Resolute Reports Preliminary Fourth Quarter and 2018 Results
-Q4 GAAP net income of $36 million / $235 million for 2018
-Adjusted EBITDA of $105 million in the quarter / $574 million for the full year
-Completed Catawba and Fairmont mill sales for approximately $360 million
-Net debt to adjusted EBITDA falls to 0.6x
-Repurchased $225 million of senior notes after year-end
Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) reported net income for the quarter ended December 31, 2018, of $36 million, or $0.38 per diluted share, compared to $13 million, or $0.14 per diluted share, in the same period in 2017. Sales were $932 million in the quarter, an increase of $34 million from the year-ago period. Excluding special items, the company reported net income of $4 million, or $0.04 per diluted share, compared to $14 million, or $0.15 per diluted share, in the fourth quarter of 2017.
For the year, the company reported GAAP net income of $235 million, or $2.52 per diluted share, compared to a net loss of $84 million, or $0.93 per share, in 2017. Sales were $3.8 billion, up 7%, from the previous year. Excluding special items, the company reported net income of $183 million, or $1.96 per diluted share, compared to $12 million, or $0.13 per diluted share, in 2017.
"With our optimized asset base, we were able to deliver strong annual performance with the positive market dynamics in the year, despite cost headwinds and a soft lumber market in the fourth quarter," said Yves Laflamme (photo), president and chief executive officer. "We experienced significantly weaker pricing for lumber in the quarter, unforeseen operational disruptions, planned maintenance, as well as higher energy and wood costs. Despite these challenges, we generated $435 million of cash from operations in 2018, monetized the Catawba and Fairmont assets at attractive valuations, returned $136 million of capital to shareholders through a special dividend and further reduced our leverage shortly after year-end. Our stronger balance sheet improves our financial strength and flexibility and positions us well for future growth opportunities."
Operating Income Variance Against Prior Period
The company reported operating income of $75 million in the quarter, compared to $135 million in the third quarter of 2018. Overall pricing had an unfavorable impact of $33 million because of the $110 per thousand board feet drop in the average transaction price for wood products, which more than offset the increase in market pulp and paper prices. Manufacturing costs were also higher in the quarter, by $45 million, mostly due to production disruptions, planned maintenance, seasonally higher energy costs, as well as higher wood costs attributable to extremely wet weather, mainly in the U.S. Southeast.
In the fourth quarter, the company recorded a non-cash impairment charge of $120 million against the goodwill and long-lived assets originally recorded at the time of the acquisition of Atlas Paper Holdings Inc. in 2015, to reduce the carrying value of these assets to their estimated fair value. We also recorded a $141 million gain on disposition of assets in the quarter, following the sale of the Fairmont (West Virginia) and Catawba (South Carolina) facilities.
The company generated $379 million of operating income in 2018, compared to $42 million in 2017, mostly due to higher average transaction prices across all business segments. The average transaction price increased by 19% for market pulp, 17% for newsprint, 13% for wood products and 9% for specialty papers. Operating results also benefited from gains on disposition of assets of $145 million, compared to a $15 million gain recorded in 2017 mostly related to the disposition of the assets at the Mokpo (South Korea) paper mill.
Manufacturing costs rose by $152 million this year, largely due to higher energy costs and market-related fiber and chemical expenses, as well as additional maintenance, while freight costs increased by $59 million, or 13%, because of higher rates and longer shipping distances. Lower sales volumes, reflecting weaker lumber markets ($23 million), the fluctuation of the Canadian dollar ($19 million), as well as higher impairment and closure-related charges ($14 million) also unfavorably impacted the company's results.
Operating income in the market pulp segment was $41 million, a reduction of $16 million when compared to the previous quarter. The average transaction price continued to rise across most grades, up a further $25 per metric ton this quarter to $809. Shipments decreased by 25,000 metric tons, mostly due to scheduled maintenance downtime, operational disruptions and the reduction in recycled pulp capacity following the sale of the Fairmont facility. The operating cost per unit (the "delivered cost") rose by $59 to $688 per metric ton, due to production outages, as well as weather-related wood shortages in the U.S. Southeast, and an increase in energy costs. Consequently, EBITDA realized this quarter decreased to $46 million or, $136 per metric ton.
