Resolute Reports Second Quarter 2022 Results

Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) reported net income for the quarter ended June 30 of $256 million, or $3.29 per diluted share, compared to net income of $268 million, or $3.34 per diluted share, in the same period in 2021. Sales were $1,058 million in the quarter, a decrease of $82 million from the year-ago period. Excluding special items, the company reported net income of $155 million, or $2.00 per diluted share, compared to net income of $300 million, or $3.74 per diluted share, in the second quarter of 2021.

Consolidated
The company reported operating income of $217 million in the quarter, compared to $235 million in the first quarter. The $18 million variation mainly reflects higher shipments ($47 million) across all segments, more than offset by higher manufacturing costs ($55 million), mainly related to fiber ($25 million) and maintenance ($19 million) costs, as well as energy prices ($7 million). The overall impact of pricing was neutral as higher realized transaction prices in the pulp and paper segments were offset by lower average transaction prices in the wood products segment. The company also recorded higher freight ($8 million) and selling, general and administrative expenses ($4 million).

Segment Operating Income Variance
Wood Products
The wood products segment generated operating income of $180 million in the quarter, $39 million lower than the previous quarter. The average transaction price fell to $931 per thousand board feet, a decrease of $91 per thousand board feet, or 9%, reflecting lower benchmark lumber prices, despite the positive impact of consolidating engineered wood products in the segment's sales following the acquisition of the remaining 50% equity interest in Resolute-LP Engineered Wood Larouche Inc. and Resolute-LP Engineered Wood St-Prime Limited Partnership. Shipments rose by 65 million board feet, but finished goods inventory increased by 16 million board feet, to 239 million board feet, reflecting continued challenges with rail car availability. The operating cost per unit (or, "delivered cost") rose by $43 per thousand board feet, or 8%, mainly reflecting higher log costs due to stumpage fees and fuel price. EBITDA in the segment slipped by $39 million, to $191 million.

Market Pulp
Operating income in the market pulp segment was $41 million in the second quarter, $19 million higher than in the prior quarter. The average transaction price increased by $117 per metric ton, or 14%, due to stronger market conditions. Shipments were 29,000 metric tons higher, helping to reduce finished goods inventory by 14,000 metric tons to 68,000 metric tons at quarter-end. The delivered cost rose by $42 per metric ton, mainly due to higher maintenance and fiber costs. EBITDA in the segment improved by $22 million, to $48 million.

Tissue
The tissue segment incurred an operating loss of $9 million in the quarter, in line with the first quarter. The average transaction price increased by $84 per short ton, or 4%, on rising market pricing. Shipments were 1,000 short tons higher and finished goods inventory fell by 2,000 short tons. The delivered cost increased by $126 per short ton, or 6%, mostly due to higher market pulp prices. EBITDA in the segment fell by $1 million, to negative $5 million.

Paper
The paper segment recorded operating income of $37 million in the quarter, an improvement of $12 million over the previous quarter. The average transaction price rose by $35 per metric ton, or 5%, due to stronger market conditions in all grades. Shipments rose by 29,000 metric tons, helping to reduce finished goods inventory by 18,000 metric tons to 67,000 metric tons at quarter-end. The delivered cost increased by $11 per metric ton, or 2%, mainly due to higher freight and maintenance costs. EBITDA improved by $13 million, to $47 million.
Consolidated Quarterly Operating Income Variance Against Year-Ago Period

The $217 million of operating income reported in the second quarter was $189 million lower than the comparable quarter of 2021. The variance includes higher selling prices for the pulp, paper and tissue segments ($108 million), more than offset by lower selling prices for wood ($157 million) and lower shipments as a result of logistics constraints ($17 million). The company faced higher manufacturing costs ($104 million), mainly related to fiber costs ($42 million), maintenance, labor and outside service costs ($31 million) and energy prices ($25 million), as well as higher freight costs ($25 million). It also benefitted from a lower Canadian dollar ($8 million).

Corporate, Cash and Liquidity
The company generated $281 million of cash from operating activities in the quarter, and it invested $24 million, net, in fixed assets, for a total of $37 million in the first six months of the year.

With $355 million of quarter-end cash, liquidity stood at $1.3 billion. As a result, the company ended the quarter in a net cash position of $53 million.

By quarter-end, the company recorded cumulative softwood lumber duty deposits of $500 million on the balance sheet, including $60 million paid in the quarter.

The company also determined that it is more likely than not that $105 million of the U.S. net deferred income tax assets will be fully realized in the future prior to expiration, which resulted in a valuation allowance reversal and related income tax benefit during the quarter.

On July 6, Resolute and Paper Excellence Group, through its wholly-owned subsidiary Domtar Corporation, announced that they have entered into an agreement under which the latter will acquire all of the outstanding common shares of Resolute stock. The company expects the transaction to close in the first half of 2023, following stockholder and regulatory approvals, and satisfaction of other customary closing conditions. For additional information on the transaction, please see Resolute's current reports on Form 8-K filed on July 6 and July 7, 2022 with the U.S. Securities and Exchange Commission (or, the "SEC"). A full description of the transaction will be outlined in the proxy statement of Resolute to be filed with the SEC at www.sec.gov and with the Canadian securities regulators on the System for Electronic Document Analysis and Retrieval at www.sedar.com and mailed to stockholders of Resolute.