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Resolute reports strong wood products segment in Q2

“This quarter’s performance was a clear improvement from the first quarter,” said Richard Garneau, president and chief executive officer. “The results of our wood products segment were strong given higher prices associated with the U.S. imposition of trade barriers, while our market pulp segment recorded a solid performance despite production curtailments associated with annual outages. In tissue, the improvement in our profitability continued but remained short of expectations. Paper segments continued to be impacted by adverse market conditions, particularly in specialty grades.”

Operating Income Variance Against Prior Period

Consolidated
The company recorded an operating loss of $47 million in the quarter, compared to an operating loss of $6 million in the first quarter of 2017, while adjusted EBITDA increased by $22 million over the same period, to $83 million.

The company’s operating results were positively impacted by overall increases in pricing, particularly in our wood products and market pulp segments. Those improvements were partially offset by lower volumes in our market pulp and paper segments, as well as higher maintenance expenses related to annual outages at a number of our facilities.

The company also incurred $60 million of non-cash impairment charges in the second quarter in connection with the indefinite idling of a paper machine at Catawba (South Carolina), as well as to reflect the write-down of assets at the Coosa Pines (Alabama) facility.

Market Pulp
Operating income in the market pulp segment was $16 million, $9 million more than the first quarter. Following price increases implemented from the beginning of the year, realized prices in the segment rose by 7%, or $39 per metric ton, to $632 per metric ton. Shipments to third parties fell by 17,000 metric tons compared to the first quarter, largely resulting from annual outages in Calhoun (Tennessee), Thunder Bay (Ontario) and Coosa Pines, and lower demand for recycled grades during the period. The operating cost per unit (the “delivered cost”), rose by $8 per metric ton, reaching $583 per metric ton, resulting mostly from the maintenance outages. EBITDA per unit was $71 per metric ton compared to $42 per metric ton in the previous quarter. Finished goods inventory was substantially flat when compared to the first quarter.

Tissue
Our tissue segment, which included only the Atlas Tissue operations in the second quarter, reported a marginal improvement in its operating loss compared to the first quarter. The overall transaction price rose by $4 per short ton, as gains in converted products, particularly in retail, were partially offset by declining pricing for parent rolls. The delivered cost continued to decrease and fell by $6 per short ton. Overall shipments rose by 1,000 short tons. Consequently, quarterly EBITDA also rose marginally when compared to the previous quarter. Finished goods inventory of 8,000 short tons was unchanged from the previous quarter. We expect to include the results of our Calhoun tissue operations in our tissue segment in the fourth quarter of 2017.

Wood Products
The wood products segment recorded operating income of $45 million for the quarter, an improvement of $25 million against the previous quarter. Despite market unpredictability from the imposition of countervailing and anti-dumping duties in the quarter, shipments increased, reaching 509 million board feet. The average transaction price rose by $36 per thousand board feet to $386. The delivered cost went down by $11 per thousand board feet, mostly resulting from improved log yields and better efficiency. EBITDA for the segment was $52 million, a $23 million increase compared to the previous quarter and equivalent to $102 per thousand board feet, an increase of $45 per thousand board feet. Finished goods inventory dropped by 15% to 125 million board feet.

Similar to duty deposits associated with exports of supercalendered paper to the United States, the company has recorded duty deposits of $4 million on exports of lumber in “Other assets” in its consolidated balance sheet. Consequently, EBITDA as reported for the wood products segment does not include any amounts related to softwood lumber duties.

Newsprint
The newsprint segment incurred an operating loss of $7 million in the quarter, compared to a loss of $4 million in the first quarter. Pricing remained roughly stable at $509 per metric ton. Shipments fell by 46,000 metric tons, mostly from the permanent closure of our newsprint mill in Mokpo (South Korea) late in the first quarter, as well as continued structural demand decline. The delivered cost in the segment rose by $6 per metric ton compared to the previous quarter, as the combined impact of higher planned maintenance and lower volumes were offset by reductions in fixed costs associated with the closure of Mokpo and seasonally lower energy expenses. EBITDA was $10 million for the quarter, equivalent to $25 per metric ton, compared to $27 in the previous quarter. Finished goods inventory rose by 7,000 metric tons.

Specialty Papers
The specialty papers segment recorded an operating loss of $7 million during the second quarter, a decline of $11 million from the previous quarter. The average transaction price was lower by $8 per short ton, as demand continued to decrease. Shipments fell by 4% compared to the first quarter, to 349,000 short tons. The combination of volume reductions as well as higher maintenance and chemical usage translated into an increase in our segment delivered cost of $26 per short ton. EBITDA for the segment was $4 million in the quarter, equivalent to $11 per short ton, down from $44 per short ton in the previous quarter. Finished goods inventory declined by 7% to 93,000 short tons.

Consolidated Quarterly Operating Income Variance Against Year-Ago Period
The company recorded an operating loss of $47 million for the second quarter, compared to an operating loss of $18 million for the same period in 2016. The difference is mostly explained by higher charges associated with the combination of closure costs for a paper machine at Catawba and the impairment charge recorded for our Coosa Pines mill when compared to the second quarter of 2016.

Overall pricing gains reached $36 million compared to the second quarter of 2016, excluding a $4 million favorable impact from foreign exchange, and are mostly the result of increases in our wood products and market pulp segments, which rose by 19% and 4% respectively. While the average transaction price for newsprint was up by 1%, tissue fell by 11% and specialty papers declined by 3%. Delivered costs also rose when compared to the year-ago period, the result of rising energy and fiber expenses, as well as less favorable distribution costs.

Lower sales volumes in all our segments except wood products led to an unfavorable impact of $16 million during the quarter compared to the year-ago period. While shipments in wood products rose by 14% compared to the same period last year, specialty papers and newsprint fell by 9% and 22% respectively.

Corporate and Finance
The company invested $47 million in fixed assets during the quarter, $33 million of which was spent on the Calhoun tissue project. Also, total countervailing duty deposits of $11 million in the second quarter were recorded on our balance sheet, of which $7 million were attributable to supercalendered papers and $4 million to lumber.

As a consequence of an improvement in our profitability compared to previous quarters, a decrease in working capital, and the winding down of capital spending for the Calhoun tissue project, $41 million was repaid on our revolving credit facilities. Total liquidity rose by $34 million during the quarter and remained solid at $414 million.

Outlook
Mr. Garneau added: “As our results continue to improve, we remain focused on our short-term priorities of increasing sales in our tissue segment, battling unfair U.S. countervailing and anti-dumping duties and managing our indebtedness and liquidity to be in a position to continue our long-term transformation. Now that the uncertainty surrounding trade duties in lumber has started to dissipate, we expect market conditions to remain favorable. In pulp, we are cautiously optimistic that market conditions will remain relatively favorable at least through the third quarter. In tissue, I am confident that our progress will accelerate in the short-term with the addition of Patrice Minguez to our leadership team. In our paper segments, ongoing global demand declines are expected to continue.”