Resolute Forest Products Inc.
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Q1 2017 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, Thursday, May 4, 2017 at 9

[Alain Bourdages:]

Thank you. Good morning and welcome to Resolute's first quarter earnings call. Today, we'll hear from Richard Garneau, 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 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 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 number two of today's presentation.

[Richard Garneau:]

Good morning and thank you for joining us. We generated adjusted EBITDA of $61 million for the quarter compared $63million in the fourth quarter of 2016. Our results were supported by higher prices in our wood product segment and significantly lower unplanned maintenance expenses when compared to the previous quarter. On the other hand, higher costs related to seasonally higher energy expenses, SG&A adjustment and lower volume mainly in newsprints negatively impacted our financial performance. By segment, we generated adjusted EBITDA of $15 million in Market Pulp, an improvement of $2 million against the previous quarter, $1 million from our tissue operations, $29 million in wood products compared to $25 million in Q4, $12 in newsprint, down by $7 million; and $16 million in Specialty Papers, up by $2 million. Even as demand declines continue in our paper segments and unfair trade action on supercalendered paper negatively affected our cash position, we will report improvements in segments focussed on growth markets, namely pulp, wood product and tissue which collectively generated an increase in EBITDA of $7 million when compared to Q4. In our pulp segments we experienced a reduction in unplanned downtime, which allowed us to reduce cost. Despite several price increase announcements throughout the quarter, pricing was only up slightly compared to the fourth quarter. In tissue, we had achieved important milestones, first we successfully started out our new machine at Calhoun nearly a month ahead of our original schedule. We are now able to support our sales efforts with our own product samples and will be in a better position to compete in the retail business bidding cycle. At Atlas, we are also making progress by delivering positive EBTIDA this quarter. As for our wood product business, it continued to demonstrate very solid results, thanks to strong pricing in part due to market expectation of countervailing duties on export. In our paper segments, market conditions continue to deteriorate which led to the permanent closure of Mokpo and the indefinite idling of Thorold during the quarter. Nevertheless, our speciality paper segment benefitted from lower maintenance and chemical cost which led to an increase in EBITDA despite reduction in pricing. Let’s review our individual segments starting with market pulp. World demand for chemical pulp grew by 6.4% in the quarter compared to the same period of 2016. Demand in China and North America rose 18.7%, and 2.9% respectively while Western Europe declined by 3.1%. Specifically for softwood kraft, demand increased by 5.4% globally with China rising 12%, North America 8.4% and Western Europe declining 1.7%. Operating rates were solid in the quarter for softwood kraft mills reaching 95%. For hardwood grades, we saw global demand growth of 7.5% entirely due to China which recorded an increase of 24.4% during the quarter compared to Q1 of 2016. Demand in North America and Western Europe both declined by 4.7% and 4.4% respectively. After falling during the fourth quarter of 2016 our realized pricing gradually increased from the lows of last December reversing the trend and resulting in a small increase over the fourth quarter average pricing. Our maintenance improvement efforts resulted in lower overall cost. Reduction in unplanned repair led to a $6 million reduction in costs for the segment. However, total shipments fell by 15,000 metric tons due in part to Catawba annual maintenance shutdown taking place at the end of March. In the first quarter, total tissue consumption in the U.S. grew by 2.7% against the same period last year. Away from home shipments increased 2.9% while at home volume grew 1.5%. At Atlas, our volume growth of 17% was entirely driven by parent rolls, and we achieved a positive EBITDA for the segment in the quarter. One of the highlights was the start up of our Calhoun integrated tissue operation. The facility started production in structure mode which not only represent a world first of this technology but also allowed us to produce premium products right from the start. The tissue machine is manufacturing quality products from how to [Indiscernible] internally supply pulp. We are now focused on ramping up production and accelerating sales. We have firm orders with important retailers which will be shipped in the coming quarters. Growth in the U.S. housing market continued in the first quarter. Overall, seasonally adjusted housing start in the U.S. rose by 7.4% with single family starts increasing by 0.2% on average when compared to the fourth quarter. New home sales also increased significantly rising 6% on average when compared to Q4, influenced by market expectations on softwood lumber duties market pricing rose during the quarter. Our overall realized price in the segment increased by $23 to thousand board feet compared to the fourth quarter. Despite adverse weather condition, our shipments exceeded half a billion board feet for the third consecutive quarter. Our profitability was impacted by higher log cost and production curtailment. Overall, EBITDA was $29 million for the quarter compared to $25 million in the fourth quarter and only $3 million in the first quarter of 2016. The U.S. Department of Commerce imposed countervailing duties of 12.82% on the company’s export of softwood lumber effective April 28. We find this decision to be baseless, ignoring the regulatory changes made in Quebec Forestry System in 2013 making it the market base and that [Indiscernible] NAFTA panel ruling confirming the absence of sub cities in Ontario residual system. We expect that the final duty of termination will recognize these elements. North American demand from newsprint fell by 11.6% in the first quarter compared to the same period of 2016. Exports declined 9.9% over the same period as global demand went down 5.8%. Even as North American consumption continues to decline, the industry production to capacity ratio was 92%. Our newsprint shipments fell by 50,000 metric tonnes when compared to the fourth quarter and this reduction is mostly explained by the permanent closure of Mokpo and the definitive idling of Thorold. Pricing slid by $2 per metric ton during the quarter which was mainly attributable to our export business and the weakness of global currencies against the U.S. dollars. The other root cause in the segment rose by $6 per metric ton compared to the previous quarter. This was mostly the result of lower volumes and higher distribution and energy costs which were partially offset by lower maintenance and a reduction in fixed cost. This led to a reduction in EBITDA of $7 million down to $12 million. North American demand for uncoated mechanical papers was down by 7.2% in the quarter compared to the same period last year. Markets for supercalendered papers led this decline, dropping 10.9% while other uncoated grades fell 3.8%. Industry production fell 10.7% compared to 2016. This resulted in a shipment to capacity ratio of 93% for the quarter. Market conditions in coated mechanical grades continue to deteriorate. North American demand fell 10.3% during the quarter compared to the same period last year. Imports also fell by 7% over the same period and North American production declined by 5.8% resulting in a shipment to capacity ratio of 93%. Our overall segment pricing fell by $6 per short ton when compared to the fourth quarter of 2016 impacted by a reduction in demand in supercalendered and coated grades. However, our shipment increased by 900 short tons compared to Q4 mostly in white paper products. The combination of this increased volume and a reduction in our delivered cost of $11 per short ton due to lower maintenance and chemical cost offset by seasonally higher energy expenses resulted in an increase EBTIDA of $2 million compared to the fourth quarter to $16 million. I will now let Jo-Ann discuss our financial performance before I conclude with our priorities and outlook.

