Mr. Yves Laflamme reports
RESOLUTE REPORTS RECORD PRELIMINARY THIRD QUARTER 2018 RESULTS AND DECLARES SPECIAL DIVIDEND
Resolute Forest Products Inc. has released its third quarter 2018 financial results. The company had net income for the quarter ended Sept. 30, 2018, of $117-million, or $1.25 per diluted share, compared with $24-million, or 26 cents per share, in the same period in 2017. Sales were $974-million in the quarter, an increase of $89-million from the same period last year. Excluding special items, the company reported net income of $96-million, or $1.03 per share, compared with $31-million, or 34 cents per share, in the third quarter of 2017. Unless otherwise indicated, all dollar amounts are in U.S. dollars.
Highlights:
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Q3 generally accepted accounting principles net income of $117-million, or $1.25 per diluted share;
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Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $189-million;
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Net debt to trailing 12-month adjusted EBITDA dropped to 1.0 -- liquidity at $654-million;
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Completion of the sale of Fairmont for $62-million;
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Special dividend of $1.50 per share.
"Our best pulp quarter, combined with continued positive market dynamics for paper, helped offset the effects of a weaker lumber market, leading to another quarter of record results and a further reduction in leverage. Our continued focus on improving operational performance also resulted in a notable increase in the profitability of our
specialty papers business," commented Yves Laflamme, president and chief executive officer of Resolute Forest Products.
"We recently entered into an agreement to sell the Catawba paper and pulp mill for $300-million and, today, we will complete the previously announced sale of the Fairmont recycled pulp mill for proceeds of $62-million, subject to final working capital adjustments. These transactions allow us to maximize the value of these assets and redeploy capital to increase shareholder value. We remain focused on growing our core businesses in line with our transformation strategy, reducing debt and returning capital to our shareholders," added Mr. Laflamme.
Operating income variance against prior period
Consolidated
Resolute Forest Products reported operating income of $135-million in the quarter, compared with $121-million in the second quarter of 2018. Despite weaker lumber markets, overall results increased by $14-million, supported by higher pricing and improved productivity in the company's pulp and paper operations. Higher manufacturing expenses, mostly associated with rising fibre costs, were mitigated by the favourable impact of the weaker Canadian dollar and improved freight costs.
Market pulp
Operating income in the market pulp segment was $57-million, $16-million higher than the second quarter. The average transaction price continued to rise, up another $37 per metric ton to $784. Shipments also increased by 14,000 metric tons, largely due to improved productivity. Despite higher recovered paper prices and extended downtime planned at the Saint-Felicien mill (Quebec), the operating cost per unit decreased to $629 per metric ton, mostly due to higher volume. Consequently, record EBITDA of $64-million, or $174 per metric ton, was realized this quarter.
A significant portion of the strategic project at the Saint-Felicien mill to increase production capacity, decrease costs and further reduce greenhouse gas emissions was completed as planned. Production at the mill restarted in mid-October, 2018.
Tissue
The tissue segment incurred an operating loss of $10-million, unchanged from the previous quarter. Sales continued to improve, rising another 5 per cent, driven by more converted product shipments and an increase in the average transaction price of $34 per short ton. However, the delivered cost remained elevated in the quarter at $2,003 per short ton, as Resolute Forest Products continues to focus on ramping up both the tissue machine and converting lines at its Calhoun (Tennessee) facility. As a result, EBITDA for the segment remained at negative $5-million.
Wood products
Compared with the second quarter, operating income in the wood products segment dropped by $34-million to $45-million, largely due to weaker pricing. Resolute Forest Products' average transaction price retreated from record levels in the second quarter to $457 per thousand board feet this quarter, down 11 per cent, or $57 per thousand board feet. Shipments also decreased by 49 million board feet, pushing finished goods inventory up to 162 million board feet. Despite higher log costs and lower sales volume, the delivered cost remained unchanged at $355 per thousand board feet, mainly due to the favourable effect of the weaker Canadian dollar and lower freight costs, as shipments to the United States decreased. EBITDA for the segment decreased to $53-million, compared with $86-million in the second quarter.
Newsprint
At $32-million in the third quarter, newsprint generated $14-million more operating income than the second quarter. This increase is attributable to the rise in average transaction price, up $45 to $629 per metric ton. Timing of export sales impacted shipments, which decreased by 22,000 metric tons, and contributed to the 11,000-metric-ton rise in finished goods inventory. The delivered cost increased by $5 per metric ton, mainly due to higher power costs associated with abnormally warm weather and maintenance outages. As a result, EBITDA increased by $13-million to $48-million for the quarter, equivalent to $130 per metric ton.
Specialty papers
The specialty papers segment generated operating income of $26-million in the quarter, a $22-million improvement over the second quarter. Sales rose by 10 per cent as pricing increased by $36 per short ton to $737, and shipments were 14,000 short tons higher due to better productivity and the absence of planned maintenance outages at Resolute Forest Products' integrated pulp and paper mills. The delivered cost fell by 6 per cent, or $41 per short ton, resulting from improved efficiency as well as lower maintenance and freight costs. EBITDA rose to $38-million, or $131 per short ton, compared with $16-million in the previous quarter. Finished goods inventory was 11 per cent higher this quarter to meet the expected seasonal increase in demand in the fourth quarter for supercalendered paper.
