Resolute Forest Products Inc.
Q1 2018 Earnings Call Transcript

Published: 3 May 2018

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products’ First Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, May 3, 2018 at 9 AM Eastern Time. I would now like to turn the meeting over to Silvana Travaglini, Vice President. Please go ahead, Ms. Travaglini.

[Silvana Travaglini:]

Good morning. Welcome to Resolute’s first quarter earnings call. Today, we’ll hear from Yves Laflamme, President and Chief Executive Officer; and Jo-Ann Longworth, Senior Vice President and Chief Financial Officer. You can follow along with the slides for today’s presentation by logging on to the webcast using the link in the Presentations and Webcast page, under the Investor Relations section of our website, or you can also download the slides. Today’s presentations will include certain non-U.S. GAAP financial information. A reconciliation of those non-GAAP numbers to U.S. GAAP financial measures is included in our press release and in the appendix to the slides. We will also make forward-looking statements. Forward-looking information is based on our current assumptions, beliefs and expectations, all of which involve a number of business risks and uncertainties and can change as conditions do. Please review the cautionary statements in our press release and on slide 2 of today’s presentation.

[Yves Laflamme:]

Good morning. Thank you for joining us today. We realized the best first quarter in terms of profitability since 2011. We generated adjusted EBITDA of 108 million compared to 102 million in the fourth quarter and 61 million in the same period last year. Wood products and market pulp segments reported 101 million of EBITDA, a 50 million improvement over the same period last year. Our first quarter results benefited from strong price momentum across most of our product offerings as well as a decrease in maintenance outages and lower share based compensation expense. [indiscernible] lower shipments, seasonally higher energy expenses and increased costs tampered the benefits of higher pricing, leading to a moderate improvement in earnings compared to the fourth quarter. By segment, we reported adjusted EBITDA of 40 million in market pulp, down 4 million from the fourth quarter. Breakeven for our tissue operation, 61 million in wood products, down 4 million, 12 million in newsprint, up 1 million and 5 million in specialty paper, an improvement of 7 million against the previous quarter. Transportation challenges widespread across North America and weather related issues negatively impacted our first quarter earnings by more than 15 million. Higher trucking rates and limited rail cars availability led to a significant increase in our freight cost this quarter, rising 8% compared to the fourth quarter. Freight constraints also reduced shipments volume and led to an increase in finished goods inventory. In addition, the unusually cold weather in the US South aggravated seasonally higher energy costs and reduced the operational efficiency of [indiscernible]. Let’s review our individual segments starting with market pulp. World shipments of chemical pulp were flat in the quarter, compared to the year ago period. Shipments to North America and China decreased by 3% and 2% respectively, while shipments to Western Europe rose by 4%. Softwood shipment decreased by 3% globally, reflecting lower shipments to China, North America and Western Europe, down 6%, 5% and 1% respectively. Softwood pulp mills ran at 90% shipments to capacity ratio. World shipments of hardwood rose 4%, led by an increase of 8% in shipments to Western Europe and 1% to China, while shipments to North America fell by 2%. Hardwood mills were at 88% shipments to capacity ratio. The supply demand balance has remained favorable so far in 2018 for pulp, primarily due to global supply disruptions. As a result, our overall realized pricing has continued to climb, reaching 710 per metric ton, an increase of $32 compared to the fourth quarter of 2017 and 117 per metric ton compared to the year ago period. Further price increases have been perfectly reported for the second quarter. Despite the additional sales volume of recycled pulp, order of pulp shipments fell by 7% in the quarter or 26,000 metric ton to 362,000. Shipments fell short of our expectations due to the timing of ramping up of our fourth quarter shipments and lower positivity at some of our US Southeast mills and impacted mainly by the unusually cold weather. On tissue, in the first quarter, total tissue consumption in the United States remained favorable growing 3% compared to the same period last year. Converted product shipments increased 2.1% largely driven by away from home volumes, up 3.5%, while at home grew 1.5%. Overall sales volume for the segment, which continues to include only the Florida tissue operations, increased largely because of improved productivity, leading to higher shipments of parent rolls which grew by more than 30%. Additional volumes were also realized in the quarter for both away from home and at home products. Given the relatively higher percentage of parent roll sales, overall pricing decreased by $62 per short term. At Calhoun, shipments were also higher. During the quarter, we continued to focus on volume growth and have secured new business, which will lead to more volumes, starting at the end of the second quarter. On wood products, US housing starts averaged 1,318,000 on a seasonally adjusted basis this quarter, up 5% from the previous quarter. This increase is entirely driven by multi-family, up 18%, while