Resolute Forest Products Inc.
Q3 2018 Earnings Call Transcript

Published: 1 Nov 2018

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Third Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, November 1, 2018, at 9

[Silvana Travaglini:]

Good morning. Welcome to Resolute's third 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 Web site, or you can also download the slides. Today's presentation 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 expectation, 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 two of today's presentation.

[Yves Laflamme:]

Good morning. Thank you for joining us today. Supported by ongoing positive price momentum for our pulp and paper products, we announced record third quarter earnings, despite weaker lumber market. Our adjusted EBITDA of $189 million exceeded last quarter's [indiscernible] and is 60% higher than the year-ago period. Our third quarter results also benefited from improved productivity, lower freight cost, and the federal [indiscernible] impact of the weaker Canadian dollars. But this federal [indiscernible] by the rise in markets [indiscernible] products. During the quarter, we generated $131 million of operating cash flow, and year-to-date, our cash from operation was $361 million, a year-over-year increase of over $250 million. We continue to invest in our businesses this year, including the [indiscernible] strategic project at our Saint-Félicien pulp mill, which I will discuss later. Also, Resolute's Board of Directors approved a special dividend of a $1.50 per share. This quarter, we reported EBITDA of $64 million in market bond, all up $15 million from the second quarter. Tissue was unchanged at negative $5 million; wood projects generated $53 million, down $33 million; newsprint $48 million, up $13 million; and $38 million in specialty papers, an improvement of $22 million against the previous quarter. In line with our strategy to maximize the value generation from our assets, we recently entered into an agreement to serve our Catawba facility, which is expected to close around year-end for $300 million, and today we will complete the sale of the Fairmont mill of total proceeds of $62 million. With the sales of Catawba, we are realizing the most value for an asset was [indiscernible] earnings, potentialize with a conversation project. With all the Catawba operation, we estimate that our EBITDA mainly from a small business would have been reduced by approximately $35 million for the last 12 months ended September 30, 2018. With both of our recycled pulp mills running at 65% of their capacity, the Fairmont disposition enabled us to optimize production and minimally recycled pulp mill and improve our overall profitability. Excluding Fairmont, our EBITDA would have been about $5 million higher for the last 12-month end of September 30, before taking into account the expected increase in production at our [indiscernible]. Let's review our individual segments starting with market pulp. World shipments of chemical pulp grew 3% in the first nine months of 2018, compared to the year-ago period. Shipments to China and Western Europe were up 7% and 5% respectively, while shipments to North America fell by 5%. Softwood shipment was 2% lower during the same period, while wood shipments of hardwood rose 7%%. Softwood mills ran at 89% shipments to capacity ratio and hardwood mills were at 90%. The shipments to capacity ratio do not fully reflect the wave of recurring industry prediction, challenges, and general supply disruptions, which has affected global pulp markets. Supply constraints coupled with a steady growth in demand led to the highest EBITDA the company added or ever achieved in our core segment. Price realizations continue to increase up another $37 per metric ton this quarter and up a $134 per ton compared to the year-ago period. Shipments were also higher due to the improved productivity. A significant portion of the strategic project at the Saint-Félicien mill aim at increasing more production and reducing costs and greenhouse gases was completed on schedule. At that mill we started production in mid-October and is now operating at full capacity. Additional phases of the project will be completed by the end of 2019. Total project cost is about $45 million. Once completed, the Saint-Félicien will increase the minimum production by 27,000 metric tons. We have also announced an investment plan providing $30 million for our Thunder Bay mill to improve energy efficiency, productivity, and cost, as well as residual greenhouse gas emissions. For the first month of the year, total tissue -- excuse me; for the first nine months of the year, total tissue consumption in the United States grew by 