Resolute Reports Preliminary Third Quarter 2019 Results
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Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) reported a net loss for the quarter ended September 30, 2019, of $43 million, or $0.47 per share, compared to net income of $117 million, or $1.25 per diluted share, in the same period in 2018. Sales were $705 million in the quarter, a decrease of $269 million from the year-ago period.
The third quarter of 2018 included sales from the Catawba (South Carolina) and Fairmont (West Virginia) facilities, which were sold in the fourth quarter of 2018. Excluding special items, the company reported a net loss of $34 million, or $0.37 per share, compared to net income of $96 million, or $1.03 per diluted share, in the third quarter of 2018.
"Ongoing weakness in market pulp pricing had a significant impact on our quarterly results," said Yves Laflamme, president and chief executive officer. "While paper has come under pressure this year and lumber markets continue their slow recovery, we are pleased with the progress in sales growth and productivity gains in the tissue business, as we continue to build our position in the segment with positive EBITDA. In October, we successfully used our strong financial situation to increase and extend our senior secured credit facility by $175 million, providing us additional liquidity at very competitive terms to support our transformation initiatives. The proactive steps we have taken over the last few years to strengthen our balance sheet position us well to execute on our strategy despite the cyclical downturn currently affecting the industry."
Non-GAAP financial measures, such as adjustments for special items and adjusted EBITDA, are explained and reconciled below.
Operating Income Variance Against Prior Period
Consolidated
The company reported an operating loss of $18 million in the quarter, compared to operating income of $40 million in the second quarter. Lower pricing adversely affected results by $48 million, particularly in market pulp ($34 million), as did an increase in manufacturing costs ($19 million) due to more planned maintenance outages this quarter, and an increase in chemical costs. Lower freight costs and a decrease in share-based compensation expense partially offset these unfavorable items. Overall volumes remained unchanged, as the 25% increase in market pulp shipments outweighed lower paper and lumber volumes.
Market Pulp
The market pulp segment recorded an operating loss of $12 million in the third quarter compared to operating income of $27 million in the second quarter. The drop in profitability was largely attributable to the 15% lower average transaction price, to $625 per metric ton, as global market conditions further weakened. The operating cost per unit (the "delivered cost") rose by $34 per metric ton, to $664, largely due to additional maintenance costs, mainly incurred during the scheduled outages at two mills. Given steps taken to reduce finished goods inventory, shipments rose by 63,000 metric tons. Despite the volume increase, EBITDA fell to negative $5 million in the third quarter. Finished goods inventory dropped to more normal levels of 74,000 metric tons at quarter-end.
Tissue
The tissue segment incurred an operating loss of $3 million in the quarter, an improvement of $1 million compared to the second quarter, and building on the gains of the previous quarter. Favorable product mix and continued pricing gains for away-from-home products led to a $46 per short ton increase in average transaction price, to $1,741, more than offsetting the $32 per short ton increase in delivered cost. As a result, EBITDA improved slightly to $1 million.
Wood Products
The wood products segment reported an operating loss of $4 million in the quarter compared to an operating loss of $3 million in the second quarter. Pricing decreased by $7 per thousand board feet, to $341, mainly due to unfavorable sales mix, while shipments dropped by 55 million board feet due to soft demand. Despite lower shipments, finished goods inventory at quarter-end remained unchanged at a normalized level of 122 million board feet, as the company took over 70 million board feet of downtime in the quarter, for nearly 170 million year-to-date. Even with lower volumes, the delivered cost improved by $4 to $351 per thousand board feet, but not enough to outweigh the 13% drop in sales. Accordingly, EBITDA decreased to $4 million for the quarter, compared to $6 million in the previous quarter.
Newsprint
At $4 million in the third quarter, newsprint's operating income decreased by $13 million compared to the previous quarter. Sales retreated by 14% as the average transaction price decreased by $24 per metric ton, to $573, and volume was 36,000 metric tons lower, at 314,000. The drop was more significant in offshore markets, which account for approximately 40% of newsprint volumes. Even with the reduction in shipments, finished goods inventory remained relatively unchanged at 104,000 metric tons at quarter-end, as the company continued to take temporary production downtime. Lower volumes combined with unfavorable chemical usage led to most of the $13 per metric ton increase in delivered cost. As a result, EBITDA decreased by $14 million to $11 million for the quarter, equivalent to $36 per metric ton. EBITDA margin decreased to 6%.
Specialty Papers
The specialty papers segment generated operating income of $4 million in the quarter, down $11 million from the second quarter. Pricing decreased by $21 per short ton to $732, while shipments declined slightly to 185,000 short tons. The delivered cost also increased by $29 per short ton, to $705, mainly as a result of higher maintenance and lower cogeneration contribution associated with downtime - mostly planned - at one mill. EBITDA decreased to $15 million, or $85 per short ton. EBITDA margin declined to 11%.
