Q1 GAAP net income of $42 million / $0.45 per share
Adjusted EBITDA of $104 million in the quarter
Repurchased $225 million of senior notes
Liquidity strong at $595 million
Net debt to adjusted EBITDA at 0.6x
Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) today reported net income for the quarter ended March 31, 2019, of $42 million, or $0.45 per diluted share, compared to $10 million, or $0.11 per diluted share, in the same period in 2018. Sales were $795 million in the quarter, a decrease of $79 million from the year-ago period. The first quarter of 2018 included sales from the Catawba (South Carolina) and Fairmont (West Virginia) facilities, sold in the fourth quarter of 2018. Excluding special items, the company reported net income of $30 million, or $0.32 per diluted share, compared to $17 million, or $0.18 per diluted share, in the first quarter of 2018.
"Our diversified asset base continued to produce strong EBITDA in the quarter despite building market pressure in some of our businesses," said Yves Laflamme, president and chief executive officer. "Our quarterly results benefitted from improved productivity, which allowed us to absorb the significant rise in wood fiber costs and offset the reduction in EBITDA associated with the divestiture of the Catawba mill. Accordingly, we continued to generate consistent value from our paper portfolio, and the results of our wood products business improved as prices rebounded modestly from multi-year lows. We're also pleased with the recent ratification of a four-year collective agreement covering our nearly 800 unionized employees at three of our U.S. pulp, paper and tissue mills."
Non-GAAP financial measures, such as adjustments for special items and adjusted EBITDA, are explained and reconciled below.
Operating Income Variance Against Prior Period
The company reported operating income of $64 million in the quarter, compared to $75 million in the fourth quarter of 2018. The operating results reflect higher average transaction prices for wood products, lower depreciation expense, the favorable effect of the weaker Canadian dollar and fewer production outages. These elements were partly offset by lower volumes, mainly attributable to the Catawba mill divestiture at the end of the fourth quarter and softening newsprint market conditions, as well as an increase in wood fiber costs and seasonally higher energy expenses. The operating results in the fourth quarter of 2018 included a $141 million gain on disposition of assets and a non-cash impairment charge of $120 million. Adjusted EBITDA in the quarter was $104 million, essentially unchanged from $105 million reported in the fourth quarter, which included $15 million from the Catawba facility.
Operating income in the market pulp segment was $42 million, relatively unchanged compared to the previous quarter. The average transaction price remained at $808 per metric ton, while shipments declined by 56,000 metric tons due to a reduction in pulp capacity following the divestiture of the Catawba and Fairmont facilities. On a pro forma basis, sales volume rose by 26,000 metric tons because of less scheduled downtime and production disruptions this quarter. The operating cost per unit (the "delivered cost") decreased by $24 to $664 per metric ton as higher fiber costs were more than offset by improved productivity, increasing EBITDA per metric ton to $162. Accordingly, despite the sale of the Catawba mill, EBITDA was relatively unchanged at $47 million.
The tissue segment incurred an operating loss of $8 million in the quarter, an improvement of $1 million compared to the fourth quarter of 2018. Overall sales increased by 11%, reflecting improved product mix, price increases for away-from-home products, and higher shipments. Delivered cost remained unchanged, as lower freight expenses associated with our new distribution center were offset by higher pulp costs following the divestiture of the Fairmont mill. EBITDA improved to negative $3 million, from negative $5 million in the first quarter.
The wood products segment reported an operating income of $6 million in the quarter, compared to an operating loss of $8 million in the fourth quarter. The improvement reflects an increase in average transaction price, up $27 per thousand board feet, to $374. Lower market-based stumpage fees and maintenance costs more than offset seasonally higher fiber usage and freight costs, leading to a $6 per thousand board feet decrease in delivered cost. Pricing gains and lower costs largely outweighed the 24 million board feet decrease in shipments. Volumes this quarter were unfavorably impacted by adverse weather conditions, which affected rail car availability, log supply and U.S. consumption. EBITDA for the segment increased to $14 million, compared to $1 million in the prior quarter. Finished goods inventory remained elevated at 159 million board feet.
