Resolute Forest Products Inc. has reported net income of $7 million (excluding special items), or $0.07 per share, for the quarter ended June 30, 2015, compared to net income of $17 million (excluding special items), or $0.18 per share, in the same period in 2014. Sales were $926 million in the quarter, down $165 million, or 15%, from the second quarter of 2014. GAAP net loss was $4 million, or $0.04 per share, compared to a net loss of $2 million, or $0.02 per share, in the second quarter of 2014.

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• Q2 adjusted EBITDA of $89 million, up from $64 million in Q1
• Significantly lower costs and favorable FX overcame effect of price declines
• Q2 earnings of $0.07 per share (excl. special items) / GAAP net loss of $0.04 per share

"Our continued focus on costs helped to deliver solid results considering the challenges that continue to pressure our industry," said Richard Garneau, president and chief executive officer.  "Our competitive and diversified platform allowed us to weather the tough conditions, including the cyclical headwinds we faced in our growth businesses – market pulp and wood products – as well as increasing difficulty in paper grades, especially newsprint. We are working to maintain our competitive edge by focusing on the proven Resolute operating model in everything we do and pushing to optimize our asset base in order to maximize the utilization of our most cost-effective mills."

Non-GAAP financial measures, such as adjustments for special items and adjusted EBITDA, are explained and reconciled below.

Operating Income Variance Against Prior Quarter

Consolidated

The company reported operating income of $16 million in the quarter, compared to an operating loss of $15 million in the first quarter. The $31 million improvement reflects lower costs ($38 million) due to the effect of spring temperatures, natural gas pricing and better mill productivity, as well as higher volume ($12 million) and the favorable effect of the weaker Canadian dollar ($9 million), despite lower realized prices across all grades ($31 million), particularly wood products and newsprint. There were no closure costs in the quarter, compared to $6 million of closure costs associated with the permanent newsprint capacity closures at Iroquois Falls, Ontario, and Clermont, Quebec, in the first quarter.

Adjusted EBITDA was $89 million in the quarter, $25 million higher than the $64 million reported in the first quarter. As more fully described below, in the quarter the company changed its presentation of pension and other postretirement benefit (or "OPEB") costs to present the net financing and remeasurement components as a special item adjustment used in its non-GAAP performance measures, including adjusted EBITDA. Adjusted EBITDA in the second quarter would have been $77 million without this adjustment, compared to the $50 million previously disclosed for the first quarter. The net financing and remeasurement components of pension and OPEB costs are now allocated solely to "corporate and other" in its segment presentation of operating income.

Market Pulp

Operating income in the market pulp segment was $26 million in the second quarter, $15 million higher than the first. The increase reflects a 7%, or $46 per metric ton, drop in the operating cost per unit (the "delivered cost"), due to better operating efficiency and seasonal factors, as well as a 23,000 metric ton increase in shipments, or 7%, mostly bleached softwood kraft. But the overall average transaction price slipped by $8 per metric ton, or 1%, due to significantly lower realized prices for softwood, which was only partly offset by higher realizations for fluff and bleached hardwood kraft. Adjusted EBITDA improved to $108 per metric ton, for a 16% margin, compared to $76 in the previous quarter and a trailing twelve month average of $88 per metric ton. Finished goods inventory at the end of the quarter was 14,000 metric tons lower, or 14%, which represents almost four days of supply.

Wood Products

The wood products segment generated an operating loss of $4 million in the quarter, compared to operating income of $5 million in the first quarter. The drop reflects a $33 per thousand board feet reduction in average transaction price, or 9%, because of a lower average market price in the quarter. Shipments, however, rose by 25 million board feet, or 6%, to 418 million board feet, and the delivered cost dropped by $15 per thousand board feet, or 4%, to $327 per thousand board feet. The lower delivered cost is mostly because of the first quarter weakness in the Canadian dollar and its lag effect on inventory costs, as well as better fiber recovery overall and higher production efficiency.  Finished goods inventory fell by 16 million board feet, or 12%. With the average transaction price in the quarter at multi-year lows, adjusted EBITDA was just $12 per thousand board feet, reflecting a 4% margin, compared to $33 in the previous quarter and a trailing twelve month average of $47 per thousand board feet.

Newsprint

Operating income in the newsprint segment was $3 million in the quarter, compared to an operating loss of $3 million in the first quarter. The improvement reflects a $31 per metric ton, or 6%, drop in the delivered cost, largely as a result of seasonally lower steam and power costs as well as lower prices for natural gas. Newsprint shipments were 14,000 metric tons higher, or 3%, but the overall average transaction price fell by a further $17 per metric ton, or 3%. Pricing conditions since late 2014 have reflected the increasing challenges for North American producers in the global newsprint business, who face an accelerating pace of global structural decline, a currency disadvantage in export markets because of the strong U.S. dollar, and very low operating rates outside of North America. The company reduced finished goods inventory by 8%, to 97,000 metric tons. Despite the challenging environment, adjusted EBITDA was $35 per metric ton in the quarter, for a 7% margin, compared to $24 in the previous quarter and a trailing twelve month average of $38 per metric ton.