2.5%, compared to the same period last year. Converted product shipments increased 2% led by away from home sales by 3.1%, while at home improved 1.5%. During the quarter, our tissue sales rose by 5% as we secured new business and improved our product mix by shifting more volume to one of the converted products. As a result, average transaction price also increased by $30 for short-term. We continue to focus on ramping up the operation, walking to increase the output of both the tissue machine and our [indiscernible]. We have also undertaken initiatives to improve our cost structure. In October, we post through less efficient converting line at the Florida facilities and various others to take up the volumes. Construction of an outside world adjacent to our Calhoun mill is near completion, and is expected to significantly reduce warehousing and logistic costs. Housing stuff in the U.S. on a certainly adjusted basis was 6% higher in the first nine months of the year compared to 1070. For the quarter, U.S. housing starts average 1,218,000 units down 3% from the previous quarter. This decrease reflected a 4.79% in multifamily stuff and the 3% decrease in single family starts. While prices decline 11% from the historical high in the second quarter, our average transaction price of 457,000 per thousand board feet was nevertheless $44 higher when compared to the year-ago period. The unwinding of inventory builds earlier in the year due to freight constraints, mainly in Western Canada combined with a slowdown in the U.S. housing stuff [indiscernible] in weaker market conditions. Shipment all over this quarter leading to a 34 million motion increase and finished goods inventory. Despise the recent softening in North American lumber market we generated a healthy EBITDA of $53. We continue to focus on improving productivity and efficiency at our, we recently announced investment in another new sawmill just will increase annual lumber capacity by 50 million board feet. Capital expense also being made at several of our project sawmill to optimize our manufacturing processes, which once completed will increase capacity by 30 million board feet. North American demand for newsprint decline 12% in the first nine months of 2018 compared to the same period last year, driven by a 14% drop in demand from Newspaper Publishers and a 7% reduction from commercial printers. North American shipments to capacity ratio rose to 95% up from 93% in the year ago period. Total demand from newsprint was up 9% through August compared to the same period last year, with North America 11%, Asia 9%, and Western Europe 8%. The World shipments capacity ratio was 89%. During the quarter, the supply demand balance remained favorable with continued implementation of previously announced price increases. Our average transaction price rose to $629 per metric ton, a $118 higher than a year ago. Shipments however, decreased largely due to the timing of export sale. This led to an increase in finished goods inventory at quarter end. North American demand for uncoated mechanical papers was down 7% in the first nine months of 2018 compared to the year ago period. Lower demand for standard grades drove this decline decreasing 10% while the demand for supercalendered grades was down only 1%. Compared to the year ago period, the shipments capacity improved from 90% to 91%. Total mechanical design was up 7% in the first nine months of 2018 compared to the year ago period. The industry shipments to capacity ratio decreased to 94% from 95% in 2017. During the quarter, we realized further price increases across all [indiscernible] and the average transaction price rose by $36 per ton restructuring compared to the previous one. Shipments were also higher allows a reflecting increased production flowing plan of all ages at Catawba and Calhoun in the second quarter as well as better operational performance. In addition, the initiatives now that they get to improve cost and productivity at [indiscernible] and Calhoun have contributed to the increase profitability of our especial papers business, in that situation of higher seasonal demand for supercalendar papers in the fourth quarter. Our finished goods inventory rose by 11%. In July, the United States Department of Commerce, we vote the converging duty order on supercalendar paper from Canada and in August the U.S. International Trade Commission wrote that U.S. uncoated groundwood, paper producer rolled up materially high by imports from Canada. As a result, all paper producers are being reformed. For our software lumber exports from Canada to United States average continue to apply. I would now have Jo-Ann discuss our financial performance before I conclude with [indiscernible].