single family sales were unchanged. Supply constraints, lower inventory and solid demand have continued to push our lumber prices to record high during the first quarter. Our realized price rose to 459 per thousand board feet, an increase of 5% compared to the fourth quarter and 31% compared to the same quarter last year. The spread between the reference price of random 2 and better and stud grades remains at more than $100 per thousand board feet. Approximately 50% of our lumber production originates from random mills. Shipments were however 11 million board feet lower as a result of limited rail cars availability, leading to a 16 million board feet increase in finished goods inventory to 140 million board feet. Our newsprint -- North American demand for newsprint declined 10% in the first quarter of 2018, compared to the same period last year, driven by a 15% reduction in demand for newspaper publishers, while demand from commercial printers was up 1%, industry production was also significantly lower, down 15%. Accordingly, the shipment to capacity ratio in North America increased to 94% in the first quarter, from 92% in the year ago period. Global demand for newsprint was down 9% through February with Latin America down 11%, Asia 9% and Western Europe 7%. Despite the drop, the world newsprint shipment to capacity ratio rose to 90% as a result of major global capacity cuts in the second half of 2017 and the carryover effects. Overall, our average transaction price rose 33% per metric ton in the quarter. With increases realized in both North America and in export markets. Further US price increases have been publicly reported for the second quarter. During the first quarter, our shipments were significantly impacted by detaining of export sales and transportation issues, dropping by 55,000 metric ton and resulting in a 15,000 metric ton increase in finished goods inventory. On specialty paper, North American demand for on coated mechanical paper was down 9% in the first quarter of 2018 compared to the year ago period. Lower demand for supercalendered grades continued to drive this decline, decreasing 10% while the demand for standard grades was down 5%. Overall, North American industry projection for the quarter declined only 2%, but imports dropped 35% mainly for supercalendered papers. The operating rate decreased to 90% compared to 93% in the year ago period. Coated mechanical demand was down 5% in the first quarter compared to the year ago period. North American production however was down 15% while imports rose 17%. With the North American capacity closure in 2017 and early 2018, the industry shipments to capacity ratio rose to 98% in the first quarter of 2018. Our average transaction price for specialty papers increased by 15 per short term compared to the previous quarter. Further price increases for all uncoated mechanical papers and uncoated free sheet rates have been perfectly reported for the second quarter. Shipments were however down 18,000 short term or 6%, mostly due to seasonally lower demand for supercalendered papers. In March, the US Department of Commerce announced the preliminary results on the antidumping duty investigation for imports of uncoated groundwood grades from Canada, including the determination that Resolute did not do such projects in US. Only Resolute and one of its competitor were assigned to zero percent antidumping cash duty already compared to the rate of 22.16 for all other producers and exporters. Since January 16, we have been making countervailing duty deposit at a rate of 4.42%, compared to an average of 6.53% for companies subject to this duty. Final determinations for both countervailing and antidumping investigations are expected in late summer. We continue to advocate on both sides of the border that this transaction and other US trade measures is without merit. Uncoated groundwood duties only serve to accelerate demand decline. We are working with a broad based coalition in the US to oppose these duties. The majority of US newsprint manufacturers and national trade associations for the US paper and forest project industry as well as major US customers have all taken a strong stance against the imposition of these duties. Additionally, more than 50 members of the US House and Senate have voiced their opposition to this duties. In March, Verso Corporation entered into an agreement with Port Hawkesbury Paper and Irving Paper to settle the supercalendered paper contributing duty proceeds. As per the disclosed terms of the agreement, Verso has requested the termination of the countervailing duty order, which should apply to all companies that have paid deposit on entries of supercalendered paper since August 3, 2015. Meanwhile, we continue to make cash deposits at a rate of 17.87%. During the first quarter, cash duty deposit of 21 million were paid for a cumulative total of 96 million recorded in our balance sheet, 54 million for supercalendered paper, 40 million for softwood lumber and 2 million for uncoated groundwood paper. We announced on May 1 that unionized employees at 8 of our Canadian pulp and paper mills, representing about 40% of our total pulp and paper production capacity voted in favor of a four year renewal of their master operative agreement. We are very pleased to have reached an agreement with union leadership and members to ensure our Canadian pulp and paper mills remain competitive while providing stability for our customers, shareholders, communities and other partners. I will now let Jo-Ann discuss our financial performance before I conclude with our outlook.