Specialty Papers

Operating income in the specialty papers segment was $17 million in the second quarter, $12 million higher than the first quarter. As with the other segments, the improvement is the result of significantly lower costs, down by $40 per short ton, or 6%, which reflects seasonally lower steam costs, as well as better mill efficiencies and productivity compared to the first quarter. Shipments were 6,000 short tons higher, or 2%, but the average transaction price slipped by $10 per short ton, or 1%, as a result of decreases in supercalender and white paper pricing. Finished goods inventory rose by 22,000 short tons. Overall, adjusted EBITDA per short ton was $93, reflecting a 13% margin, compared to $58 in the previous quarter and a trailing twelve month average of $63 per short ton.

Consolidated Quarterly Operating Income Variance Against Year-Ago Quarter

The company reported operating income of $16 million in the quarter, compared to an operating loss of $8 million in the year-ago period, despite an $88 million drop in overall pricing, reflecting 17% lower average transaction prices for wood products, 11% for newsprint, 9% for market pulp and 2% for specialty papers. Newsprint and specialty paper shipments were also lower due to the impact of the company's 2014 capacity rationalization initiatives to, among other things, adapt to changing market dynamics. Excluding the $14 million increase in total pension and OPEB expenses, costs were $46 million lower in the quarter compared to the year-ago period, because of asset optimization initiatives, better mill efficiencies and productivity, lower prices for commodities and reduced maintenance costs. The increase in pension and OPEB expenses related to the $330 million increase in balance sheet net pension and OPEB liability in 2014. The weaker Canadian dollar favorably affected operating income by $41 million in the quarter. There were no closure costs in the quarter compared to the second quarter of last year when the company incurred $52 million of accelerated depreciation and other closure-related costs, most of which related to the permanent closure of an idled paper machine at our Catawba, South Carolina, mill.

Corporate & Finance

The company repurchased 3,195,127 shares of common stock in the quarter, or 3.4% of the outstanding amount, for aggregate consideration of $37 million. With $61 million of cash provided by operations and $39 million in capital expenditures, cash was $303 million at the end of the quarter. This provides the company with $771 million of liquidity, and net debt at $294 million.

"We took advantage of the recent stock price underperformance to buy back a significant portion of our stock under the recently-renewed share repurchase program," said Jo-Ann Longworth, senior vice president and chief financial officer. "This was an opportunistic move that does not compromise our ongoing value-creating initiatives to build capacity in markets with future growth opportunities as we continue to execute on our growth strategy, including the expansion into tissue and the pulp digester project in Calhoun, as well as the two new sawmills in Northern Ontario."

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 will continue to be allocated to the operating segments.

The company now also treats net financing and remeasurement components of pension and OPEB costs as a special item to be adjusted for purposes of establishing its non-GAAP performance measures, such as adjusted EBITDA and adjustments to earnings for special items. The change was applied retroactively by adjusting comparative financial information, including the information presented in this earnings release.

The company believes that isolating the net financing and remeasurement components of pension and OPEB costs, which are non-operating in nature, outside the operating segments and removing them from non-GAAP performance measures better reflects its ongoing operating results and improves their comparability between periods, and will therefore be more useful to investors. This approach is consistent with the indicators management uses internally to measure performance and also consistent with a number of industry peers.

Outlook

Mr. Garneau added: "Lower North American exports to Asia and softer than expected demand pulled lumber prices down to multi-year lows during the quarter. But in light of pricing momentum of late and the recent encouraging data on U.S. housing starts, our near-term outlook for lumber is more positive. For pulp, the slowing pace of growth in China, the strong U.S. dollar and lower demand for printing and writing grades dragged our average market pulp price down $67 per metric ton since its peak in the second quarter of last year. Accordingly, our near-term outlook for pulp is unclear. But we continue to believe that the underlying fundamentals for pulp and lumber will support stronger performance in the medium and long-term. Our quarterly results show that our platform of quality assets is very well positioned to capitalize on the recovery once this downturn has run its course."

He continued: "Even as conditions in the newsprint business continue to deteriorate, we expect to run our network to capacity, as we believe that our asset base gives us a competitive edge to weather the accelerating pace of global structural decline, the currency disadvantage in export markets because of the strong U.S. dollar, and very low operating rates outside North America. We expect a modest seasonal uptick in specialty paper shipments, but the weak euro and the accelerating pace of demand decline in North America could put pressure on selling prices. We will continue to focus on maximizing our competitive edge as we execute our growth strategy that will build the Resolute of the future with projects like the tissue manufacturing and converting facility scheduled for ramp-up in 2017 and our ongoing capacity-building initiatives in pulp and lumber."

About Resolute Forest Products

Resolute Forest Products is a global leader in the forest products industry with a diverse range of products, including newsprint, specialty papers, market pulp and wood products. The company owns or operates some 40 pulp and paper mills and wood products facilities in the United States, Canada and South Korea, and power generation assets in Canada. Marketing its products in close to 80 countries, Resolute has third-party certified 100% of its managed woodlands to at least one of three internationally recognized sustainable forest management standards. The shares of Resolute Forest Products trade under the stock symbol RFP on both the New York Stock Exchange and the Toronto Stock Exchange.

Resolute and other member companies of the Forest Products Association of Canada, as well as a number of environmental organizations, are partners in the Canadian Boreal Forest Agreement. The group works to identify solutions to conservation issues that meet the goal of balancing equally the three pillars of sustainability linked to human activities: environmental, social and economic.

Resolute is proud to be ranked by Corporate Knights as one of Canada's Best 50 Corporate Citizens for 2014. The company and Richard Garneau, president and chief executive officer, have been named to Canada's 2015 Clean50, and Resolute was also awarded The New Economy magazine's global Clean Tech Award for best forestry and paper solutions.

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