Resolute Forest Products Inc. reported a net loss for the quarter ended March 31, 2015, excluding special items, of $30 million, or $0.32 per share, compared to a net loss, excluding special items, of $26 million, or $0.27 per share, in the same period in 2014. Sales were $920 million in the quarter, down $96 million, or 9%, from the first quarter of 2014. GAAP net loss was $33 million, or $0.35 per share, compared to a net loss of $50 million, or $0.53 per share, in the first quarter of 2014.
– Q1 adjusted EBITDA of $50 million US $
– Cash remains strong at $324 million; liquidity of almost $800 million US $
– Excluding special items, net loss of $0.32 per share / GAAP net loss of $0.35 per share US $.
“This quarter’s results were most affected by the combination of lower price realizations in our market pulp and wood products businesses, together with intensifying challenges in the global newsprint market,” said Richard Garneau, president and chief executive officer. “Even as market prices have retreated from recent highs this quarter, we remain bullish on our lumber and pulp businesses. We’re confident that we will add significant value with our investments to build capacity, including the two new Ontario sawmills and the Calhoun pulp digester project. We believe in the long-term global pulp market fundamentals, including its underlying growth drivers like tissue production in North America, which has been a growing consumer of our pulp. Our recent newsprint and specialty paper capacity closures, on the other hand, show our efforts to adapt to changing market dynamics in the paper businesses, which will continue to evolve. Our clear objective is to generate as much value as we can from these assets, by concentrating production to maximize the use of our most cost-effective mills, eliminating fixed costs and avoiding costly rotating downtime.”
Non-GAAP financial measures, such as adjustments for special items and adjusted EBITDA, are explained and reconciled below.
Operating Income Variance Against Prior Period
The company recorded an operating loss of $15 million in the quarter, compared to a $93 million loss in the fourth quarter. Adjusted EBITDA was $50 million in the quarter, a $56 million decrease from the fourth quarter. The company’s results were adversely affected by lower newsprint, pulp and lumber pricing ($34 million, not including the unfavorable effect of the weaker Canadian dollar), lower pulp and paper volumes ($23 million) and an increase in pension and other postretirement benefit (or “OPEB”) expenses ($15 million). The increase in pension and OPEB expenses, which does not have a cash impact, relates to the $330 million increase in balance sheet net pension and OPEB liability in 2014. In the fourth quarter, the company incurred $131 million of accelerated depreciation and other closure-related costs, most of which were non-cash costs related to the permanent newsprint capacity closures announced in the quarter for Iroquois Falls, Ontario, Baie-Comeau, Québec, and Clermont, Québec, as well as the permanent closure of the Laurentide specialty paper mill in Shawinigan, Québec.
Operating income in the market pulp segment was $10 million in the first quarter, $3 million lower than the fourth quarter. The overall average transaction price slipped by $29 per metric ton, or 4%, as a result of lower average transaction prices in softwood and fluff grades. Shipments were down by almost 7%, or 23,000 metric tons, because of lower softwood shipments, offset in part by an additional shipment of fluff pulp delayed from the fourth quarter. Overall shipments fell short of target in the segment, which has been more vulnerable to pressure from ongoing misinformation campaigns by certain environmental activist groups, and also because of unscheduled outages at certain mills. Finished goods inventory rose by 9,000 metric tons. The operating cost per unit (the “delivered cost”) fell by over 3%, mostly because of lower maintenance costs and higher contribution from the Saint-Félicien, Québec, cogeneration facility following the mill’s annual maintenance outage in the fourth quarter, offset in part by higher pension and OPEB expenses.
The wood products segment generated operating income of $5 million in the quarter, $13 million lower than the fourth quarter. Shipments rose by 1%, to 393 million board feet, but the average transaction price fell by $25 per thousand board feet, or 7%, reflecting lower market prices. The delivered cost in the segment was 3% higher, to $342 per thousand board feet, as a result of the recognition, in the previous quarter, of additional tax credits in connection with infrastructure investments, which we did not recognize in the first quarter. Finished goods inventory increased by 14%, reflecting the softer market conditions in the quarter.
