-Q4 adjusted EBITDA of $41 million / $276 million in 2015
-Lower costs and CAD tailwind insufficient to overcome $348 million of lower pricing for 2015
-Net pension & OPEB liability dropped by $438 million
-Continuing to execute on growth strategy into tissue with Atlas Paper acquisition
-Q4 loss of $0.29 per share (excl. special items) / GAAP net loss of $2.39 per share
Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) reported a net loss of $26 million (excluding special items), or $0.29 per share, for the quarter ended December 31, 2015, compared to net income of $35 million (excluding special items), or $0.37 per share, in the same period in 2014. Sales were $894 million in the quarter, down $161 million, or 15%, from the fourth quarter of 2014. GAAP net loss was $214 million, or $2.39 per share, compared to a net loss of $109 million, or $1.15 per share, in the fourth quarter of 2014.
For the year, the company reported a net loss of $24 million (excluding special items), or $0.26 per share, compared to net income of $39 million (excluding special items), or $0.41 per share, in 2014. Annual sales were $3.6 billion, down $613 million, or 14%, from 2014. GAAP net loss for the year was $257 million, or $2.78 per share, compared to a net loss of $277 million, or $2.93 per share, in 2014. Almost all the special items in the periods covered are made up of non-cash impairment or closure-related costs, and non-cash non-operating pension expenses.
"Even as we continue to make progress lowering our costs, the price deterioration we experienced in the fourth quarter and for all of 2015 demonstrates that the forest products industry has not been spared from the cyclical downturn in global commodities," said Richard Garneau (photo), president and chief executive officer. "With our financial strength, our competitive position and our focus on operational excellence, we are well positioned to weather this storm and to sustain our growth initiatives in wood products, market pulp and tissue. As we enter the critical construction stages of our Calhoun tissue expansion, we're also focused on: gaining efficiency with our two new Northern Ontario sawmills; quickly ramping-up the Calhoun continuous pulp digester; and smoothly integrating Atlas Paper after our November acquisition. This transaction not only gives us an immediate tissue presence and allows us to capture unique synergies, but the Atlas management team also adds a key success factor in the execution of the Calhoun tissue expansion."
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 $226 million in the quarter, compared to operating income of $6 million in the third quarter. The difference reflects primarily lower selling prices ($22 million), particularly for wood products, newsprint and market pulp, as well as a $14 million non-cash settlement charge related to annuity purchases for certain inactive U.S. employees, and an unfavorable variance related to property tax adjustments and the recognition of additional tax credits in connection with infrastructure investments during the third quarter ($13 million).
The company also incurred a $176 million non-cash impairment charge in the fourth quarter in connection with the write-down of assets at the Catawba, South Carolina, mill. In the same quarter of 2014, the company reported $131 million of accelerated depreciation and other closure-related costs associated with the permanent capacity closures announced in that quarter.
The company reported an operating loss of $219 million for the full-year period, compared to a loss of $174 million in 2014. Lower selling prices across all the segments unfavorably affected operating income by $348 million in the year, including a 17% drop in average transaction price in the wood products segment, 13% in newsprint, 8% in market pulp and 2% in specialty papers. Operating results were also affected by lower volume overall, reflecting lower shipments of newsprint and specialty papers following capacity rationalization initiatives in 2014 to, among other things, adapt to changing market dynamics. This was only partially offset by an increase of wood products shipments as a result of capacity enhancement initiatives in that segment.
Total pension and other postretirement benefit ("OPEB") expenses were $68 million higher in 2015, which is related to the $330 million increase in balance sheet net pension and OPEB liability in 20141 and the fourth quarter settlement charge related to annuity purchases for certain inactive U.S. employees. Otherwise, manufacturing costs fell by $148 million compared to 2014, which reflects the abnormally cold winter of 2014 ($40 million), the effect of asset optimization initiatives ($37 million) as well as lower costs associated with maintenance and higher productivity ($25 million), and lower natural gas, chemicals and other commodity-related costs ($16 million). The weaker Canadian dollar favorably affected operating income by $171 million.
