prices across all business segments. The average transaction price increased by 19 per cent for market pulp, 17 per cent for newsprint, 13 per cent for wood products and 9 per cent for specialty papers. Operating results also benefited from gains on disposition of assets of $145 million, compared to a $15 million gain recorded in 2017 mostly related to the disposition of the assets at the Mokpo (South Korea) paper mill.

Manufacturing costs rose by $152 million this year, largely due to higher energy costs and market-related fibre and chemical expenses, as well as additional maintenance, while freight costs increased by $59 million, or 13 per cent, because of higher rates and longer shipping distances. Lower sales volumes, reflecting weaker lumber markets ($23 million), the fluctuation of the Canadian dollar ($19 million), as well as higher impairment and closure-related charges ($14 million) also unfavourably impacted the company’s results.

Wood Products

The wood products segment recorded an operating loss of $8 million in the quarter, compared to an operating income of $45 million in the third quarter, almost entirely due to weaker pricing. The average transaction price fell to $347 per thousand board feet this quarter, down 24 per cent, or $110. The delivered cost increased by $11 to $366 per thousand board feet, reflecting higher maintenance and log costs. Despite market and weather-related production curtailment in the quarter, shipments increased by 7 million board feet. EBITDA for the segment dropped to $1 million, compared to $53 million in the prior quarter and finished goods inventory remained elevated at 157 million board feet.

Operating income for the year was $169 million in the segment, $17 million lower than in 2017. The delivered cost rose by $50 to $354 per thousand board feet, as a result of higher market-driven fibre costs and an increase in transportation expenses. Shipments were also lower by 165 million board feet, largely due to lower production volumes and weaker market conditions in the latter part of the year. Offsetting in part these unfavourable elements was the increase in average transaction price, which rose by $50 per thousand board feet this year, to $446. EBITDA for the segment declined to $201 million, or $109 per thousand board feet, compared to $219 million in 2017, reflecting EBITDA margins of 24 per cent and 27 per cent, respectively.

Outlook

“After reaching historical highs in the first half of the year, lumber prices dropped to multi-year lows in the fourth quarter. Nevertheless, favourable economic conditions and recent production curtailments among Canadian producers, including ourselves, make us cautiously optimistic that markets will gradually improve in 2019. Accordingly, our long-term view for lumber is unchanged; we believe in the underlying fundamentals and growth prospects for this market. Despite recent softening in Chinese buying activity, we expect the fundamentals for market pulp to remain positive, given the limited capacity additions over the medium term. For paper, given lower seasonal demand, as well as the continued structural decline, we expect our shipments to be lower in the first quarter. We are now making progress in stepping-up the productivity of Calhoun tissue operations, leading us to target positive earnings generation in the first half of 2019. We remain optimistic with the long-term growth prospects of our tissue business,” said Laflamme.