[Jo-Ann Longworth:]

Thank you, Yves and good morning, everyone. Today, we reported net income of 17 million for the first quarter or $0.18 per share, excluding special items. This compares to a net income, excluding special items, of 14 million or $0.15 per share in the previous quarter and a net loss, excluding special items, of 30 million or $0.33 per share in the same period last year. Special items pretax in the quarter included non-operating pension and other post-retirement benefit credits of 13 million and startup costs of 8 million associated with Calhoun tissue. Total sales in the first quarter were 874 million, down 3% from the fourth quarter of 2017. Higher prices across most of our products positively impacted results by 37 million compared to the fourth quarter. The average transaction price rose by $32 per metric ton in market pulp, $21 per thousand board feet in wood products, $33 per metric ton in newsprint and $15 per short ton in specialty papers. In tissue, prices were lower by 4%, mainly due to relatively higher parent roll sales. Shipments however fell in most segments, reflecting the impact of transportation challenges, the timing of overseas shipments, seasonally lower demand for supercalendered paper and lower productivity. Shipment delays led to an increase in finished goods inventory, notably in newsprint and wood products where inventories rose by 15,000 metric ton and 16 million board feet respectively. After removing the effective volume and foreign exchange, our manufacturing cost increased by 9 million from the fourth quarter. The increase reflected mainly higher energy costs, exacerbated by unusually cold weather, particularly in the US south and the increase in market based stumpage fees in our wood product segment and seasonally higher fiber usage, offset in part by lower maintenance costs, given less planned maintenance this quarter. Compared to the fourth quarter, market pulp’s all-in cash costs increased by $35 per metric ton, mostly because of higher freight expenses, largely related to rail car shortages and an increase in fuel and fiber costs, mainly associated with the colder weather, offset in part by lower maintenance and a decrease in woodchip prices. Higher costs and lower volume outweighed pricing gains, resulting in EBITDA of $110 per metric ton or 40 million in the quarter, down from 44 million. The cash cost of our tissue segment, which excludes the Calhoun operations improved due to higher volumes and a higher percentage of parent roll shipments. Given that pricing decreased also as a result of product mix, the improvement in EBITDA this quarter was marginal. In wood products, the cash cost increased by $26 per thousand board feet compared to the previous quarter. Lower internal woodchip selling prices, higher market based stumpage fees and an increase in freight expenses due to the longer distances led to higher overall costs. Despite the $21 per thousand board feet increase in realized prices, higher costs and lower volumes led to a $5 per thousand board feet decrease in EBITDA to 134 or $61 million. Newsprint cash cost was $524 per metric ton in the first quarter, up $26 due to increased transportation expenses tied to freight constraints, seasonally higher energy costs and lower volumes. With prices increasing by $33 per metric ton, EBITDA improved marginally from $11 million to $12 million for the quarter, equivalent to $34 per metric ton. The cash cost in specialty papers decreased by $10 per short ton to $657 due to less maintenance outages, increased internal hydroelectric generation and a decline in wood chip prices, which more than compensated for the rise in freight and energy costs. Combined with the increase in realized pricing, EBITDA rose by $7 million or $25 per short ton compared to the previous quarter. Our selling, general and administrative expenses decreased mostly to a reduction in share-based compensation expense. The fourth quarter of 2017 included an $8 million increase in share based compensation, largely due to the appreciation of our share price in that quarter. Excluding the effect of volume, our distribution costs rose by $12 million, as a result of increased truck rates, largely stemming from higher demand and lack of rail car availability, mostly seasonal in addition to an increase in lumber shipments to the US. During the quarter, our cash position increased by 7 million to 13 million. We repaid 9 million under our revolving credit facilities and reduced our total debt to 779 million at quarter end. Liquidity rose to 452 million. Despite the seasonal buildup of long inventory at our saw mill and delays in shipments, resulting in a $51 million increase in inventory, net cash provided by operating activities improved to 62 million compared to 59 million in the fourth quarter. Capital expenditures in the quarter were 25 million, in line with the fourth quarter. As previously disclosed, we expect to make investments in 2018 to improve productivity and yields at our sawmills and increase our pulp production capacity. Due to the timing of project spending, we now expect to invest 175 million in 2018, lower than our previous guidance of 200 million. Duty cash deposits increased by 8 million compared to the previous quarter, as we resumed making countervailing duty deposits on softwood lumber at the end of 2017, following their suspension back in August. We also became subject to countervailing duty deposits on uncoated groundwood paper, beginning in January. In the quarter, we made 29 million of pension contributions and OPEB payments of 3 million compared to a total of 25 million in the previous quarter, an increase of 7 million due exclusively to the timing of contributions to our US plants. We recorded pension and OPEB credits of 3 million compared to an expense of 5 million, excluding closure related costs in the previous quarter. The decrease in expense is a result of stronger asset returns in 2017 and lower amortization of actuarial losses in 2018 for our US plants. Consistent with our earlier guidance, we expect to make 125 million of pension contributions and 15 million of OPEB payments this year, a $35 million decrease compared to a 2016 baseline, before we exited from the Quebec funding relief regulations. The associated pension and OPEB credit for 2018 is expected to be 15 million. The net pension and OPEB liability on our balance sheet decreased by 62 million to 1.2 billion, largely the result of ongoing pension contributions and the favorable currency impact. I will now turn it back to Yves for concluding remarks.