[Jo-Ann Longworth:]

Thank you, Yves, and good morning everyone. Today, we reported net income of $117 million for the third quarter or a $1.25 per diluted share. Excluding special items, net income was $96 million or a $1.3 per diluted share. This compared to net income excluding special items of $56 million or $0.71 cents per share in the previous quarter and $31 million or $0.34 per share in the same period last year. Total sales in the third quarter were unchanged compared to the previous quarter, as higher pricing and production in our pulp and paper operations offset lower newsprint volume, mostly timing related and lower sales for lumber. After removing the effect of volume and foreign exchange, our manufacturing costs increased by $8 million from the second quarter, reflecting a 13% rise in recovered paper prices and an increase in market related loss costs. Compared to the second quarter market pulp all in cash costs decreased to $609 per metric ton, as higher volume outweighed the rise in recovered paper prices and the impact of the previously announced extended downtime at -- combined with better pricing and volume gains EBITDA rose to $64 million or $175 per metric ton. Cash costs of our tissues segment remained elevated. As we continue ramping up the tissue machine and the converting lines at our Calhoun facility. So growth in sales this quarter was offset by these higher costs and as a result EBITDA was unchanged at negative 5 million. In wood products, despite higher log costs and lower sales volume, the cash costs improved by $3 per thousand board feet to $337. This is mainly due to the favorable effect of the weaker Canadian dollar and lower freight costs as shipments to the U.S. decreased. With lower pricing and volume EBITDA decreased by $33 million to $53 million this quarter. Newsprint cash costs increased by $3 per metric ton to $499 in the third quarter, mainly due to higher power costs with the abnormally warm weather and maintenance outages. Higher price realizations of $45 per metric ton more than compensated at EBIRDA rose from $35 to $48 million equivalent to a $130 per metric ton. The cash cost especially papers filed by $40 for short time to $604, given improved efficiency, lower maintenance as well as a decrease in freight costs. With prices increasing by $36 dollars per short ton and higher volume EBITDA rose the $38 million or $131 per short ton compared to $16 million in the previous quarter. Despite the increase in inventory, we generated $131 million of cash from operations in the quarter. This allowed us to fully repay the $30 million that was remaining under our revolving credit facilities and increase our cash to $72 million at quarter end up $66 million from the prior quarter. As result liquidity improved by a $137 million to $654 million and our debt trailing to 12 months EBITDA dropped to one time. Capital expenditures in the quarter were $41 million up $13 million from the second quarter. As previously disclosed, we expect to invest a $150 million in capital expending for the full year. For the quarter Softwood lumber duties duty deposits of $21 million were paid with cumulative deposits of $88 million reported on the balance sheet as of September 30, 2018. For unclothed groundwood no duty deposits were paid in the quarter and the $6 million of cash deposits will be refunded with interest. For SC paper $25 million of the $61 million of cash deposits were returned with interest. In the third quarter and as of today only $6 million remains to be refunded. As of September 30, the Catawba and Fairmont assets subject to sale and the liabilities to be assumed by the potential buyers were reclassified as assets and liabilities held for sale on the balance sheet. This quarter our net pension and OPEB liabilities decreased by $65 million reflecting pension contributions and OpEx payments of $39 million as well as the reclassification to liabilities held for sale of the obligation to be assumed in our agreement to sell Catawba. The corresponding pension and OpEx expense included in adjusted EBITDA was the same as in the previous quarter at $10 million. Our pension and OPEB guidance is unchanged for 2018 at a $125 million of pension contributions and $15 million of OPEB payments with an associated expense reducing adjusted EBITDA by $40 million. In the context of our current financial position and announced asset disposal I want to talk about the specifics of our approach to capital allocation. Our low debt which has favorable pricing and flexibility combined with strong liquidity levels provide us with the ability to execute our strategy. Our capital expenditure, our capital spending is undertaken in a disciplined, strategic and focused manner concentrating on our most competitive sites. We take an opportunistic approach, the strengths strategic initiative pursuing only those that reduce our cost position, improve our product diversification, provide synergies or position us to expand into markets that benefit from long term growth. From time-to-time based on market conditions, we may seek to retire repay or refinance our outstanding indebtedness with a view to reducing costs and further enhancing our financial flexibility. We explore value creating opportunities for the divestiture of idle non-core or some optimized operations and we return excess capital over time to our shareholders through dividends and share repurchases. As a result today we announced a special cash dividend of a $1.50 per share. It is payable on December 20, 2018 to shareholders of record on December 6, 2018. I will now turn it back to Yves for concluding remarks.