Closure-related costs were $181 million in 2015 as a result of the Catawba impairment, compared to $278 million in 2014 when the company incurred accelerated depreciation and other closure-related charges in connection with the permanent closure of the Laurentide, Quebec, and Iroquois Falls, Ontario, mills, in addition to a paper machine at the Catawba mill and two newsprint machines in Quebec.
Market Pulp
The market pulp segment generated operating income of $17 million in the fourth quarter, $5 million lower than the third. The decrease reflects a 3%, or $16 per metric ton, drop in the average transaction price largely due to softer market conditions in North America and a 24,000 metric ton decrease in shipments, or 7%. In addition to an unfavorable variance due to a property tax adjustment in the third quarter, these unfavorable effects were only partly offset by $7 million of other lower manufacturing costs. As a result, the operating cost per unit (or the "delivered cost"), at $574 per metric ton, was essentially unchanged. Despite down-cycle pricing, adjusted EBITDA for the segment was $30 million, for a margin of $89 per metric ton, or 14%, compared to $100 in the previous quarter and a trailing twelve month average of $94 per metric ton. Finished goods inventory was 90,000 metric tons at quarter end, a 13,000 metric ton increase from the abnormally low level at the end of the third quarter.
For 2015, the segment generated operating income of $76 million, a $13 million improvement over 2014. This reflects a significant reduction in manufacturing costs, with the delivered cost down by $67 per metric ton, or 10%, as a result of a better contribution from the Saint-Félicien, Quebec, power cogeneration facility, lower commodity prices and stronger operating performance. The improvement in operating income also includes the positive effect of the weaker Canadian dollar and a positive variance related to the abnormally cold winter of 2014, which led to higher steam costs and wood prices in the year-ago period. But these favorable elements were almost entirely offset by the significant drop in average transaction price, down by $58 per metric ton, or 8%, year-over-year. Lower overall costs more than compensated for the drop in pricing, resulting in an 11% increase in adjusted EBITDA, to $129 million, or $94 per metric ton, compared to $84 in 2014. Year-end finished goods inventory was essentially unchanged from the year-ago period.
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1 In the second quarter, the company changed its presentation of pension and OPEB costs to isolate the net financing and remeasurement components previously allocated to the operating segments and reallocate them to "corporate and other" in the segment presentation of operating income. Current service costs and amortization of prior service credits continue to be allocated to the operating segments.
Tissue
The company acquired Atlas Paper Holdings, Inc. on November 16, and included its results of operations as of the acquisition date. Based in Florida, Atlas Paper manufactures a range of tissue products for the away-from-home and private-label at-home markets, including virgin and recycled products, covering economy, value and premium grades. It operates: three tissue machines, with an annual production capacity of approximately 65,000 short tons; 14 converting lines in Miami and Orlando; and a paper recycling facility in Tampa.
Starting with the fourth quarter, the Atlas Paper results of operations are reported in a stand-alone "tissue" segment. In the short period since the acquisition, the tissue assets generated an operating loss of $1 million and adjusted EBITDA of nil. The average transaction price in the segment was $1,537 per short ton and the delivered cost was $1,569; sales were $11 million on shipments of 7,000 short tons.
Wood Products
The wood products segment generated an operating loss of $8 million in the quarter, compared to operating income of $9 million in the third quarter. The difference reflects the $18 per thousand board feet decrease in average transaction price, or 6%, and an unfavorable variance due to the recognition of additional tax credits in connection with infrastructure investments in the third quarter. This caused a 5% increase in the delivered cost, to $310 per thousand board feet. Shipments rose by a further 25 million board feet, or 6%, to 446 million board feet, including production improvements at the Atikokan and Ignace sawmills in Northern Ontario. Segment adjusted EBITDA was $3 million in the quarter, for a margin of $7 per thousand board feet, or 2%, compared to $43 in the previous quarter and a trailing twelve month average of $23 per thousand board feet. Finished goods inventory was slightly lower at quarter-end.
