Hurricane Sandy: Richard Garneau, Resolute CEO, Says Canada's Forestry Industry To Profit From Storm

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HURRICANE SANDY CANADA FORESTRY ECONOMY
The destructive wrath of Hurricane Sandy will help boost recovery in Canada's forest products industry next year as communities in New York City area and along the New Jersey coast rebuild, the head of Resolute Forest Products said Friday. (John Lehmann/Globe and Mail) | CP

MONTREAL — The destructive wrath of Hurricane Sandy will help boost recovery in Canada's forest products industry next year as communities in New York City area and along the New Jersey coast rebuild, the head of Resolute Forest Products said Friday.

"When you look at the devastation it's mind boggling and it's going to have an impact,'' CEO Richard Garneau said in an interview.

"They're going to have to rebuild but it always takes some time for the cleanup to be done so I think the impact on demand of wood consumption is probably going to materialize in the second and third quarter of next year with the rebuilding efforts,'' Garneau said.

After being battered by the deep recession and financial crisis, the Canadian industry is seeing positive signs from the gradual improvement in U.S. housing starts.

Garneau said he's optimistic about regular housing demand for lumber and said the additional impact of the hurricane will help to support higher prices, which are expected to be pushed up by a decline in wood availability due to the pine beetle epidemic in British Columbia.

But he said it's too early to know the level of impact. Although the hurricane is believed to have caused more than US$50 billion in damages, there are no estimates yet about the value of forest products that will be used in the rebuilding effort.

Resolute Forest Products missed expectations on earnings despite swinging to a profit in the third quarter as it was hurt by downtime at its recently acquired Fibrek pulp operations and challenges in the newsprint export and lumber businesses.

The company formerly known as AbitibiBowater, reporting in U.S. dollars, said it earned $31 million or 32 cents per diluted share on sales of $1.15 billion in the period ended Sept. 30.

That compared with a net loss of $44 million, or 46 cents per share, on sales of $1.22 billion in the third quarter of 2011. Charges in the 2011 quarter included a currency translation loss of $60 million and an income tax provision of $27 billion.

Adjusting for one-time costs, it earned $7 million or seven cents per share and $91 million in pre-tax operating earnings (EBITDA).

Analysts had expected it would earn 23 cents per share in adjusted profits and $112 million in adjusted EBITDA.

Still, Garneau said he's pleased with the results, considering the quarter's challenges, including the more extensive maintenance required "to bring our recently acquired St. Felicien mill up to par.''

Resolute took a $10-million charge for annual maintenance and work to improve the operational and environmental performance of the St. Felicien mill.

"When you take into account all the events that took place during the quarter, I think that overall even though the analysts expected a higher net earning or EBITDA, we're certainly satisfied with the overall results.''

The company says newsprint demand is expected to remain weak while industry capacity is negatively affected by the restart of a competitor's mill in Quebec City.

Pulp pricing and demand, helped by China, will improve in the second half of next year but uncertainty about the global economy remains a challenge.

While the shutdown of St. Felicien hurt earnings in the quarter, the startup of a co-generation project there later this month, along two others next year — at Dolbeau, Que., and Thunder Bay, Ont., — will increase EBITDA by up to $70 million a year, said chief financial officer Jo-Ann Longworth.

"So yes, the market side I would say is slightly negative, but the things we control we're improving quarter on quarter.''

Paul Quinn of RBC Capital Markets said the results were below expectations and will likely put downward pressure on the stock, particularly in light of additional shares that will released.

"The upcoming distribution of about 15 million shares related to post-emergence disputed claims reserve, while not increasing the overall share count, will likely put further pressure on the stock,'' he wrote in a research note.

Moody's Investors Service upgraded Resolute's corporate family rating and senior secured note rating to Ba3 from B1 to reflect moves to reduce its debt since exiting bankruptcy protection about two years ago.

Resolute produces newsprint, commercial printing papers, market pulp and wood products. The company owns or operates 21 pulp and paper mills and 22 wood products mills in Canada, the United States and South Korea.

On the Toronto Stock Exchange, Resolute's shares dropped 52 cents, or 4.16 per cent, at C$11.98 in afternoon trading Friday.

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