Wood Business

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Resolute reports preliminary fourth quarter and 2016 results

Feb. 27, 2017- Resolute Forest Products Inc. reported a net loss for the quarter ended December 31, 2016, of $45 million, or $0.50 per share, compared to a GAAP net loss of $214 million, or $2.39 per share, in the same period in 2015. Sales were $889 million in the quarter, essentially unchanged from the fourth quarter of 2015. Excluding special items, the company reported a net loss of $3 million, or $0.03 per share, compared to a net loss of $26 million, or $0.29 per share, in the fourth quarter of 2015.

For the year, the company reported a GAAP net loss of $81 million, or $0.90 per share, compared to a net loss of $257 million, or $2.78 per share, in 2015. Annual sales were $3.5 billion, down $100 million, or 3%, from the previous year.  Excluding special items, the company reported net income of $4 million, or $0.04 per share, compared to a net loss of $24 million, or $0.26 per share, in 2015.     

"We maintained our focus on costs and reliability, delivering improved operating performance compared to the third quarter," said Richard Garneau, president and chief executive officer. "Contribution from our paper segments ended the year on a solid note, as cost reductions offset price declines. Our pulp segment showed great resilience despite market pricing pressures, as our continuous digester at Calhounhad higher production and chemical costs were brought under control. In tissue, our efforts at Atlas started to yield results and our Calhounconverting operations are now fully commissioned. We expect the startup of our new tissue machine to begin over the coming weeks. In wood products, we maintained our volume gains from prior quarters and recorded one of our strongest annual performances in recent years."   

Non-GAAP financial measures, such as adjustments for special items and adjusted EBITDA, are explained and reconciled below. 

Operating Income Variance Against Prior Period

Consolidated

Following a review of our recycled newsprint assets during the fourth quarter of 2016, we recorded impairment and other associated charges of $27 million. Excluding these items, we generated operating income of $9 million, substantially unchanged from the third quarter. Items negatively impacting our results, such as pricing ($15 million), higher costs for fiber ($10 million) and purchased energy ($5 million), were largely offset by higher overall volume ($9 million), lower chemical costs ($7 million), favorable foreign exchange ($4 million) and reduced selling, general and administrative expenses ($3 million).

The company reported an operating loss of $26 million for the full-year period, compared to a loss of $219 million for 2015. This is mainly the result of an asset impairment recorded at our Catawba (South Carolina) facility in the fourth quarter of 2015. Also positively impacting the results were foreign exchange ($74 million), reductions in pension and other postretirement benefit ("OPEB") costs ($45 million), lower purchased energy expenses ($31 million), depreciation ($31 million), and fiber costs ($21 million). Conversely, declines in overall pricing ($104 million) and volumes ($7 million), as well as increases in maintenance costs ($20 million) affected our 2016 performance.

Market Pulp

Operating income in the market pulp segment was $6 million in the fourth quarter, an increase of $1 million relative to the third quarter. This improvement resulted from a stronger operating performance and a 45,000 metric tons increase in shipments during the quarter. The operating cost per unit (the "delivered cost") fell by $17 per metric ton, to $575 per metric ton, explained mostly by the higher volumes and lower chemical costs, offset by higher pricing for recycled fiber. On the other hand, the overall average transaction price fell by $18 per metric ton, as gains in fluff and recycled bleached kraft were insufficient to offset declines in hardwood and softwood grades. EBITDA was$15 million for the quarter, unchanged from the third quarter. Finished goods inventory was 91,000 metric tons at the end of the quarter, down 9,000 metric tons when compared to the previous quarter.

For 2016, the segment generated operating income of $43 million, a reduction of $33 million when compared to the previous year. This mostly reflects a significant reduction in pricing, which fell by $44 per metric ton, or 7%. This impact was partially offset by a lower delivered cost, which was mostly explained by a reduction in depreciation and amortization following a review of the estimated economic useful life of our fixed assets conducted at the beginning of 2016.  

Tissue

The tissue segment generated operating income of $1 million during the quarter, $6 million more than the previous quarter. This result was largely due to a substantial reduction in the delivered cost, which fell by 27% over the quarter, reflecting an adjustment in amortization expense of $2 million and progress in reducing costs. Offsetting those gains were reductions in shipments and a marginal decline in pricing. EBITDA was slightly positive for the quarter, an improvement of $3 million when compared to the third quarter.

For the year, the segment reported an operating loss of $10 million, and negative EBITDA of $5 million.

Wood Products

The wood products segment generated operating income of $17 million in the quarter, compared to $36 million against the previous quarter. While prices slipped by $4 per thousand board feet to $327, the delivered cost increased by $29 per thousand board feet, prompted by seasonally higher fiber usage and higher operating expenses. Shipments were 503 million board feet during the quarter, very close to the third quarter. EBITDA for the segment was $25 million, compared to $43 million in the third quarter. Finished goods inventory increased slightly, by 3 million board feet, or 2%, to 124 million board feet.

For 2016, the wood products segment reported operating income of $69 million, up significantly from the $2 million reported for the previous year. This performance is explained mainly by the weaker Canadian dollar, which resulted in $32 per thousand board feet drop in our delivered cost. Our profitability was also supported by incremental volumes from Ontario's Atikokan and Ignace sawmills and higher efficiency across our other facilities. Shipments for the year were 1.8 billion board feet, 10% higher than the previous year. Consequently, the segment generated $100 million of EBITDA, a significant increase from $39 million in 2015.    

