By: The Working Forest Staff
MONTREAL — Resolute Forest Products Inc. has reported net income for the quarter ended December 31, 2017, of $13 million, or $0.14 per share, compared to a net loss of $45 million, or $0.50 per share, in the same period in 2016.
Sales were $898 million in the quarter, an increase of $9 million from the fourth quarter of 2016. Excluding special items, the company reported net income of $14 million, or $0.15 per share, compared to a net loss, excluding special items, of $7 million, or $0.08 per share, in the fourth quarter of 2016.
For the year, the company reported a GAAP net loss of $84 million, or $0.93 per share, compared to a net loss of $81 million, or $0.90 per share, in 2016. Sales were $3.5 billion, down 1%, from the previous year. Excluding special items, the company reported net income of $12 million, or $0.13 per share, compared to a net loss of $12 million, or $0.13 per share, in 2016.
“An otherwise solid quarter was impacted by the ongoing restructuring at our Calhoun paper operations, as well as maintenance outages at several locations. Also, the appreciation in our share price in the quarter, and company performance increased our share-based compensation expense,” said Richard Garneau, president and chief executive officer. “Overall, we are pleased with the performance of our lumber and newsprint segments, as well as our pulp business, which realized one of its best quarters.”
Non-GAAP financial measures, such as adjustments for special items and adjusted EBITDA, are explained and reconciled below.
Resolute also announced the selection and appointment of Yves Laflamme as the company’s new president and chief executive officer, and a member of the Board of Directors, succeeding Richard Garneau.
Operating Income Variance Against Prior Period
The company recorded operating income of $54 million in the quarter, an improvement of $6 million compared to the third quarter of 2017. The company’s operating results benefitted from higher selling prices across most segments ($29 million), a gain on the disposition of assets of our Mokpo (South Korea) paper mill, and lower closure-related costs. Despite higher shipments in market pulp and newsprint, overall volumes decreased, reflecting lower shipments of specialty papers following the closure of two paper machines at Calhoun (Tennessee), and seasonally lower volumes in wood products. Operating results were also unfavorably affected by higher planned maintenance costs, and seasonally higher fuel expenses, and fiber costs. As a result of the company’s performance and the 119% increase in share price in the quarter, an $8 million increase in share-based compensation expense was recorded in the fourth quarter.
The company reported operating income of $49 million in 2017, compared to a loss of $26 million in 2016, mostly due to higher selling prices ($191 million). The average transaction price increased by 23% for wood products ($148 million), 6% for market pulp and 2% for newsprint, offset only in part by a decrease in specialty papers. The improvement in overall manufacturing costs achieved as a result of the company’s restructuring initiatives ($79 million), and the decrease in total pension and other postretirement benefit (“OPEB“) expenses ($21 million) were partially offset by higher natural gas pricing, increased fiber costs, and additional maintenance ($45 million). Freight costs also rose in the year ($33 million), largely because of increases in rates, shipping distances and various transportation issues related to the shortage of truck drivers. Overall volumes were lower as a result of capacity rationalizations in newsprint and specialty papers,but were higher in wood products and market pulp. The stronger Canadian dollar ($20 million), as well as higher start-up costs ($19 million) and inventory write-downs related to closures ($17 million) also unfavorably impacted the company’s results.
Operating income in the market pulp segment was $37 million, $18 million more than the third quarter. Realized pricing continued to increase in the quarter, reaching $678 per metric ton, a rise of $28 per metric ton, or 4%, as market dynamics remained solid. Shipments rose by 40,000 metric tons to 388,000, mostly because of incremental market pulp production at Calhoun, following the closure of two paper machines, and the absence of annual maintenance outages in the quarter. Finished goods inventory fell by 11,000 metric tons. The operating cost per unit (the “delivered cost“) improved by $12 per metric ton, largely because of higher volumes, offset in part by an increase in planned maintenance outages. EBITDA per unit improved by $35 per metric ton from the previous quarter, reaching $113 per metric ton, or $44 million.
