Consumables
Resolute Reports Preliminary Fourth Quarter and 2013 Results
Monday 10. February 2014 - Q4 adjusted EBITDA of $110 million; $377 million in 2013
Excluding special items, 2013 net earnings of $1.13 per share; $0.34 per share in Q4
GAAP net loss of $6.75 per share in 2013, due mainly to tax charge; $0.03 per share in Q4
Net pension & OPEB liability decreased by $672 million
Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) today reported net income, excluding special items ($746 million), of $107 million for the year ended December 31, 2013, up 24% compared to 2012, on sales of $4.5 billion, unchanged from prior year. Earnings per share, excluding special items ($7.88 per share), were $1.13, up 28% compared to 2012. GAAP net loss was $639 million in 2013, or $6.75 per share, compared to net income of $1 million, or $0.01 per share, in 2012.
In the fourth quarter of 2013, the Company reported net income, excluding special items ($35 million), of $32 million, or $0.34 per share, up 13% from the fourth quarter of 2012. GAAP net loss was $3 million in the quarter, or $0.03 per share, compared to a loss of $45 million, or $0.47 per share, in the fourth quarter of 2012. Sales were $1.2 billion, up 2% from the fourth quarter of 2012.
“In 2013, 45% of adjusted EBITDA came from our market pulp and wood products businesses,” said Richard Garneau, president and chief executive officer. “Because of our diversified asset base, improvements in market pulp and wood products made up for a challenging year in paper grades. We’ve taken important steps to grow these businesses with acquisitions and investment commitments, while at the same time optimizing paper assets to maximize capacity utilization and margins. We also continued to focus on costs to improve earnings power.”
Non-GAAP financial measures, such as adjustments for special items and adjusted EBITDA, are reconciled below.
Consolidated Operating Income Variance
The Company recorded an operating loss of $2 million in 2013, compared to an operating loss of $28 million in 2012. Lower overall pricing and shipments offset improvements in manufacturing costs ($30 million) and the weaker Canadian dollar ($40 million). Although pricing and volumes improved in wood products and market pulp, they were overshadowed by this year’s market weakness in paper grades. Manufacturing costs improved because of the Company’s asset optimization and mill restructuring initiatives and the effect of external power sales from new cogeneration facilities, offset in part by higher maintenance costs, higher fuel energy costs because of natural gas pricing and increased fiber costs. Overall shipment volumes rose compared to 2012, largely because of the acquisition of Fibrek Inc. in May of 2012. Closure costs, impairment and other related charges were $96 million lower due to the timing of asset optimization and mill restructuring initiatives. Selling, general and administrative expenses rose in the year ($17 million), largely because of credits recorded in 2012.
Segment Operating Income Variance
As of the fourth quarter, the Company’s results from its coated papers assets have been combined with the specialty papers segment. This better reflects management’s internal analysis, given the increasingly high degree of substitution with supercalender grades, and the diminishing percentage coated papers represents in its product portfolio. Comparative information, including the information in this earnings release, has been modified to conform with this revised segment presentation.
Newsprint
Compared to the third quarter, operating income rose by $6 million in the fourth quarter, to $19 million. Shipments and the average transaction price were essentially unchanged. North American shipments represented 59% of total shipments, as export markets improved but remained sporadic. Despite an increase in fuel energy consumption due to the cold weather at Canadian mills, operating cost per unit (the “delivered cost”) was 2% lower than in the third quarter, at $579 per metric ton, because of seasonally lower electricity costs in the U.S. southeast, higher production from power cogeneration assets, as well as a favorable power adjustment.
Newsprint generated $40 million of operating income in 2013, down $57 million from 2012, as the average transaction price fell by 6%, or $37 per metric ton, and shipments decreased by 4%. The reduction in shipments reflects initiatives, such as the closure of two machines, partially offset by the restart of a mill in Gatineau, Québec, to optimize mill assets in response to changing market dynamics. With the resulting improvement in costs, in addition to external power sales from new cogeneration facilities, the weaker Canadian dollar and lower chip prices, the delivered cost fell by $15 per metric ton compared to 2012.
Specialty Papers
Operating income was $11 million in the fourth quarter, $3 million lower than the third quarter. Shipments were up by 3%, mostly because of seasonality in supercalender grades, but the average transaction price was essentially unchanged, reflecting the offsetting effect of higher pricing for uncoated freesheet substitutes and lower prices for coated mechanical grades. The delivered cost rose 1%, at $718 per short ton, because of higher seasonal fuel energy usage in Québec and maintenance-related costs, despite a drop in costs of electricity and raw materials.
Compared to 2012, the specialty papers segment generated operating income of $35 million in 2013, down $50 million, as shipments fell by 11%, or 217,000 short tons, and the average transaction price decreased by 2%. The drop in shipments reflects efforts to adjust to market dynamics by streamlining production and optimizing mill assets, including the idling or closure of three machines, partially offset by the restart of a machine at Dolbeau, Québec. Despite higher maintenance costs and higher wood costs in the U.S. southeast due to wet weather, the Company cut manufacturing costs by $21 million as a result of lower usage of kraft pulp and coating chemicals, external power sales from new cogeneration facilities, the weaker Canadian dollar and lower labor costs. The delivered cost, however, rose by 1% as a result of the lower shipments.