The newsprint segment generated an operating loss of $6 million in the quarter, compared to operating income of $15 million in the fourth quarter. Shipments were 63,000 metric tons lower, or 11%, reflecting seasonally lower demand and the impact of the company’s 2014 capacity rationalization initiatives to, among other things, adapt to changing market dynamics. The overall average transaction price for newsprint fell by $34 per metric ton, or 6%. These changes largely reflect the ongoing challenges for North American producers in the global newsprint business, who face an accelerating pace of global structural decline, a currency disadvantage in export markets because of the strong U.S. dollar, and very low operating rates outside North America. The delivered cost in the segment was essentially unchanged, reflecting the favorable effect of the weaker Canadian dollar and lower fixed costs following the capacity closures, offset by higher power and steam costs, mostly seasonal, and higher pension and OPEB expenses. Finished goods inventory was down by 9%.
The company announced in December a reduction of 465,000 metric tons of annual capacity with the permanent closure of three newsprint machines in Canada. Its goal is to optimize assets by concentrating production to maximize the use of its most cost-effective mills, eliminate fixed costs and avoid costly rotating downtime.
Operating income in the specialty papers segment was $1 million in the first quarter, down by $3 million from the fourth quarter. The average transaction price was essentially unchanged, but shipments fell by 14%, or 61,000 short tons, due mostly to seasonally lower demand and the company’s 2014 capacity rationalization initiative. The Laurentide mill was closed in October, representing 191,000 metric tons of annual capacity. The delivered cost in the quarter was also essentially unchanged, favorably affected by the weaker Canadian dollar and lower natural gas pricing, but offset by seasonally higher power and steam costs, production inefficiencies at certain mills and higher pension and OPEB expenses.
The company reported under “corporate and other” the higher pension and OPEB expenses associated with closed mills ($7 million), largely impacted by the higher pension and OPEB expenses associated with those mills, as well as certain selling, general and administrative expenses that were not allocated to the segments.
Consolidated Quarterly Operating Income Variance Against Year-Ago Period
The company recorded an operating loss of $15 million in the first quarter, compared to a loss of $33 million in the year-ago period. The year-ago period was significantly affected by an abnormally cold winter, which caused a material increase in costs and approximately 30,000 metric tons of lost production, as well as an additional 25,000 metric tons of non-weather-related operational disruptions. Although this year’s winter was also harsh, the company mitigated its impact by implementing measures to reduce its exposure to these types of events.
Overall pricing this quarter was lower ($42 million) because of a 9% drop in the average transaction price for newsprint, 8% for wood products and 4% for market pulp. Despite an 11% increase in shipments of wood products due to the company’s growth initiatives, overall volume was down from the year-ago period, reflecting a 2% drop in market pulp shipments, 8% in newsprint and 9% in specialty. Manufacturing costs were unchanged in the quarter after adjusting for the favorable effect of the abnormally cold winter of 2014 ($40 million), the lower volume ($34 million) and the weaker Canadian dollar ($30 million). This reflects the higher pension and OPEB expenses ($12 million), as well as higher power prices and steam costs, offset by the benefits of the company’s asset optimization initiatives, and lower maintenance costs.
Mr. Garneau added: “Since peaking in the second quarter of last year, our realized prices for market pulp are down, on average, about $60 per metric ton, but we expect that market fundamentals will support better performance in the segment for the balance of the year. Given lower-than-expected first quarter U.S. housing starts, the drop in North American lumber exports to Asia, the strong U.S. dollar and the reintroduction of export duties and quotas under the Canada-U.S. Softwood Lumber Agreement of 2006, our near-term outlook for lumber is more uncertain, but our medium to long-term outlook continues to be positive. We expect a moderate uptick in specialty paper shipments, and also fairly stable overall pricing conditions into the second quarter. We would also expect to maintain our share of newsprint volumes this quarter, but pricing is likely to remain under pressure given the accelerating pace of global structural decline, the currency disadvantage in export markets because of the strong U.S. dollar, and very low operating rates outside North America.”
In the picture: Richard Garneau, President and Chief Executive Officer of Resolute Forest.