MONTRÉAL - Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) today reported a GAAP net loss for the quarter ended June 30, 2016, of $42 million, or $0.47 per share, compared to a GAAP net loss of $4 million, or $0.04 per share, in the same period in 2015. Sales were $891 million in the quarter, down $35 million, or 4%, from the second quarter of 2015. Excluding special items, the company reported net income of $6 million, or $0.07 per share, compared to net income of $7 million, or $0.07 per share, in the second quarter of 2015.
"Despite challenging market conditions in certain of our business segments, we recorded a solid performance this quarter," said Richard Garneau, president and chief executive officer. "Our wood products segment has delivered significant improvements as markets continued their slow recovery. In our paper segments, we continue to demonstrate our ability to generate consistent value despite structurally challenging market conditions, while annual maintenance-related declines in pulp production more than offset benefits of rising market prices. Although our tissue operations continued to underperform and remain a key focus for the year, we are excited by the advancement of our Calhoun tissue project, as we achieve a key milestone this month with the commissioning of our first converting line."
Non-GAAP financial measures, such as adjustments for special items and adjusted EBITDA, are explained and reconciled below.
Operating Income Variance Against Prior Quarter
The company reported an operating loss of $18 million for the quarter, compared to a break even position in the first quarter. The company's operating results were positively impacted by higher realized prices across most grades ($10 million), particularly wood products, and reductions in costs of $15 million, mostly through gains in energy ($9 million), wood ($7 million) and chemical costs ($5 million). However, a strengthening of the Canadian dollar diminished the effect of these improvements, negatively impacting results by $9 million. In the quarter, there were $36 million of closure costs related to the permanent shutdown of a newsprint machine at the company's Augusta (Georgia) facility in May, $32 million of which represents accelerated depreciation. Adjusted EBITDA was $85 million, $26 million higher than the $59 million reported in the first quarter.
Operating income in the market pulp segment was $12 million in the second quarter, $8 million lower than the first quarter. The overall average transaction price rose by $6 per metric ton, or 1%, as seasonal supply and demand supported prices. But the operating cost per unit (the "delivered cost") was higher due to maintenance costs, as well as unfavorable foreign exchange impacts. As a result, the delivered cost, increased by $32 per metric ton during the quarter, to $575 per metric ton. Shipments were down by 7,000 metric tons, or 2% in the quarter. Inventories also fell, by 11,000 metric tons over the same period. This overall decline in production was mostly due to annual outages in Calhoun (Tennessee) and Coosa Pines (Alabama), as well as maintenance-related downtime in Saint-Félicien (Quebec) and Thunder Bay (Ontario).
Our tissue segment incurred an operating loss of $4 million for the quarter, $2 million more than the previous quarter. The overall transaction price increased by $71 per short ton. Our delivered cost increased by $149 per short ton compared to the first quarter, mostly due to productivity challenges as well as unforeseen maintenance and repair spending and other administrative costs. Negative EBITDA of $2 million was incurred in the period, $2 million less than the first quarter of 2016, which was breakeven. Finished goods inventory fell by 2,000 short tons to 3,000 short tons.
The wood products segment generated operating income of $20 million in the quarter, a $24 million improvement against the previous quarter. Shipments increased by 14%, to 445 million board feet, helped by good overall production and improved market demand. The average transaction price rose by $19 per thousand board feet, or 6%. The delivered cost in the segment was 12% lower, at $278 per thousand board feet, mostly as a result of the first quarter weakness in the Canadian dollar, which favorably impacted costs only in the second quarter, as well as improved productivity in most of our sawmills, including our newer facilities in Ontario, and better fiber usage. EBITDA for the segment was $29 million, or $65 per thousand board feet, compared to $8 in the first quarter and a trailing twelve-month average of $31 per thousand board feet. Finished goods inventory increased by 2%.