[Yves Laflamme:]

Thank you, Jo-Ann. We expect positive price momentum in the near term across most of our segments, as we continue to make progress on our 2018 priorities, mainly completing the operational ramp up of our Calhoun tissue operations, and investing in our lumber and pulp operation and optimizing our specialty paper business. Near term, we remain optimistic about our pulp business as the North American pulp industry moves into maintenance outage season. Further price increases have been publicly reported for the second quarter. Pulp maintenance outages are scheduled at two of our mills in the second quarter. As a result, our pulp production is expected to decrease by approximately 15,000 tons. While plant maintenance costs are deferred a number of times until the next maintenance cost or – until the next planned outage sorry, the result of both our pulp and paper segments are typically impacted by addition maintenance activity scheduled during these outages as well as our lower volumes. The maintenance outage at one of our mills is scheduled at the end of the third quarter, while the remaining two pulp mills outages are scheduled in the fourth quarter. In tissue, our short term perspective remains the same. We continue to work on improving the tissue machine’s productivity and expect to attain the targeted operational capacity by mid-year. We are also focused on improving market access for converted projects and have secured additional sales, which we will begin to realize in the latter part of the second quarter. The results of our Calhoun tissue operation are expected to be recorded in our tissue segments sometime in the second quarter of 2018. In wood products, we are cautiously optimistic that lumber markets will remain favorable. Even the current supply constraints and the ongoing recovery in the US housing starts, housing market. Wood chip prices are expected to remain low in 2018, compared to 2017, reducing wood products profitability but benefiting our pulp and paper costs and company’s overall resource as we are a net buyer of wood chips. In the quarter, lower internal wood chip selling prices increased wood products production cost by $6 million. The impact of industry capacity reduction in both newsprint and specialty grades in the second half of 2017 are carried over in to 2018 and we expect the market balance to remain strong in the near term. We have progressively reported price increases in the second quarter for newsprint, uncoated mechanical paper as well as uncoated free sheet. Transportation related headwinds are expected to continue to impact our business and earnings, but to a lesser extent, given the typical first quarter weather related freight constraints. We also expect to walk down the finished goods inventory buildup during the first quarter in both newsprint and wood products.