Consolidated quarterly operating income variance against year-ago period
Resolute Forest Products' operating income improved by $89-million, compared with the third quarter of 2017. Favourable pricing in all segments added $134-million to the company's results, compared with 2017, as the average transaction price increased by 23 per cent for newsprint, 21 per cent for market pulp, 12 per cent for specialty papers and 11 per cent for wood products. In addition, no closure and related inventory writedown charges were recorded in the quarter, compared with $19-million in the year-ago period.
These favourable items were partially offset by an increase in manufacturing costs of $46-million, mainly resulting from higher market-related fibre costs and maintenance. Results were also impacted by lower volume ($5-million), mainly due to weaker lumber demand, and a 13-per-cent rise in freight expense ($14-million), both of which are largely higher rates.
Corporate and finance
During the quarter, the company generated $131-million of cash from operations. In addition, following the revocation of the countervailing duty order on supercalendered paper, $25-million of the $61-million of cash deposits were returned with interest. After $41-million of capital expenditures and $21-million of lumber duty deposits, $30-million of debt was repaid, leaving nothing drawn on the revolving credit facilities on Sept. 30, 2018. As a result, liquidity rose to $654-million and Resolute Forest Products' net debt to trailing 12-month adjusted EBITDA dropped to a multiple of 1.0.
Cumulative duty deposits of $130-million were recorded on Resolute Forest Products' balance sheet, including $88-million for softwood lumber. Following the termination of cash deposit requirements for the company's paper products, outstanding deposits of $36-million for supercalendered paper and $6-million for uncoated groundwood papers will be refunded, with interest, largely in the fourth quarter.
On Aug. 14, 2018, Moody's Investors Service upgraded the company's corporate family rating to Ba3 and affirmed a stable outlook.
Outlook
"Our view on pulp markets remains positive through the fourth quarter, supported by continued market supply disruptions and steady demand growth. For lumber, the recent price declines are expected to negatively impact our results in the fourth quarter. In the medium to long term, we believe that the ongoing recovery in U.S. housing starts and the growth in the repair and renovation segment should improve demand. While paper markets continue to be impacted by the structural decline in demand, we expect the implementation of previously announced price increases for some of our paper products to continue to favourably impact our results in the fourth quarter. For tissue, we continue to focus on operational improvements to support our sales growth," commented Mr. Laflamme.
Special dividend
The company has declared a special cash dividend of $1.50 per share. The special dividend will be payable on Dec. 20, 2018, to shareholders of record at the close of business on Dec. 6, 2018.
Earnings conference call
The company will hold a conference call to discuss the financial results at 9 a.m. ET today. The public is invited to join the call at 877-223-4471 at least 15 minutes before its scheduled start time. A simultaneous webcast will also be available using the link provided at the Resolute Forest Products website. A replay of the webcast will be archived on the company's website. A phone replay will also be available until Nov. 15, 2018, by dialling 800-585-8367 and entering the conference ID 7256676.
Description of special items
SPECIAL ITEMS
(in millions)
Third quarter 2018 Third quarter 2017
Foreign currency translation gain - $(7)
Closure costs, impairment and other related charges - 8
Inventory writedowns related to closures - 11
Start-up costs - 3
Net (loss) on disposition of assets - (2)
Non-operating pension and OPEB credits $(13) (2)
Other (income) expense, net (14) 1
Income tax effect of special items 6 (5)
Total (21) 7
About Resolute Forest Products Inc.
Resolute Forest Products is a global leader in the forest product industry with a diverse range of products, including market pulp, tissue, wood products, newsprint and specialty papers, which are marketed in close to 70 countries. Resolute Forest Products owns or operates about 40 manufacturing facilities, as well as power generation assets, in the United States and Canada. Resolute Forest Products has third party certified 100 per cent of its managed woodlands to internationally recognized sustainable forest management standards.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share amounts)
Three months ended Sept. 30, Nine months ended Sept.30,
2018 2017 2018 2017
Sales $ 974 $ 885 $2,824 $2,615
Costs and expenses
Cost of sales, excluding depreciation, amortization
and distribution costs 628 628 1,881 1,945
Depreciation and amortization 54 52 161 153
Distribution costs 117 110 356 328
Selling, general and administrative expenses 40 43 125 122
Closure costs, impairment and other related charges - 8 1 80
Net gain (loss) on disposition of assets - (2) (4) (2)
Operating income (loss) 135 46 304 (11)
Interest expense (12) (13) (36) (36)
Non-operating pension and other postretirement
benefit credits 13 2 38 6
Other income, net 14 6 4 11
Income (loss) before income taxes 150 41 310 (30)
Income tax provision (33) (15) (111) (63)
Net income (loss), including non-controlling interests 117 26 199 (93)
Net income attributable to non-controlling interests - (2) - (4)
Net income (loss) attributable to Resolute Forest 117 24 199 (97)
Net income (loss) per share attributable to Resolute
Forest common shareholders
Basic 1.28 0.27 2.18 (1.07)
Diluted 1.25 0.26 2.14 (1.07)
We seek Safe Harbor.
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