The newsprint segment incurred an operating loss of $3 million in the quarter, compared to an operating loss of $5 million in the first quarter. The pricing environment continued to be favorable during the quarter, prompting an increase of $9 per metric ton in the overall transaction price against the first three months of the year. The delivered cost, on the other hand, increased by $7 per metric ton, to $511 per metric ton, fueled by unfavorable foreign exchange impacts and lower volume. Shipments declined by 9,000 metric tons, or 2%, as a result of the permanent closure of one paper machine at Augusta during the quarter as well as market-related downtime taken at our Thorold (Ontario) facility. EBITDA was $16 million for the quarter, equivalent to $31 per metric ton, compared to $29 in the previous quarter and $19 per metric ton on average for the last twelve months. Finished goods inventory declined by 8,000 metric tons to 96,000 metric tons, a reduction of 8% against the previous quarter.
Operating income in the specialty papers segment was $16 million in the second quarter, up by $9 million from the $7 million recorded in the first quarter. The average transaction price was lower by $11 per short ton, mainly as a result of unfavorable markets in coated grades and, to a lesser extent, supercalendered papers. Shipments declined by 3% or 11,000 short tons, following general market trends across specialty paper grades. Despite the lower volumes, the delivered cost in the quarter improved against the prior period, falling to $625 per short ton, a 6% decline. This improvement was prompted mostly by greater operating efficiencies as well as stronger hydroelectric generation. As a result, EBITDA for the segment strengthened by $6 million, reaching $26 million, equivalent to $68 per short ton, $17 per short ton higher than the first quarter, and also higher than the $56 average per short ton recorded over the last twelve months. Finished goods inventory was up by 13%, reaching 88,000 short tons.
Consolidated Quarterly Operating Income Variance Against Year-Ago Period
The company recorded an operating loss of $18 million for the second quarter, compared to operating income of $16 million in the year-ago period. Key to the quarter's reported performance was a non-recurring $37 million closure and impairment related charge, almost all of which resulted from the permanent shutdown of a newsprint machine at the Augusta facility during the quarter. A decline in sales arising mostly from comparatively weaker prices was almost entirely offset by reductions in costs and the weaker Canadian dollar.
The average transaction price for market pulp fell by 8%, newsprint by 5%, and specialty papers by 5%, but rose by 2% in wood products, resulting in an overall unfavorable variance of $38 million on pricing, excluding foreign exchange, when compared to last year.
However, the delivered cost also declined, by 2% for pulp, 15% for wood products, 2% for newsprint, and 5% for specialty papers, mainly due to favorable foreign exchange and lower manufacturing costs, including a reduction in the non-operating pension and OPEB expense resulting from the lower net balance sheet pension liability as of December 31, 2015. The lower manufacturing costs also reflect lower commodity prices and stronger internal hydroelectric generation, which were offset in part by higher maintenance costs. The delivered cost was also favorably impacted by a reduction in depreciation and amortization related to the periodic review of the estimated economic useful life of our machinery and equipment conducted in the first quarter, as well as the impairment of the Catawba (South Carolina) assets taken in the fourth quarter of 2015.
Shipments decreased 2% in market pulp as well as by 7% and 2% in newsprint and specialty papers respectively, reflecting structural market declines across printing paper grades. On the other hand, shipments of wood products have risen by 6%, supported by firmer demand in the U.S. housing market. Overall inventories have declined in all segments compared to the year-ago period, except in wood products, where stocks increased by 10%.
Corporate and Finance
During the quarter, the company invested $52 million in fixed assets, $30 million of which were dedicated to the Calhoun (Tennessee) tissue project. No drawdown was made on the asset-based credit facility in the quarter, maintaining the $20 million drawn on the facility as of June 30. Cash and cash equivalents increased by $3 million. Total liquidity has increased by $9 million to $452 million.
Mr. Garneau added: "Our views on pulp markets remain unchanged, with near-term perspectives still positive but deteriorating as incremental supply creates unfavorable pressure on prices. In wood products, on the other hand, we believe market conditions will continue to improve, diminishing the potential impact of trade restrictions in 2017. We believe paper grades will see a seasonal uptick in the short-term, with newsprint prices continuing to rise while coated and supercalendered grades see sustained downward pressure. Our tissue segment will remain a focus as action plans are executed and profitability improves over the next two quarters. Our greenfield tissue project in Calhoun continues to advance as planned and on budget. The two remaining conversion lines will be commissioned in the next few months, ahead of our tissue machine startup, scheduled for the first quarter of 2017."
For more information, see resolutefp.com.
Have something to say? Share your thoughts with us in the comments below.