May 1, 2012 / 12:43 PM / 5 years ago

UPDATE 2-Resolute's profits hurt by weak paper, pulp demand

* Profit hurt by weak pulp prices and weak newsprint demand

* Q1 EPS $0.23 vs $0.31 a year earlier

* Q1 Adjusted EPS $0.07 vs $0.10 a year earlier

* Shares fall 5.4 pct in afternoon trading on the TSX

May 1 (Reuters) - Resolute Forest Products reported a 23 percent drop in its quarterly profit, as all of its segments - newsprint, paper, pulp and wood products - reported weak results, sending its share price down 5.4 percent.

The Montreal-based company, formerly known as AbitibiBowater Inc, said it remains focused on reducing operating costs, even as it moves closer toward clinching a C$130 million takeover of rival North American pulp producer Fibrek Inc.

“Acquiring Fibrek would provide increased exposure to pulp markets, which enjoy stronger long-term fundamentals than many of Resolute’s paper grades,” said Scotia Capital analyst Benoit Laprade in a note to clients.

Resolute announced its plans to bid for Fibrek in November, with the backing of some major investors who control roughly 46 percent of the shares in Fibrek, although the target’s management team has strongly opposed the C$1 per share bid.

Canadian pulp producer Mercer International Inc emerged as Fibrek’s white knight in February with a C$1.30 per share bid that also involved a controversial private placement of Fibrek warrants that would have leveled the playing field and negated the advantage that Resolute held through its lock-up agreements with certain large Fibrek shareholders.

However, regulators and courts ruled that the proposed issue of special warrants was unlawful. Mercer finally bowed out of the battle for Fibrek on Monday, paving the way for Resolute to clinch a deal.

“Our offer is going to expire on Friday, I cannot predict how many shareholders are going to tender their shares, but we expect that we are going to see Fibrek shareholders tender to our offer,” said Resolute’s Chief Executive Richard Garneau.

Garneau said so far 48.8 percent of Fibrek’s shares have been tendered in favor of its offer and the company believes that it will top the 50 percent threshold by the end of the week. Resolute however requires a two-thirds majority to push through with its plan of acquiring full control.

“If we don’t get to that two-thirds in the first round of tendering then we’ll have to hold a shareholder meeting, issue a proxy and have a vote, where we will need two-thirds of the shareholders attending and voting in favor of an amalgamation,” said Resolute’s Chief Financial Officer Jo-Ann Longworth.

“Our intention is to own a 100 percent of this company and to fully integrate it,” she added.

Shares of Resolute were down 71 Canadian cents at C$12.39 in afternoon trading on the Toronto Stock Exchange. Fibrek shares fell 3 Canadian cents lower to 92 Canadian cents a share, while those of Mercer rose 30 Canadian cents to C$6.90.

QUARTERLY RESULTS

Resolute said its quarterly results were hurt by weak prices for pulp, weaker newsprint demand and lower shipments of wood products.

“The first-quarter is always tough, it was probably tougher this quarter, because of specific conditions like the strong U.S. dollar and low-cost old newspaper,” said Garneau. “Overall though, I think it was a decent quarter considering the head-winds that we faced.”

Resolute said net income fell to $23 million, or 23 cents a share, from $30 million, or 31 cents a share, a year earlier.

Excluding one-time items, Resolute reported net income of $7 million, or 7 cents a share, down from $10 million or 10 cents a share, a year earlier.

Revenue fell 8 percent to $1.1 billion.

Resolute reported an operating loss in its pulp segment of $21 million, compared with an income of $23 million last year. The average transaction price almost halved to $38 per metric ton from $74 per metric ton last year.

The newsprint business reported a $21 million profit in the quarter, down $5 million from a year earlier, due to a decline in shipments.

“We continue to work on costs to optimize our operations,” said Garneau. “And when you look at the outlook, even though we are cautious for the balance of the year, we certainly see some small improvements.”

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