Operating income for the year was $2 million in the wood products segment, $67 million lower than in 2014. The drop is almost entirely due to the significant fall in average transaction price, down by $65 per thousand board feet, or 17%, which was only partially offset by the favorable effect of the weaker Canadian dollar and the 93 million board feet increase in shipments, or 6%. The increase in shipments follows capacity enhancement initiatives, including better productivity at the Comtois, Quebec, and Thunder Bay, Ontario, sawmills, the start-up of the Thunder Bay wood pellet facility, and also shipments from the new Atikokan and Ignace sawmills. Adjusted EBITDA for the segment was $39 million in 2015, compared to $102 million in 2014, a 62% decrease, reflecting margins of 7% and 17%, respectively.
Newsprint
The newsprint segment generated an operating loss of $13 million in the quarter, compared to a loss of $10 million in the third quarter. The widening loss is due to the further decline in average transaction price, falling another 3%, or $14 per metric ton, to $484 per metric ton. This is the fifth consecutive quarter where the average price has fallen by more than $10 per metric ton, and the effect in the quarter was only partially offset by a 7% increase in shipments, or 34,000 metric tons. The increase in shipments was due to seasonality and downtime at the Thorold, Ontario, mill in the third quarter to minimize the company's exposure to elevated power costs in Southern Ontario. The delivered cost fell by $8 per metric ton, or 2%, in large part due to the effect of volume, and finished goods inventory was 10% lower at quarter-end compared to the third quarter. The lower pricing reduced the EBITDA margin to $5 per metric ton, compared to $12 per metric ton in the previous quarter and a trailing twelve month average of $19 per metric ton.
Primarily as a result of a significant drop in selling prices and lower shipments, the segment generated an operating loss of $23 million in 2015, compared to operating income of $20 million in 2014. The year-over-year average transaction price fell by $77 per metric ton, or 13%, and shipments were 221,000 metric tons lower, or 9%, following capacity closures in late 2014 and early 2015. These items had a $143 million and $26 million, respectively, detrimental effect on operating results, and were only partially offset by the favorable effect of the weaker Canadian dollar and asset optimization initiatives to lower costs, as well as a positive variance related to the abnormally cold winter of 2014. As a result, adjusted EBITDA in the newsprint segment fell from $89 million in 2014 to $41 million in 2015, reflecting an EBITDA margin of 4% in 2015 and 6% in 2014.
Specialty Papers
The specialty papers segment generated an operating loss of $2 million in the quarter, compared to income of $9 million in the third. The change was largely due to an increase in manufacturing costs due to the transition process to Calhoun's new continuous digester and its pre-start-up, as well as some operational inefficiencies in Catawba, which pushed the delivered cost up by 4% in the quarter. The average transaction price was essentially unchanged, but shipments decreased by 12,000 short tons, or 3%. Finished goods inventory fell by 14,000 short tons, or 14%. Adjusted EBITDA from specialty papers was $15 million in the quarter, down from $27 million in the previous quarter, for an EBITDA margin of $38 per short ton, or 5%, compared to $66 in the previous quarter and a trailing twelve month average of $63 per short ton.
Operating income in the segment for the year was $29 million, a $48 million improvement over 2014. The change reflects mainly the favorable effect of the weaker Canadian dollar and asset optimization initiatives to lower costs, as well as a positive variance related to the abnormally cold winter of 2014. As a result, the delivered cost was down by $45 per short ton, or 6%, to $681. But these items were partially offset by a 198,000 short ton decrease in shipments following the closure of the Laurentide, Quebec, mill in the fourth quarter of 2014, as well as lower average transaction prices, down by 2%. Adjusted EBTIDA in the segment was $100 million in 2015, a 59% increase over 2014, with the EBITDA margin at $63 per short ton compared to $35 in 2014.
CONSOLIDATED QUARTERLY OPERATING INCOME VARIANCE AGAINST YEAR-AGO PERIOD
The company reported an operating loss of $226 million in the quarter, compared to a loss of $93 million in the year-ago period. The most significant contributor to the change was the lower selling prices ($115 million), which affected each segment: the average transaction price fell by 22% in wood products, 16% in newsprint, 10% in market pulp and 3% in specialty papers. Despite higher shipments of wood products with the company's capacity enhancement initiatives, overall volume was lower ($12 million) because of 2014 newsprint and specialty papers capacity rationalization initiatives to, among other things, adapt to changing market dynamics. The effect of lower prices and volume was partially offset by the weaker Canadian dollar ($49 million) and, despite the inclusion of Atlas, lower manufacturing and freight costs ($18 million). The lower freight costs largely reflect lower fuel surcharges. Total pension and OPEB expenses increased by $29 million in the quarter, which is related to the $330 million increase in balance sheet net pension and OPEB liability in 2014 and a $14 million settlement charge in the fourth quarter related to annuity purchases for certain inactive U.S. employees.