[Silvana Travaglini:]

This concludes our formal presentation. Operator, we will now open the call for questions.

[Operator:]

[Operator Instructions] Your first question comes from Paul Quinn with RBC Capital Markets.

[Paul Quinn:]

Just a couple of questions. Maybe to start on tissue. Your current platform really sells a lot of I guess low and mid-grade product lines. What kind of competitive pressures are you seeing there and have you started to sell some of the premium and ultra on the Calhoun machine.

[Yves Laflamme:]

First of all, when we are talking about lower grade, we're talking about parent rolls, not more than lower grade. So that was in Atlas mostly. So the reason for that was getting more sales on the convertings, on the Florida machine. So -- and this is what we're doing with the Florida operation. As far as Calhoun, as we said, our sales are going up and so we don’t expect to sell that much parent rolls, so even though the parent roll is not a hard job to sell right now.

[Paul Quinn:]

Okay. And then what affects the timing of when you account for Calhoun in Q2 and when do you expect that, at the beginning of the quarter or the end of the quarter and is it going to be material?

[Yves Laflamme:]

I think we're doing pretty good on ramp up right now. So we kind of have some stability according to, let’s say, accounting rules. We're not there yet and we're getting closer. This is why we're not really precise about when in the second quarter, but so we see that coming soon.

[Paul Quinn:]

Will it be a material to the segment?

[Yves Laflamme:]

Yes.

[Paul Quinn:]

Okay. And then just looking at the pulp side, I mean I understand the drop in shipments 26,000 tons, it looks like the inventories were only up 2000. So I guess the delta there was less production than 24,000.

[Yves Laflamme:]

What is your question?

[Paul Quinn:]

Just wondering if you’d experience, I guess, higher or sorry adverse weather in Q1. Did that materially affect your production in pulp the quarter?

[Yves Laflamme:]

Yes. It did. In the first water, we had mostly the solid mill. We had power outage that was mostly resulted from problem we had in Catawba and weather affected our pulp production in Calhoun. So as far as the north, Quebec and Ontario was more about shipments and rail than logistics and anything else and production.

[Paul Quinn:]

Okay. And then just on the transportation issues, is that a bigger concern for you on rail or truck or both or does that breakdown regionally if you can help us kind of understand your issues?

[Yves Laflamme:]

Yeah. The issue was, first of all, the previous quarter we're talking about issue on the trucks for chips, so which has been pretty much resolved. I think, we're doing okay now. In the first quarter, mostly rail, as you know, in Eastern Canada, so and of course you know when you have pressure on rails, you have to deliver to the customer, you move to trucks and now you're putting pressure on trucks. So it would be kind of both and mostly on the, on the paper side than lumber. So lumber, we were a little behind. As we saw, we ship less volume, but as far as costs on transportation and lumber, that was not that much affected as more about volume, but on the paper side was the stuff was rail and because of the rail issue and there is a problem in America with truck drivers, we had to switch to spot market on truck driver. So -- and we expect to do better in the second quarter as I said.