For 2017, the segment generated operating income of $79 million, a $42 million improvement over 2016. The average transaction price improved by $37 per metric ton, or 6%, reflecting stronger demand for all grades, while shipments were also higher by 37,000 metric tons, or 3%, mostly at Calhoun. The delivered cost, however, increased by $9 per metric ton, as a result of higher natural gas pricing, higher recovered paper prices and lower contribution from the Saint-Félicien (Quebec) cogeneration facility due to an increase in fuel costs. Higher pricing and shipments more than compensated for the increase in costs, resulting in a 49% increase in EBITDA, to $110 million, or $77 per metric ton, compared to $53 per metric ton in 2016. This reflects EBITDA margins of 12% and 9%, respectively. Year-end finished goods inventory was essentially unchanged.
Operating results of the tissue segment, which continues to include only the former Atlas tissue operations, improved by $1 million compared to the third quarter, reflecting higher overall pricing of $50 per short ton, largely because of product mix. Despite the improvement in manufacturing costs, mainly attributable to the impact of Hurricane Irma in the third quarter, the delivered cost remained essentially unchanged due to lower volumes. Inventories increased by 3,000 short tons to 13,000 short tons.
For the year, the segment reported an operating loss of $6 million, an improvement of $4 million over 2016. The difference reflects primarily a decline in delivered cost of $164 per short ton, or 9%.
The wood products segment generated operating income of $57 million in the quarter, compared to $64 million in the previous quarter. The decrease reflects a 65 million board feet reduction in shipments, or 12%, largely due to lower seasonal construction activity, uncertainty related to the announcement of the final duty rates, and lower production at the Thunder Bay (Ontario) sawmill due to a fire in the kiln boiler. The decrease in operating income also includes an increase in the delivered cost of $27 per thousand board feet, mostly as a result of higher fiber costs, and lower volumes. These unfavorable elements were almost entirely offset by the rise in average transaction price, up another 6% this quarter, to $438 per thousand board feet. This reflects a 10% increase in random lengths #2 and better reference price, offset in part by a 4% decline in stud grades. EBITDA for the segment was $65 million, or $139 per thousand board feet, compared to $73 million, or $137 per thousand board feet, in the previous quarter. Finished goods inventory increased by 2 million board feet to 124 million board feet.
Operating income for the year was $186 million in the wood products segment, $117 million higher than in 2016. The increase is almost entirely due to the significant rise in average transaction price, up by $73 per thousand board feet, or 23%, as well as the 167 million board feet increase in shipments, or 9%, due to better productivity and stronger demand for our products. These favorable elements were only partially offset by higher fiber and operating costs, and the unfavorable effect of the stronger Canadian dollar. EBITDA for the segment was $219 million in 2017, compared to $100 million in 2016, a 119% increase, reflecting EBITDA margins of 27% and 17%, respectively.
The newsprint segment incurred an operating loss of $6 million in the quarter, unchanged from the third quarter. Favorable market conditions pushed the average transaction price up by $14 per metric ton in the quarter, to $525 per metric ton. Despite the production capacity reduction related to the paper machine closures in Calhoun, shipments were also up by 22,000 metric tons as finished goods inventory decreased by 20,000 metric tons. These items were offset by a $14 per metric ton increase in the delivered cost. The benefit of lower fixed costs following the Calhounrestructuring was not enough to offset higher maintenance costs, largely due to equipment failures, and the lower contribution from the cogeneration assets as a result of the planned annual outage in the quarter at our Thunder Baymill. EBITDA increased by $1 million to $11 million for the quarter, equivalent to $27 per metric ton, largely unchanged from the third quarter.
Newsprint recorded an operating loss of $23 million in 2017, $7 million more than in 2016, as shipments decreased by 354,000 metric tons, or 18%, reflecting capacity closures in Calhoun, Mokpo, Thorold (Ontario) and Augusta (Georgia). Although the resulting improvement in costs due to fixed costs savings more than offset higher natural gas pricing, planned maintenance outages and freight, the delivered cost increased by $13 per metric ton compared to 2016 due to lower volumes. Combined with the year-over-year increase in average transaction price of $8 per metric ton, EBITDA decreased by $15 million to $43 million in 2017. Finished goods inventory at year-end was 27,000 metric tons, or 26% lower.