There were $173 million of closure-related costs in the quarter, almost of all of which is due to the impairment of assets at the Catawba facility. In the same period of 2014, there was $131 million of accelerated depreciation and other closure-related costs, mostly related to the permanent capacity closures announced in that quarter.
CORPORATE & FINANCE
"The net pension and OPEB liability on our balance sheet fell by $438 million at year-end, mainly as a result of the favorable currency impact, an increase in the applicable discount rate and our regular contributions," said Jo-Ann Longworth, senior vice president and chief financial officer. "With the acquisition of Atlas Paper, our cash position dropped by $177 million in the quarter, reflecting mostly the lower EBITDA, the $156 million acquisition price but also an $18 million increase in capital expenditures, to $62 million, partially offset by a favorable change in working capital. With a presently undrawn ABL, we retain very strong liquidity, over $500 million, to support our continued transformation, building on the Atlas acquisition and the Calhoun pulp digester project to scale up in tissue with our Calhoun expansion."
OUTLOOK
Mr. Garneau added: "Like many other global commodities, market prices and margins associated with forest products were under significant pressure in 2015. In the case of newsprint, our view is that this momentum – amplified as it was by the effect of weaker global currencies – has pushed transaction prices down to levels that exaggerate actual market conditions. We've therefore announced, for the first time in nearly six years, two incremental newsprint price increases in North America effective as of January and February, which we are implementing. More broadly speaking, we're confident that we have the asset base, the service model, the financial strength and the mindset to compete in this challenging environment. This applies also to our specialty papers, but market conditions in that segment show additional signs of near-term headwinds as a result of currency-driven imports, grade interchangeability and also the effect of seasonality.
Our view in market pulp is unchanged: We believe in the underlying fundamentals and growth prospects longer term, but our near-term pricing expectations remain cautious. Despite that, our continuous pulp digester in Calhoun is now running, and making good progress toward reaching its expected normal operating efficiency. We expect to reach that level by the end of this quarter, which will give us additional capacity and lower mill-wide costs.
We are also uniquely positioned to generate synergies and capitalize on related benefits with the Atlas Paper acquisition, primarily by optimizing its pulp supply with our own strong U.S. market pulp network and pressing ahead with opportunities to maximize its converting capacity. In fact, we are already well advanced in the integration process, having run a number of successful trials using Resolute kraft and recycled pulp. Our tissue segment will grow as we drive synergies and improve market penetration with Atlas and as we ramp-up our world-class tissue and converting facilities in Calhoun.
North American lumber markets continue to be under pressure as a result of lower North American lumber and log exports to Asia, but we're confident that our asset base and competitive position will see us through this dip in the cycle. We remain optimistic longer term with the progressive recovery of U.S. housing starts and tightening Canadian log supply over time. We share the concerns of many, however, around the state of free trade for North American softwood lumber following the expiration of the 2006 Softwood Lumber Agreement last October. Our view is clear: We believe in free trade, including open and unencumbered access to the U.S. markets for all our products, including softwood lumber, because everyone benefits from open and fair market-driven competition. The U.S. has agreed to not initiate trade action that would disrupt free trade during the one-year standstill period after the expiration of the SLA. While some would have extended the SLA construct of managed trade, the U.S. has rejected the idea. Considering the truly market-based systems currently in place in Ontario and Quebec, we feel strongly that Canada should not initiate a move toward managed trade. These systems were either explicitly recognized by NAFTA bi-national panels as "market-determined," like in the case of Ontario, or were recently implemented as a result of wholesale reforms based entirely on leading examples from the U.S., as is the case in Quebec. These extensive reforms must be recognized. In light of the recent progress toward broader international trade partnerships, when it comes to softwood lumber there is every reason for the U.S. and Canada to return to the founding principle of free trade embodied in NAFTA."
(Resolute Forest Products)