Resolute reports increased net income in Q1 2019
April 30, 2019 By Resolute Forest Products
Resolute Forest Products Inc. today reported net income for the quarter ended March 31, 2019, of $42 million, or $0.45 per diluted share, compared to $10 million, or $0.11 per diluted share, in the same period in 2018. Sales were $795 million in the quarter, a decrease of $79 million from the year-ago period. The first 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 $30 million, or $0.32 per diluted share, compared to $17 million, or $0.18 per diluted share, in the first quarter of 2018.
“Our diversified asset base continued to produce strong EBITDA in the quarter despite building market pressure in some of our businesses,” said Yves Laflamme, president and chief executive officer. “Our quarterly results benefitted from improved productivity, which allowed us to absorb the significant rise in wood fibre costs and offset the reduction in EBITDA associated with the divestiture of the Catawba mill. Accordingly, we continued to generate consistent value from our paper portfolio, and the results of our wood products business improved as prices rebounded modestly from multi-year lows. We’re also pleased with the recent ratification of a four-year collective agreement covering our nearly 800 unionized employees at three of our U.S. pulp, paper and tissue mills.”
The company reported operating income of $64 million in the quarter, compared to $75 million in the fourth quarter of 2018. The operating results reflect higher average transaction prices for wood products, lower depreciation expense, the favourable effect of the weaker Canadian dollar and fewer production outages. These elements were partly offset by lower volumes, mainly attributable to the Catawba mill divestiture at the end of the fourth quarter and softening newsprint market conditions, as well as an increase in wood fibre costs and seasonally higher energy expenses. The operating results in the fourth quarter of 2018 included a $141 million gain on disposition of assets and a non-cash impairment charge of $120 million. Adjusted EBITDA in the quarter was $104 million, essentially unchanged from $105 million reported in the fourth quarter, which included $15 million from the Catawba facility.
The wood products segment reported an operating income of $6 million in the quarter, compared to an operating loss of $8 million in the fourth quarter. The improvement reflects an increase in average transaction price, up $27 per thousand board feet, to $374. Lower market-based stumpage fees and maintenance costs more than offset seasonally higher fibre usage and freight costs, leading to a $6 per thousand board feet decrease in delivered cost. Pricing gains and lower costs largely outweighed the 24 million board feet decrease in shipments. Volumes this quarter were unfavourably impacted by adverse weather conditions, which affected rail car availability, log supply and U.S. consumption. EBITDA for the segment increased to $14 million, compared to $1 million in the prior quarter. Finished goods inventory remained elevated at 159 million board feet.
Quarterly operating income
The company’s operating income was $16 million higher than the first quarter of 2018. Overall pricing added $37 million to the results, as the average transaction price increased by 14 per cent for each of market pulp, newsprint and specialty papers, offsetting the 19 per cent drop in lumber prices. The improvement in operating income also reflects the $20 million favourable impact of the weaker Canadian dollar and lower depreciation expense of $13 million due to divestitures and the full amortization of certain assets.
These favourable items were largely offset by an increase in manufacturing costs of $51 million, mainly resulting from higher fibre costs and additional maintenance, mostly planned. Results were also impacted by lower sales volume of $8 million, reflecting weaker lumber and newsprint market conditions.
Corporate and finance
During the quarter, the company generated $23 million of cash from operations, despite the seasonal build-up in log inventory and the increase in newsprint finished goods inventory. Cash decreased to $69 million, reflecting $26 million in capital expenditures and the repurchase of $225 million of the senior notes due 2023.
By quarter-end, the company had recorded cumulative softwood lumber duty deposits of $117 million on the balance sheet, including $14 million paid in the quarter. Uncoated groundwood papers duty deposits of $6 million were fully refunded during the quarter.
“We maintain our view on market pulp fundamentals even as prices have recently started to trend down. While we expect lower price realizations in the second quarter, limited capacity additions and growing demand will continue to support favourable market dynamics over the medium term. Our tissue segment remains a key focus as we continue to build on the late-year progress in terms of productivity and quality. We expect our wood products cost performance to improve for the balance of the year. But we’re more conservative with our expectations around lumber markets even as some market participants are more enthusiastic following abnormally wet and wintry conditions and in light of production curtailments among Canadian producers, including downtime of our own. While our near-term outlook is more uncertain, our medium to long-term outlook remains positive. With ongoing global demand declines and currently low operating rates, we expect lower pricing for our paper grades in the second quarter. But despite the softening market conditions, our paper business generated strong first quarter EBITDA margins, and we are confident we can continue to produce attractive cash flows as we take steps to reduce inventory and maintain our competitive cost position,” said Laflamme.
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