[Jo-Ann Longworth:]

Good morning everyone. Today we reported a net loss of $30 million for the first quarter or $0.33 per share, excluding special items. This compared to a net loss excluding special items of $7 million in the previous quarter and a net loss excluding special items of $22 million for the same period last year. Special items included start-up costs of $8 million associated with the Calhoun tissue project, $7 million of closure cost for Mokpo and $4 million in stores inventory write down associated with the closure. Total sales in the first quarter were $872 million, $17 million below the fourth quarter. Overall pricing positively impacted our results by $10 million primarily in lumber where prices rose by $23 per thousand board feet. While our market pulp pricing rose by $1 per metric ton, our three other segments stock pricing declined of $130 per short ton in tissue primarily due to an increase in parent roll sales, $2 per metric ton in newsprint and $6 per short ton in speciality papers. Shipments of wood products and speciality papers increased by 2 million board feet and 9000 short tons respectively. In tissue, volumes rose by 2000 short tons resulting from higher sales of parent rolls, which represented 29% of our shipments in the quarter up from 17% in Q4. More than offsetting these gains were reductions in pulp of 15,000 metric tons resulting in part from the annual outage at Catawba and by 50,000 metric tons in newsprint mostly due to the capacity disclosure? Excluding foreign currency and volume impacts, our costs of goods sold was essentially unchanged from Q4. We saw a $15 million decrease in maintenance cost reflecting improved productivity and reduced repair, a $6 million reduction in pension and other post retirement benefit expense mostly due to lower interest cost resulting from the decrease in discount rates at the end of 2016 and a $3 million reduction in chemical cost, which were mostly offset by a $7 million seasonal increase in energy pricing and consumption, a $5 million rise in startup cost associated with the Calhoun tissue project and a $3 million increase in log and recycled fiber cost. Market pulp all in delivered cost was down by $4 per metric ton, largely because of lower maintenance, expenses resulting in an increase in EBITDA of $7 to $42 per metric ton. Our progress at Atlas continued to yield results, with increased shipments of short ton of parent roll and EBITDA of $1 million for the quarter. The increase in cost of $68 per short ton was due to favourable adjustments in depreciation and amortization in the fourth quarter. In wood products, the delivered cost rose by $18 per thousand board feet due largely to higher log cost and production curtailments. Nevertheless, higher prices pushed EBITDA up $7 per thousand board feet to $57. Newsprints delivered cost rose by $6 per metric ton to $519, this is mostly explained by lower production, higher freight and energy cost which were partially offset by lower maintenance and fixed cost. EBITDA per metric ton fell from $39 to $27. In Specialty Papers, the delivered cost fell by $11 per short ton, mostly driven by lower maintenance and chemical costs, partially offset by seasonally higher energy expense leading to an increased EBITDA per short ton of $5 to $44 despite a reduction in realized prices. We spend $69 million in capital expenditures in the quarter, $51 million of which was dedicated to the Calhoun tissue project. We anticipate that the total cost of the project will be about $295 million. Nevertheless, we will meet our overall 2017 CapEx target of $185 million as previously disclosed. During the quarter, we used $39 million of cash in operations, mostly due to an increase in inventories in our wood product segment. When combined with our capital spending, this resulted in additional net borrowings of $118 million from our revolving credit facility during the quarter. Our debt as on March 31 was $881 million with the cash position of $39 million and total availability under our credit facilities of $341 million liquidity at the end of the quarter remained solid at $380 million. We made contributions to our pension and OPEB plans totalling $32 million in the quarter, which resulted in a $31 million reduction in the net pension and OPEB liability on our balance sheet. During the first quarter, the company reached an agreement with the province of Ontario with respect to capacity reduction contributions under that provinces special funding relief regulations. We are no longer required to make any further contributions in respect of capacity reductions in Ontario that occurred after April 15, 2014. Consequently, contributions to the affected pension plans will be lower by approximately $12 million in 2017 and $6 million in 2018. In addition, estimated contributions to our Québec pension plans from 2017 to 2020 are expected to be lower than previously disclosed by approximately $30 million including $6 million for this year, based on the exchange rate in effect on March 31, 2017. Our total pension contributions are expected to decline by approximately $30 million in 2017 compared to 2016 and a further $12 million between 2017 and 2018. Slide 17 reflect these changes and provides greater clarity on the timing of our 2017 contributions. I will now turn it over to Richard for concluding remark.