Newsprint

The newsprint segment generated operating income of $1 million in the quarter, compared to an operating loss of $8 million in the third quarter. Our overall transaction price slipped by $3 per metric ton to $512 per metric ton during the period, as structural demand declines continued and weakening global currencies made North American producers less competitive. However, shipments rose, mainly in North America, by 23,000 metric tons. Supported by the higher volumes, the delivered cost fell by $19 per metric ton compared to the previous quarter. EBITDA more than doubled when compared to the third quarter, reaching $19 million. Finished goods inventory was unchanged from the prior period at 105,000 metric tons.  

On an annual basis, the newsprint segment reported an operating loss of $15 million, an improvement of $8 million from the previous year. The year-over-year transaction price was lower by $8 per metric ton, as challenging overseas market conditions, weaker global currencies, and lower demand negated pricing gains in domestic markets. Delivered costs, on the other hand, fell by 2%, or $11 per metric ton over the same period, mainly resulting from lower power and steam costs and a favorable foreign exchange impact. Shipments declined by 7%, resulting primarily from the shutdown of a paper machine at our Augusta (Georgia) facility in 2016 and targeted downtime at certain facilities to balance production with customer orders, mostly for export markets. EBITDA reached $59 million for the year.  

Specialty Papers

The specialty papers segment recorded operating income of $4 million in the fourth quarter, an improvement of $6 million when compared to the previous quarter. As expected, demand continues to decline for most product grades. This, combined with seasonal effects, resulted in a reduction in shipments, which declined by 29,000 short tons, and pricing, which slipped by $7 per short ton. However, the delivered cost went down by $23 per short ton, mainly resulting from lower chemical expenses. Consequently, EBITDA rose by $6 million against the previous quarter, reaching $15 million. Finished goods inventory ended the quarter at 92,000 short tons, an increase of 17,000 short tons.   

On a year-over-year basis, the segment recorded a decline of $4 million in operating income, falling to $25 million for 2016. The change is mostly the result of lower demand, which negatively impacted overall pricing by $28 per short ton, and a 4% reduction in shipments, which ended the year at 1.5 million short tons. The delivered cost improved when compared to 2015, explained mostly by the favorable impact of a weaker Canadian dollar and lower depreciation and amortization resulting from the asset impairment recorded at our Catawba facility in the last quarter of 2015. Annual EBITDA for the segment was $70 million.

Consolidated Quarterly Operating Income Variance Against Year-Ago Period

The company recorded an operating loss of $18 million for the fourth quarter, compared to an operating loss of $226 million in the year-ago period. This improvement was largely the result of the impairment of assets at the Catawba facility in the fourth quarter of 2015. In addition, reductions in pension and OPEB costs ($22 million), depreciation and amortization ($12 million), as well as selling, general and administrative expenses ($11 million) were also lower when compared to the same period in 2015.   

The average transaction price for market pulp and specialty papers fell by 5% and 4% respectively, while wood products rose by 10% and newsprint increased by 6%, resulting in an overall favorable variance of $10 million on pricing when compared to last year.

Shipments rose by 10% in market pulp, mostly through incremental production from the continuous digester at Calhoun (Tennessee). Similarly, wood products shipments rose by 13% to reach 503 million board feet, the result of production improvements in Atikokan, Ignaceand a number of our other wood product facilities.

Conversely, shipments of newsprint and specialty papers both declined by 11%, largely the result of the closure of a newsprint machine at Augusta in May of 2016 and incremental downtime at our Thorold (Ontario) newsprint facility, as well as reduced specialty papers volumes owing to structural declines in demand.  

Inventories have increased in both newsprint and specialty papers, by 15% and 5%, respectively, while falling by 5% in wood products and remaining substantially unchanged in market pulp.

Corporate and Finance

During the quarter, the company borrowed an additional $35 million from its available revolving credit facilities to finance the investment in the Calhoun tissue facility. As a result, long-term debt rose to $762 million, representing a net increase of $171 million for 2016. Cash and cash equivalents fell to $35 million, while liquidity remained solid at $468 million.

The net pension and OPEB liability on our balance sheet rose by $184 million in the quarter, which was mostly explained by a reduction in the applicable discount rate, partially offset by regular contributions.  

Outlook

Mr. Garneau added: "2016 was a critical year in our business transformation. We deployed significant capital and increased our leverage to accelerate our transformation towards more sustainable and profitable business segments. We are nearing the completion of these capital projects, and we remain confident in our ability to compete in these segments despite unfavorable short-term market dynamics. In market pulp, market conditions appear more favorable over the next two quarters given recent price increase announcements, but we anticipate the latter part of 2017 to be more challenging. In wood products, we anticipate that the North American market will continue its gradual recovery. In the paper segments, we expect that previously announced capacity reductions in the first quarter will support stable market dynamics, particularly in newsprint. From a financial perspective, the changes in of our pension funding obligations announced in December are expected to unlock significant liquidity in the next four years, which should provide additional financial flexibility.

For 2017, our priorities will be the ramp-up of the tissue operations at Calhoun, the continued deployment of our improvement plan at Atlas, and a sustained focus on operating performance to maximize profitability in demand-challenged paper markets. Finally, as we move through the Canada-U.S. trade dispute for supercalendered paper and lumber, our capital expenditures will be lowered and opportunities to reduce net debt will be identified with the goal of decreasing our leverage."


February 27, 2017
By Resolute Forest Products Inc.