[Yves Laflamme:]

Thank you, Jo-Ann. We remain opportunistic of all business through the fourth quarter and the industry continued to experience unplanned supply disruptions and demand remains strong. Favorable outlook is supported by further price increases publicly reported for October and November. In the fourth quarter, pulp maintenance outages are scheduled at funding includes mills including the Saint-Félicien mills probably the capital project, our fourth production is expected to decrease by approximately 30,000 tons in the fourth quarter operated at 20,000 tons of lost production in the third quarter. Despite the outages, we expect from most to remain solid. For tissue we are focused on the ongoing productivity improvements that can we inform our customers that segment price increase would be implemented far away from home products starting in December. The recent weakness in lower prices is expected to negatively impact our results in the fourth quarter. In the medium to long-term we believe the ongoing recovery in U.S. housing starts and the growth in the repair and renovation segment should improve in that. While paper markets continue to be impacted by this picture of the declining demand. Implementations of previous increases, we favorably impact our results in the fourth quarter.

[Silvana Travaglini:]

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

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Paul Quinn from RBC Capital Markets. Please go ahead.

[Paul Quinn:]

Yes, thanks very much.

[Yves Laflamme:]

Good morning.

[Paul Quinn:]

Good morning. Yes, maybe a couple of questions just starting with capital allocation, how you guys look at the special dividend versus share buybacks versus the implementation of a regular dividend and whether you have any restrictions around any of those?

[Yves Laflamme:]

[Indiscernible] Jo-Ann can join me on that answer, but I think as far as restriction there was no matter of restriction on any of the option that you suggested. So we decided to go with a special dividend, not having a dividend for -- I mean since the emergence of the company in 2011, so -- and we have shareholders been with us for a long time and supporting us, and that is -- you know, the cyclical business that we are in, and we set the right time to have a special dividend, this is why we went that way, and see what's going to come in front of us as the markets.

[Jo-Ann Longworth:]

Okay. I think Paul in my conversation and that's why we talked specifically about capital allocation this call. I mean, the company is focused on its previously described strategy to send capital on our most competitive sites taking opportunistic approach to growing in the segments of pulp and wood which we talked about. We talk about our leverage and keeping that at a level and financial liquidity to exercise the strategy and then obviously overtime with excess capital. We have in the past return capital to shareholders in terms of share buybacks and this time around it's a special dividend.

[Paul Quinn:]

Okay. And then, just on the CapEx spending you know I look at that simple EPN it's a pretty expensive addition for my capacity basis, what are the other benefits of that and then maybe you could outline the Ontario and Quebec sawmill capacity additions there, what's the CapEx that you are spending there and what's the timing?

[Yves Laflamme:]

The timing and when we said it's efficient of full project is $45 million U.S. about I would say 75% has been done in that phase and of course there is a lot of things being done like you know it's the largest, I would say shutdown that we have had this mill since the beginning since in 1978, so and so a lot of bottleneck that I've been fixed and improving efficiency, same thing with the recovery bottles and pricing has been changed and a lot of stuff that's going to increase first of all, a lot of their real ability same thing in Thunder Bay actually and so that's going to increase as we said by about 20,000 25,000 26,000 ton ELA [indiscernible] and it's about the same thing new storage space, storage tank in Thunder Bay, improving washing efficiency bleaching cost, new function and a new pulp machine drive and steam box that's mostly the investment that we are doing in Thunder Bay. So that is going to be down pretty much, back of it I would say has been done, probably finished by sometime, in the first of 219 when [indiscernible], we are going to do full production as far as getting the spread of the volumes sometime middle third quarter to 2019.

[Paul Quinn:]

Okay, then the amount of money you are spending on the Ontario [indiscernible] mills and what's the timing of when you expect that production to come online?

[Yves Laflamme:]

The sawmill I will say that's about the same where there's many sawmills, it's mostly about efficiency and mill capacity in Quebec. It's going to be, I would say probably much done by the second, first-half [indiscernible] to 2019. We have some new sign what's more efficiency and do better with the yield and in terms of there while we are talking mostly in the front of a family saw meal, why we can have a new printer there was a bottleneck on the to address the rough number we see from the sawmill. And the equipment has been ordered and scheduled to planner and we already had the third shift to run more and I think that capacity that we can rest now to the new revenue.

