Pulp and Paper Canada

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Resolute sees sales drop in Q2 over year-ago period as paper demand decreases


July 30, 2020
By P&PC Staff/Resolute Forest Products

Topics

Resolute Forest Products Inc. has released its second-quarter results, citing net income of $6 million or $0.07 per diluted share for the period ended June 30, 2020.

This is compared to net income of $25 million, or $0.27 per diluted share, in the same period in 2019.

Sales were $612 million in the quarter, a decrease of $143 million from the year-ago period. Excluding special items, the company reported a net loss of $22 million, or $0.25 per share, compared to net income of $11 million, or $0.12 per diluted share, in the second quarter of 2019.

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“The COVID-19 pandemic and ensuing economic slowdown have brought with them unprecedented challenges and business uncertainty,” says Yves Laflamme, president and chief executive officer.

“I am grateful for the commitment of our employees, contractors and suppliers, and their loyalty and hard work – they pulled together, allowing us to operate as an essential business, true to our commitment to world-class safety while remaining committed to a job well done. Despite the challenging business environment, except for the low-interest term loan used to finance the acquisition of the U.S. sawmills, we repaid all of the borrowings we drew in Q1, and our liquidity improved to nearly $400 million.

“On the business side, we’ve seen stronger pulp pricing and higher lumber shipments in the second quarter, offset by a weaker paper segment, which reflects lower demand levels since the onset of the pandemic and our resulting capacity adjustments. We’re pleased with the integration of our recently-acquired U.S. sawmills and we’re excited about their prospects.”

Operating income variance against prior period

The company reported operating income of $6 million in the second quarter. The $14 million improvement over the previous quarter reflects the favourable impact of the weaker Canadian dollar ($11 million), stronger pulp pricing ($9 million) and higher lumber shipments ($9 million), offset by lower paper and pulp shipments ($18 million) and softer quarter-over-quarter lumber pricing ($5 million), despite a late quarter increase in pricing.

As of the second quarter, the company’s results from the newsprint and specialty papers segments have been combined into one paper segment. Comparative information, including the information in this earnings release, has been modified to conform with this.

Market pulp

Operating income in the market pulp segment was $10 million in the quarter, an improvement of $13 million from the previous quarter.

The average transaction price rose by $34 per metric ton, or six per cent, with gains in each of the grades, and the operating cost per unit (the “delivered cost”) decreased by $14 per metric ton, or two per cent, to $581 per metric ton.

Shipments, however, were 45,000 metric tons lower, due mostly to the timing of annual outages at the Calhoun, Tennessee and Thunder Bay, Ontario mills during the quarter, and lower demand for recycled bleached kraft pulp. EBITDA in the segment was $16 million. Finished goods inventory was 87,000 metric tons at quarter-end.

Tissue

The tissue segment generated an operating loss of $2 million in the quarter compared to operating income of $2 million in the previous quarter.

The average transaction price improved by four per cent, or $65 per short ton, but shipments slipped by 4,000 short tons, or 14 -per cent, due to low inventory early in the quarter as a result of the spike in customer demand in the early stages of the pandemic.

Delivered cost per unit increased by $167 per short ton, or 10 per cent, reflecting the impact of lower sales and also maintenance costs associated with the annual outage in Calhoun. Finished goods inventory at quarter-end remains low, at 5,000 short tons. Segment EBITDA was $3 million.

Paper

The paper segment incurred an operating loss of $12 million in the quarter, a decline of $9 million from the previous quarter.

Shipments fell by 132,000 metric tons, or 27 per cent, consistent with reduced production in order to adjust to the dramatic decrease in economic activity, particularly for marketing-dependent products like newspapers, inserts, flyers and commercial papers.

The average transaction price, however, remained relatively stable, decreasing by $8 per metric ton, or one per cent.

The company recorded downtime of approximately 180,000 metric tons in the quarter, reducing inventory by 20,000 metric tons from the end of the first quarter, to 130,000 metric tons. The delivered cost increased by $20 per metric ton, to $625 per metric ton, due to the impact of downtime. EBITDA declined by $10 million, remaining positive at $4 million.

Wood products

Operating income in the wood products segment was $15 million in the quarter, a $10-million improvement from the first quarter.

Shipments rose by 78 million board feet due to added capacity for a full quarter of the U.S. sawmills acquired on February 1, as well as the impact of Canadian railroad blockades in the first quarter.

The average transaction price slipped by $9 per thousand board feet, or two per cent, compared to the first quarter, due to market uncertainty around the unfolding pandemic.

Accordingly, excluding the U.S. sawmills, the company reduced production at several sites, leading to downtime of approximately 70 million board feet in the quarter. The delivered cost improved by $25 per thousand board feet, or seven per cent, to $355 per thousand board feet, reflecting better productivity. EBITDA in the segment improved by $9 million, to $25 million.

Outlook

“We continue to focus on the short-term priorities we communicated after the first quarter, including: operating under rigorous protocols around the health and safety of our employees, contractors and suppliers; disciplined liquidity management; monitoring customer credit risk; and controlling spending around SG&A and capital expenditures,” says Laflamme.

“The significant slowdown in economic activity due to the pandemic will continue to impact demand for paper products, and we will continue to adjust our capacity as conditions evolve. Pulp has benefitted from higher demand for higher-quality tissue despite lower printing and writing shipments, but there could be short-term pressure as those markets stabilize in the ongoing pandemic economy.

“We continue to drive for customer portfolio optimization in the tissue business, particularly in the retail segment where we continue to make inroads as we place volume with new customers and demonstrate the quality of our products. We expect to continue to gain momentum in the coming quarters. The lumber market lately has been a bright spot against what were pessimistic expectations in April, driven by the strength of the repair and remodelling market and stronger housing starts, giving us the opportunity to bring back to production some of the sidelined Canadian capacity.

The integration of the U.S. lumber assets is progressing well, as they have also benefitted from an above-seasonal surge in demand for decking. As lumber demand remains promising, we are pursuing our plan to bring the El Dorado facility online in early 2021.”

See the full Resolute Forest Products Q2 2020 financial report.