For 2018, the segment generated operating income of $172 million, a $93 million improvement over the previous year. The average transaction price rose by $123 per metric ton, while shipments remained relatively unchanged, despite the extended investment-related downtime at the Saint-Félicien (Quebec) mill in 2018. The delivered cost, however, increased by $57 per metric ton, mostly a result of higher energy and recovered paper prices, additional maintenance and a rise in freight rates, offset in part by lower fiber costs. Higher selling prices more than compensated for the increased costs, leading to an 81% improvement in EBITDA, to $199 million, or $140 per metric ton, compared to $77 per metric ton in 2017.
The tissue segment incurred an operating loss of $9 million in the quarter, relatively unchanged from the previous period, with EBITDA remaining at negative $5 million.
For the year, the segment reported an operating loss of $30 million, compared to a loss of $6 million in 2017, as the results of the Calhoun (Tennessee) facility were not included in the segment until April 1, 2018. While overall sales volumes grew compared to last year, the delivered cost remained elevated, as the company continues to ramp up the production of the tissue machine and converting lines at Calhoun. EBITDA for the segment was negative $15 million.
The wood products segment recorded an operating loss of $8 million in the quarter, compared to an operating income of $45 million in the third quarter, almost entirely due to weaker pricing. The average transaction price fell to $347 per thousand board feet this quarter, down 24%, or $110. The delivered cost increased by $11 to $366 per thousand board feet, reflecting higher maintenance and log costs. Despite market and weather-related production curtailment in the quarter, shipments increased by 7 million board feet. EBITDA for the segment dropped to $1 million, compared to $53 million in the prior quarter and finished goods inventory remained elevated at 157 million board feet.
Operating income for the year was $169 million in the segment, $17 million lower than in 2017. The delivered cost rose by $50 to $354 per thousand board feet, as a result of higher market-driven fiber costs and an increase in transportation expenses. Shipments were also lower by 165 million board feet, largely due to lower production volumes and weaker market conditions in the latter part of the year. Offsetting in part these unfavorable elements was the increase in average transaction price, which rose by $50 per thousand board feet this year, to $446. EBITDA for the segment declined to $201 million, or $109 per thousand board feet, compared to $219 million in 2017, reflecting EBITDA margins of 24% and 27%, respectively.
At $28 million in the fourth quarter, newsprint's operating income declined by $4 million compared to the previous quarter. Sales were 6% higher, driven by a $5 per metric ton rise in the average transaction price, to $634, and a 17,000 metric ton increase in shipments, due to the timing of export sales and seasonality. Higher sales were more than offset by a $19 per metric ton increase in delivered cost, largely attributable to the lower contribution from the Thunder Bay (Ontario) cogeneration assets, following a turbine failure. EBITDA decreased by $3 million to $45 million for the quarter, equivalent to $116 per metric ton.
Newsprint recorded operating income of $74 million in 2018, compared to an operating loss of $23 million in 2017. The improvement reflects the rise in average transaction price, up $88 per metric ton to $602, partially offset by an increase in costs. Higher spending on maintenance, energy and freight exceeded lower fiber costs, leading to a $24 per metric ton increase in delivered cost, to $552. Pricing gains largely outweighed higher costs and lower volumes from capacity closures in 2017, resulting in EBITDA of $140 million, or $93 per metric ton, an increase from $43 million in 2017. EBITDA margin rose from 5% in 2017 to 15% in 2018.