[Paul Quinn:]

Okay, that's great. And then, just lastly just the tissue away from home price increase announces that how much is that in or maybe another area to ask it? Is that going to be enough to get into the block?

[Jo-Ann Longworth:]

Efficiently, price increase away from home, which is about 50% of our business right now was up to 10%. Obviously, not all of it, it was up to 10%. We certainly expected to be overall below 5.

[Paul Quinn:]

All right. That's all I had. Best of luck.

[Yves Laflamme:]

Thank you.

[Operator:]

Your next question comes from the line of Hamir Patel from CIBC Capital Markets. Please go ahead.

[Hamir Patel:]

Hi. Good morning. You guys have done a great job monetizing assets this year, when you look at sort of the remaining fleet of paper machines you have. Are there additional mills that you could see the company monetizing over the next year?

[Yves Laflamme:]

I mean, I don't see when I think that it's fun of us right now, but as you know there is a lot of things going on in the industry right now with us and other companies and of course that and the opportunities that we see that can makes sense for us, we are going to take evaluation of those options and see what we are going to do with it. But pretty much, what I can say right now with like a lot of things are going on right now in the industry.

[Hamir Patel:]

Fair enough and just wanted to ask you about actual markets for on the graphic papers we've seen uncoated free sheet prices continue to move higher. I know you guys produce some competing grades. How much room do you have to increase production off those grades?

[Jo-Ann Longworth:]

Well, just a couple. We do some equivalent grades but we also produce USA and Calhoun on the remaining paper machines we have there.

[Hamir Patel:]

So Jo-Ann what would those volume speed sort of on an annual basis and what's the potential to grow there?

[Jo-Ann Longworth:]

It's about 140,000 times and obviously we continue to work on the productivity. And we'll see what the market total pricing as we said was up this quarter circle.

[Hamir Patel:]

Okay, thanks. That's helpful and maybe just turning to lumber markets given the weakness. Are you guys planning on taking any downtime -- in market related downtime in Q4 and have you seen a larger discount emerge in the Canadian markets given the duties?

[Yves Laflamme:]

There is. Let's see that they are still going significantly up but there's been a discount since the beginning of the duties. Of course, the U.S. market is being slower I would say that, it's more about the industry right now. As far as our time, we don't have any downtime announced, the things that we see right now about us and other companies with in eastern Canada select board or with whatever. We have some problems and getting a lot and so that some places we just that based on market what we are not running for capacity right away.

[Hamir Patel:]

Okay, okay. Great and maybe just a final question for me given the improvement in the balance sheet, how do you think about growing the business in lumber and pulp you've announced a couple sort of smaller projects, but how much room is there to debottleneck across the system for both and do you have any interest in at some point having lumber assets in the U.S.?

[Yves Laflamme:]

Yes, I think that's just the beginning of the since tool a lot and its part of our strategy to grow a lumber and all. So lumber we build as you know the two, we started one sawmill, meaning is and restart and build kind of filled with as spoken we bought the some of the [indiscernible] sawmill. So we are looking at as we've been spinning in many up low-quality days but didn't work, so we are suddenly open through look at some things to grow that business, so possibly the same thing of course we are talking about the different size of transaction is something that looks interesting and we also have the opportunity of growing pulp and certainly we are talking to both [indiscernible. We have other possibilities, we have capacity that we can do in our own company same thing with Thunder Bay and Calhoun as well, we have today a good option with Calhoun as well to increase pulp capacity.

[Jo-Ann Longworth:]

Which we give the Calhoun with the new digester in 2017.

[Hamir Patel:]

Right. And then, you've just given your paper -- pulp and paper platform in the south. Does this maybe a Greenfield lumber mill in the U.S. or would that be something that you look at?

[Yves Laflamme:]

I think there is something that we've been looking at in the past and that's something we still have in our book somewhere. But, it's the same thing with of course, the new. I mean the new reality of the lumber pricing right now could change the situation. But if you want to build a great mill today, before you get the equipment and you are ready to go, it's going to take few years, so it's something we have to take into consideration as well.