Market Pulp
Market pulp generated operating income of $16 million in the fourth quarter, $5 million less than the third quarter. There was a 5% increase in shipments, or 18,000 metric tons, but the delivered cost rose by 3%, at $639 per metric ton, mostly as a result of higher maintenance costs, including lost cogeneration production, fuel energy consumption at Canadian mills and wood costs at U.S. mills due to wet weather. Inventories shrank by 21%, to 81,000 metric tons, their lowest level since the acquisition of Fibrek.
Operating income was $42 million for 2013, compared to an operating loss of $43 million in 2012. Shipments were 26% higher than 2012, most of which relates to Fibrek, including the additional four months of results given the timing of the acquisition as well as increased operating time at the Saint-Félicien, Québec, mill in light of the extensive downtime taken in 2012 to improve its environmental performance. Non-Fibrek shipments rose by 7% as a result of stronger market conditions. The average transaction price was 2% higher in 2013, or $16 per metric ton, and the delivered cost fell 7%, or $46 per metric ton, as a result of lower chip and recovered paper costs, external power sales from new cogeneration facilities and lower costs related to the Saint-Félicien downtime, despite higher wood costs in the U.S. southeast due to the wet weather and higher natural gas prices.
Wood Products
Compared to breakeven in the third quarter, operating income rose to $9 million in the fourth quarter. The average transaction price rose by 7%, or $26 per thousand board feet, but shipments slipped by 9% from the high levels recorded in the third quarter. The delivered cost remained stable, at $353 per thousand board feet. Finished goods inventory rose by 15% as a result of weaker demand in November.
Wood products generated operating income of $41 million in 2013, up $15 million from 2012. There was an 11% increase in average transaction price, or $37 per thousand board feet, and a 3% rise in shipments, both reflecting stronger market conditions as U.S. housing starts were 18% higher than 2012. The delivered cost increased by 8%, or $26 per thousand board feet, primarily because of log costs, due to higher stumpage fees and other costs associated with the comprehensive modification of the forest tenure system in the province of Québec, and lower internal wood chip selling prices.
Corporate & Finance
“The rising interest rate environment, strong asset returns, 2013 funding, the favorable currency impact and amendments to other postretirement benefits (OPEB) plans all contributed to the elimination of $672 million of net pension and OPEB liabilities from our balance sheet compared to 2012,” said Jo-Ann Longworth, senior vice president and chief financial officer. “We expect that in the coming months, Québec and Ontario will adopt regulations consistent with the agreement in principle we reached with Company stakeholders in Québec and Ontario in 2013. These regulations will replace the corrective measures mechanism with modest incremental contributions beyond the basic funding, providing us with stable, predictable and balanced pension funding requirements. Accordingly, we accelerated $30 million of contributions to our Canadian plans in the fourth quarter, representing the incremental funding under the regulations had they been adopted in2013. Total pension contributions were $155 million in 2013, consistent with our previous guidance.”
As described at the time, the Company reduced the carrying value of deferred income tax assets on the balance sheet by $619 million in the third quarter, which was adjusted to $604 million in the fourth quarter, representing the portion related to its U.S. operations. The reduction is a non-recurring, non-cash adjustment, recorded as an income tax charge. It does not reduce the Company’s underlying tax attributes, nor hinders its ability to use them.
Outlook
Mr. Garneau added: “After running the network at near-capacity in the fourth quarter, we expect to maintain our newsprint volume into the first quarter, despite seasonal lows. With our scale, financial strength and lower-cost operating platform, we’re confident in our ability to be a long-term, reliable supplier for our customers. We expect to see lighter, but seasonally consistent, shipment volumes in the specialty segment, as supercalender grades back off their fourth quarter seasonal highs and coated papers continue to face pressure from lower demand and grade substitution. Our market pulp inventory fell by five days of supply in the fourth quarter, and while our average transaction price didn’t reflect recent industry price announcements, mostly on account of grade mix, we expect that the improving market conditions will be more apparent in the first quarter, particularly in softwood and recycled grades. But the timing of worldwide capacity increases, mostly in hardwood grades, makes the second half of 2014 somewhat more uncertain. Based on the positive momentum of U.S. housing starts, we expect lumber pricing and shipments to hold near fourth quarter levels. But costs will remain under pressure because of lower wood allocation and the additional burdens imposed on producers with the province of Québec’s comprehensive modification of the forest tenure system. Generally speaking, seasonality has a strong influence on costs, and this winter looks to be a particularly difficult one, not just in terms of energy but also because of weather-related constraints in our distribution network in Canada and the U.S., in addition to production disruptions at mills facing unusually harsh regional weather conditions, such as in the U.S. southeast.”