The specialty papers segment generated operating income of $18 million in the quarter, compared to $26 million in the previous quarter. Pricing rose by $19 per short ton to $756, while shipments remained relatively unchanged at 287,000 short tons, as higher seasonal demand for supercalendered papers was largely offset by a decrease in volumes of other grades due to lower productivity. Operational disruptions, combined with lower contribution from the Dolbeau (Quebec) cogeneration assets during their planned outage, higher wood costs in the U.S. Southeast, and an increase in energy costs, pushed the delivered cost up $50 to $697 per short ton. EBITDA decreased to $28 million, or $95 per short ton, compared to $38 million in the previous quarter. Finished goods inventory at year-end decreased by 24,000 short tons, in part due to the sale of the Catawba facility.
The segment reported an operating income of $40 million during the year, compared to an operating loss of $9 million in 2017. Operating results in 2018 were supported by higher pricing, up $61 per short ton, and lower fiber costs, more than offsetting higher freight costs, which led to an $18 per short ton increase in delivered cost. Despite the 213,000 short tons decrease in shipments from the capacity closures in Catawba and Calhoun in 2017, EBITDA increased by $51 million to $87 million in 2018.
Consolidated Quarterly Operating Income Variance Against Year-Ago Period
The company's operating income improved by $22 million, compared to the fourth quarter of 2017. Overall pricing added $72 million to the results, as the average transaction price increased by 21% for newsprint, 19% for market pulp and 15% for specialty papers, offsetting the 21% drop in lumber prices. The improvement in operating income also included the favorable impact of the weaker Canadian dollar of $11 million and an increase in the gain on the disposition of assets of $128 million, mostly due to the $141 million gain recorded in the fourth quarter of 2018 following the sale of the Fairmont and Catawba facilities.
These favorable items were largely offset by the $120 million impairment charge recorded in the quarter and an increase in manufacturing costs of $57 million, mainly resulting from higher energy and maintenance expenses and market-driven fiber and chemical costs. Results were also impacted by lower sales volume of $16 million, mainly due to the timing of scheduled pulp outages, and a 10%, or $11 million, rise in freight expense.
Corporate and Finance
During the fourth quarter, the company generated $84 million of cash from operations and completed the sale of its Fairmont and Catawba facilities for net proceeds of $333 million. Following the revocation of the countervailing duty order on supercalendered paper, substantially all of the $61 million of cash deposits were refunded, with $35 million received in the quarter. After returning capital to shareholders with a dividend payment of $1.50 per share, or $136 million, as well as making $61 million of capital expenditures and $15 million of lumber duty deposits, cash rose to $304 million and liquidity stood at $821 million at year-end. Subsequent to year-end, the company reduced its total debt of $645 million by repurchasing $225 million of senior notes. Net debt to adjusted EBITDA fell to 0.6x.
Cumulative duty deposits of $110 million were recorded on the balance sheet, including $103 million for softwood lumber and $6 million for uncoated groundwood papers. The uncoated groundwood duty deposits of $6 million will be refunded, with interest.
Despite an increase in the applicable discount rate and ongoing pension contributions, the net pension and other postretirement benefit liability on the balance sheet increased by $182 million in the quarter, to $1.3 billion, largely the result of the negative equity market returns late in the year.
On January 7, 2019, Standard & Poor's Global Ratings revised the company's outlook from stable to positive and affirmed the BB- long-term corporate rating.
"After reaching historical highs in the first half of the year, lumber prices dropped to multi-year lows in the fourth quarter. Nevertheless, favorable economic conditions and recent production curtailments among Canadian producers, including ourselves, make us cautiously optimistic that markets will gradually improve in 2019. Accordingly, our long-term view for lumber is unchanged; we believe in the underlying fundamentals and growth prospects for this market. Despite recent softening in Chinese buying activity, we expect the fundamentals for market pulp to remain positive, given the limited capacity additions over the medium term. For paper, given lower seasonal demand, as well as the continued structural decline, we expect our shipments to be lower in the first quarter. We are now making progress in stepping-up the productivity of Calhoun tissue operations, leading us to target positive earnings generation in the first half of 2019. We remain optimistic with the long-term growth prospects of our tissue business," added Mr. Laflamme.
(Resolute Forest Products Inc.)