[Hamir Patel:]

Okay. Fair enough. That's all I had. I'll turn it over. Thanks.

[Yves Laflamme:]

Thank you.

[Operator:]

[Operator Instructions] Your next question comes from the line of Sean Steuart from T.D. Securities. Please go ahead.

[Sean Steuart:]

Thanks. Good morning, a few questions.

[Yves Laflamme:]

Good morning.

[Jo-Ann Longworth:]

Good morning.

[Sean Steuart:]

On the tissue business, just trying to get visibility on I guess the ramp up for Calhoun. Can you give us a bit more detail on where the operating rates are now and the expected timeline to ramp up to full speed there?

[Yves Laflamme:]

On tissue.

[Sean Steuart:]

Yes.

[Yves Laflamme:]

Yes, on tissue, would say that you're ready for something that would have significant improvement in the tissue machine again to the same size. We've made a lot of improvement. I think that we have a pretty good idea for studying the products. We have more, I would say together the ending up on the conversion side right now. So even though we're making improvement we tried to push hard on that side, so it just doesn't build the equipment and of the retention and labor as well. So we're training people and we have a lot of new employees. So at the end of the day right now we believe that we're heading in the right direction but we're still sorting through much of it.

[Sean Steuart:]

Okay and if you mentioned the post the sale of Fairmont, you would expect to improve the operating rates at Menominee. Could you give us a timeline on how fast do you expect to bring that mill up to full operating rates or close to that?

[Yves Laflamme:]

Yes, the bottom line is right through.

[Sean Steuart:]

Okay, quick care ramp up and then more broadly speaking on capital allocation are you in a position where you can give us guidance on 2019 CapEx, factoring in the sawmill expansion capital in some of the other initiatives you've talked about, DO you have a given number in mind for 2019 yet?

[Yves Laflamme:]

I think, I would give you a number of I would give you more over the years without Big rather we did like which I don't think I would talk about something we have today, ballpark $150 million per year so with all those big projects that I said that was a specific budget at least that would be my…

[Sean Steuart:]

Okay, that's all I had. Thanks very much.

[Yves Laflamme:]

Thank you.

[Operator:]

Your next question comes from the line of Paul Quinn from RBC Capital Markets. Please go ahead.

[Paul Quinn:]

Yes, thanks. Thanks for taking this one. Just confused on duty refund, so maybe you could just walk me through what I would have thought that once it gets reversed that check is cut for the full amount. Why does it come in periodically and it sounds like you've got $6 million left to come in and do you expect that in Q4?

[Jo-Ann Longworth:]

Yes, as Paul. We don't record our duties on any of the paper or wood into our EBITDA. We record them as deposits to be refundable over time. So for example on a fee we actually received $25 million of those refund in the third quarter. So they went against the balance sheet accounts receivable. Since then we have received another $30 million since the end of September to today another $30 million again which will go against the balance sheet. And there is only $6 million remaining to collect which we expect to have by the end of the year. And then coated groundwood we only paid $6 million before that was cancelled and we expect to receive that through Q4 the beginning of Q1 in 2019.

[Paul Quinn:]

So, specifically what's the holdup on the timing of them releasing the deposits? I mean you guys should know what you've paid. And then when it gets it gets reversed. Why a check cut right that day for the full amount.

[Jo-Ann Longworth:]

Well, that's the interesting thing how we actually get separate checks for every single entry that we pay duty on in the states over overall those here. So the processing time is a little long on their part.

[Paul Quinn:]

So how many how many entries would that be in Q3?

[Jo-Ann Longworth:]

Thousands and thousands and thousands.

[Paul Quinn:]

Okay. Now I get it. Okay thanks very much. Thank you.

[Yves Laflamme:]

Thank you.

[Operator:]

There are no further questions at this time. I turn the call back over to the presenters for closing remarks.

[Silvana Travaglini:]

That concludes today's conference call. I want to thank everybody for joining us today. Thank you.

[Operator:]

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