[Paul Quinn:]

And then just lastly, just on the 175 million CapEx for 2018, is there some major investments there? Is that just a combination of a whole bunch of little projects?

[Yves Laflamme:]

We have some good projects coming and we’re investing in, as we said before, there was one in this week on the saw mill side for better yield and better productivity. So, one of the main reason why Jo-Ann said that is going to be less than what said previously that as you know, on the lumber side right now, there are other parts of the suppliers operating. And to get the stuff delivered and completing those projects is a challenge. So, that’s mostly why and so that’s mostly what the projects are going to be.

[Operator:]

[Operator Instructions] Your next question comes from Hamir Patel, CIBC.

[Hamir Patel:]

Given the large price movements that we've seen for newsprint globally, curious what do you think the implications are for demand destruction, just given some of the pressures publishers are facing and what is your latest view as to what sort of demand declines we can expect going forward in North America and globally.

[Yves Laflamme:]

Yeah. I think even without the duties and we know that the duties has a significant impact right now on the pricing and the demand and supply being in balance, it pushes prices up. So we know that the demand for paper is still down by about 10%. So without that. So we’re really concerned about that. We don’t see that as a good news. I mean, we’re pleased to have better pricing, but it’s a definitely a concern about how it’s going to accelerate the decrease in the demand for paper. So, which I said it’s already at the bottom 10% range right now.

[Hamir Patel:]

And just turning to the tissue business, we've seen some producers suggest that there's some price increases underway in the market. What are you seeing and do you have a sense yet as to what sort of run rate EBITDA you would hope to be at by the end of the year.

[Yves Laflamme:]

As far as the run rate EBITDA, I’m going to let Jo-Ann to answer that one, but as far as the price increase, I don’t know, I mean, that something we know right now being integrated, I think that with the price of pulp going up, so I guess that it’s probably tough from some of competitors. But of course, having just the solid tons or cases of tissue business right now in our books, so we’re not, I would say a market leader to push price increase right now. So what maybe something is going to happen, based on the fact that pulp is putting pressure on the producers right now. So I don’t know Jo-Ann, if you want to add something on the EBITDA.

[Jo-Ann Longworth:]

We haven't previously disclosed EBITDA guidance for tissue. We have said that we expect to be fully ramped up in terms of profitability by the end of 2019, going into 2020. As we said, I think we’re -- we've got some promising business coming about in Q2 that we expect to realize by the end of the quarter. So we continue to access the markets and bring what we consider a very high quality product to market. And again, I will reemphasize that one of the reasons we moved into this strategic direction of tissue is the fact that we’ve fully integrated on the pulp side, which we feel is a competitive advantage going forward.

[Hamir Patel:]

And Jo-Ann of the one slide, which mentioned a 15 million transportation and weather headwind in Q1, how much of that would you expect to get back in Q2? And then just in terms of general transportation costs, do you expect them to sort of hold at Q1 levels or expecting further escalation from here?

[Jo-Ann Longworth:]

About -- almost about half of that 15 million is a result of the freight costs. Then, of course, there was the impact of a cold weather on energy prices particularly in the southern US and finally a little bit on the lost volume or the deferred volume, let's call it, some of it’s lost. As we talked about, the productivity of pulp in the US south, but also then the increase in inventory and largely in unused print and wood products. As far as dollars, we don't have a number as to how transportation is likely to improve in the second quarter, but when Yves talked about the availability of rail car, which forces us to go to spot rates in a trucking market, the availability of rail car tends to be a much larger problem in the winter months as most of our competitors have also disclosed. So we expect that that pressure will start to ease or has already started to ease in the second quarter.

[Operator:]

There are no further questions at this time. I would turn this call over to Ms. Travaglini.

[Silvana Travaglini:]

That concludes our call for today. Thank you.

[Operator:]

This concludes today’s conference call. You may now disconnect.