At $28 million in the first quarter, newsprint's operating income was unchanged compared to the previous quarter. Sales declined by 14%, driven by a 53,000 metric ton decrease in shipments, while the average transaction price remained at $634 per metric ton. The reduction in sales volume reflects seasonality, the timing of export sales and softening market conditions. As a result, finished goods inventory rose to 135,000 metric tons at quarter-end. The delivered cost decreased by $12 per metric ton, largely attributable to lower depreciation expense, as certain assets are fully amortized. Higher contribution from the Thunder Bay (Ontario) cogeneration assets, following a turbine failure in the previous quarter, and overall lower maintenance costs were largely offset by higher fiber and energy costs. Consequently, EBITDA decreased by $10 million to $35 million for the quarter, equivalent to $106 per metric ton, or 17% EBITDA margin.
The specialty papers segment generated operating income of $15 million in the quarter, compared to $17 million in the previous quarter. Pricing rose by $12 per short ton to $768, while shipments fell by 88,000 short tons with the sale of the Catawba mill at the end of 2018. Despite the exit from higher-cost coated mechanical grades, delivered cost remained unchanged at $695 per short ton, reflecting continued higher wood costs in the U.S. Southeast due to abnormally wet weather, unfavorable energy expenses and scheduled maintenance costs. While segment EBITDA decreased by $3 million to $25 million this quarter, EBITDA per short ton rose by $30 to $125, due to the sale of the Catawba mill, equivalent to a 16% margin.
Consolidated Quarterly Operating Income Variance Against Year-Ago Period
The company's operating income was $16 million higher than the first quarter of 2018. Overall pricing added $37 million to the results, as the average transaction price increased by 14% for each of market pulp, newsprint and specialty papers, offsetting the 19% drop in lumber prices. The improvement in operating income also reflects the $20 million favorable impact of the weaker Canadian dollar and lower depreciation expense of $13 million due to divestitures and the full amortization of certain assets.
These favorable items were largely offset by an increase in manufacturing costs of $51 million, mainly resulting from higher fiber costs and additional maintenance, mostly planned. Results were also impacted by lower sales volume of $8 million, reflecting weaker lumber and newsprint market conditions.
Corporate and Finance
During the quarter, the company generated $23 million of cash from operations, despite the seasonal build-up in log inventory and the increase in newsprint finished goods inventory. Cash decreased to $69 million, reflecting $26 million in capital expenditures and the repurchase of $225 million of the senior notes due 2023. Net debt to trailing 12 month adjusted EBITDA remained low, at 0.6x, and liquidity at quarter-end stood at $595 million.
By quarter-end, the company had recorded cumulative softwood lumber duty deposits of $117 million on the balance sheet, including $14 million paid in the quarter. Uncoated groundwood papers duty deposits of $6 million were fully refunded during the quarter.
Following the adoption of new lease accounting standards, the company recognized total liabilities of $66 million associated with operating leases, and corresponding assets on the balance sheet as of March 31, 2019.
"We maintain our view on market pulp fundamentals even as prices have recently started to trend down. While we expect lower price realizations in the second quarter, limited capacity additions and growing demand will continue to support favorable market dynamics over the medium term. Our tissue segment remains a key focus as we continue to build on the late-year progress in terms of productivity and quality. We expect our wood products cost performance to improve for the balance of the year. But we're more conservative with our expectations around lumber markets even as some market participants are more enthusiastic following abnormally wet and wintry conditions and in light of production curtailments among Canadian producers, including downtime of our own. While our near-term outlook is more uncertain, our medium to long-term outlook remains positive. With ongoing global demand declines and currently low operating rates, we expect lower pricing for our paper grades in the second quarter. But despite the softening market conditions, our paper business generated strong first quarter EBITDA margins, and we are confident we can continue to produce attractive cash flows as we take steps to reduce inventory and maintain our competitive cost position," added Mr. Laflamme.