The specialty papers segment incurred an operating loss of $13 million in the fourth quarter, compared to operating income of $7 million in the third quarter. The average transaction price remained unchanged, but shipments fell by 36,000 short tons, largely due to lower production following the closure of two paper machines in Calhoun at the end of the third quarter, offset in part by the restart of a paper machine at Alma (Quebec). Despite the reduction in fixed costs, the complex restructuring at our Calhoun paper operations, which required significant employee re-training, combined with several maintenance outages, pushed the delivered cost up $64 per short ton, to $703 per short ton. Lower volumes and higher costs reduced EBITDA to negative $2 million, or $7 per short ton, a decrease of $61 per short ton compared to the previous quarter. Finished goods inventory fell by 20,000 short tons.
The segment recorded an operating loss of $9 million during the year, compared to operating income of $19 million in 2016. The year-over-year average transaction price decreased by $14 per short ton, or 2%, and shipments dropped 171,000 short tons, or 11%, as a result of the closure of paper machines at Catawba (South Carolina) and Calhoun. These items were partially offset by the favorable effect of restructuring initiatives at Catawba, as well as lower chemical pricing. The delivered cost was $6 per short ton higher due to the effect of volume. As a result, EBITDA fell from $64 million in 2016 to $36 million in 2017. Finished goods inventory at year-end was 26,000 short tons lower, or 28%, than 2016.
Consolidated Quarterly Operating Income Variance Against Year-Ago Period
The company generated an operating income of $54 million in the fourth quarter, compared to an operating loss of $18 million for the same period in 2016, reflecting an $88 million increase in pricing. As a result of favorable market dynamics, the average transaction price increased by 34% for wood products, 15% for market pulp, and 3% for newsprint. The improvement in operating income also included the elimination of fixed costs due to capacity closures in our newsprint and specialty papers segments ($37 million), lower closure-related costs ($22 million) and a gain from the disposition of the assets of our Mokpo paper mill ($13 million).
These favorable items were partially offset by an overall decrease in volume associated with the restructuring initiatives of our paper segments, the unfavorable impact of the stronger Canadian dollar ($14 million), higher freight costs ($14 million), and an increase in share-based compensation expense ($8 million) resulting from the company’s performance and increase in share price in the fourth quarter of 2017.
Corporate and Finance
Since the substantial completion of the Calhoun tissue project at the end of the first quarter of 2017, we have reduced our outstanding borrowings under our revolving credit facilities by $99 million, including net repayments of $51 millionduring the fourth quarter. Total debt at the end of the quarter decreased to $789 million, while liquidity rose by $18 million, to $418 million.
During the fourth quarter, $28 million was invested in capital expenditures, for a total capital spending of $164 millionfor the year, including $90 million on the Calhoun tissue project. Cumulative duty deposits recorded on our balance sheet at year-end was $75 million, $49 million attributable to supercalendered paper and $26 million to softwood lumber.
In December, the company acquired the remaining 49 percent equity interest held by The New York Times Company in Donohue Malbaie Inc. for a cash purchase price of $15 million, and disposed of the assets of its permanently closed newsprint mill in Mokpo for a total consideration of $18 million.
Despite the decrease in the applicable discount rate and the unfavorable currency impact, the net pension and OPEB liability on our balance sheet increased by $14 million at year-end, to $1.3 billion, largely the result of strong asset returns and our ongoing pension contributions. Total pension contributions were $132 million in 2017, $30 million lower than 2016, as a result of the company’s voluntary exit from the Quebec funding relief regulations and other steps undertaken to optimize our contributions.
The enactment of the U.S. tax reform did not have a significant impact on our 2017 financial results.
“While measures are being implemented to mitigate the impact of truck driver shortages, we expect this transportation issue to continue to affect all business segments going into 2018. Market fundamentals remain favorable in our pulp and lumber segments. In paper, we expect positive price momentum to carry into the first quarter. Additional gains are also anticipated from our restructuring initiatives at Calhoun and the restart of a paper machine at Alma, and believe our paper business is positioned to improve, at least in the short term based on current supply and demand balance. Initiatives undertaken in 2017 to redefine our tissue sales and marketing strategy, including broadening our product offering, rebranding as Resolute Tissue, and reinforcing the sales force, are beginning to yield results, with additional sales volume secured for 2018. We continue to manage through U.S. capricious and arbitrary trade measures, impacting our lumber and paper markets, and appreciate the recent advocacy by the print media and others objecting to countervailing duties on uncoated groundwood paper,“ added Mr. Garneau.