[Richard Garneau:]

So before we’ll discuss our market outlook, I would like to report on our four priorities for this year. But first, we make progress business in our tissue business and we’re pleased with the start-up of our tissue machine at Calhoun, starting equipment [ph] of this complexity can bring unexpected difficulties. All employees have embraced the challenge in the product we currently manufacture meets our expectations at this point in the ramp-up. In the case of Atlas we’ve generated positive EBITDA this quarter and have increased our focus to improve sales going forward. We only made progress improving equipment reliability which translated into lower maintenance costs particularly in our market pulp segments. Our capital spending for 2017 will be centered on maintenance of business and the completion of the Calhoun tissue project. We will meet our previously disclosed target of a $185 million for the year. And finally as I pointed out that we are disappointed with the countervailing duties recently imposed on our softwood lumber exports. We support the measures taken by the Québec government who responded to industry and community needs. We also applaud the principal statements made by Canadian Federal ministers, Freeland and Carl who declared that the trade actions were unfair and unwarranted. We look forward to continuing to work with interactive stakeholders to ensure that Québec and Ontario lumber industries are recognize as free subsidies and deserve unencumbered access to the U.S. market. Our market outlook remains unchanged from last quarter. In pulp, we are confident that the favorable market we are experiencing will continue until at least mid year and possibly into the second half. We also expect to see stronger price realizations in the coming two quarters as announce price – less price increases in excess of $100 per metric ton or realized net of discount. In tissue, our manufacturing focus will be to continue to ramp up production. But the key to all success will be in our marketing and sales effort, not that we can offer a full complement of our integrated tissue and powder products, we believe that customer will be increasingly receptive to all offering. We will continue to promote our Green Heritage and Harmony brands and actively pursue bid cycle opportunities with U.S. retailers. In lumber, we expect steady increases housing starts for the foreseeable future. However, we anticipate short-term volatility in the market cause by the imposition of U.S. trade barriers. In our paper rates we expect the ongoing demand decline to continue at the similar pace both domestically and offshore where currencies will continue to handicap the competitiveness of all U.S. mills. We are committed to positioning our network to compete effectively. This concludes our formal presentation. Operator, we will now open the call for questions.

[Operator:]

[Operator Instructions] Your first question is from Hamir Patel, CIBC Capital Markets. Please go ahead.

[Hamir Patel:]

Sure. I want to get your thoughts on how lumber prices in Canada might see relative to the U.S. when duties are in effect, because I under during lumber four there was discount of the benchmark, but curious what you think that may be in this current environment?

[Richard Garneau:]

Well, there was no doubt that we’re going to -- unfortunately I see a discount in the Canadian market. So the tax, the countervailing tax imposed on the export is going to force more volume in Canada and more volume in Canada means that were going probably to see the Canadian market to be oversupply and we knew when there was more supply and demand the impact on pricing.

[Hamir Patel:]

Great. Thanks. It’s helpful. I know Québec has spoken about giving loan guarantees and I may have missed this if this is kind of reported in the French press. What exactly is the Québec government going to be doing to support the sawmilling industry?

[Richard Garneau:]

Well, the program has been-- while the Premier has indicated his intention to help the communities and the industry. so we were expecting that we’ll have to see the loans that could be offered volume [Indiscernible] Québec at market conditions depending its what I heard, depending of the credit, how strong your credit is, so I think that to make sure that its not countervailable, that is not going to taxable, so Québec has put us in this program, basically some strong production to make sure that its going to be recognized as market, so it means that they continue with this weaker credit is going to be more like it is now with commercial bank. So, the Premier has been very supportive and I think that [Indiscernible] I think the Premier has this strong position to held the communities and they has assisted also on the fact that Québec has an auction system that is market and has been strongly critical of the benchmark that has been use by commerce to determine the duty rates.

[Hamir Patel:]

Thanks for that, Richard. That's all I had. I’ll turn it over.

[Richard Garneau:]

Thank you.

[Operator:]

[Operator Instructions] And we have a question from the line of Paul Quinn with RBC Capital Markets. Please go ahead.

[Paul Quinn:]

Yes. Thanks very much and good morning Richard.

[Richard Garneau:]

Good morning.

[Paul Quinn:]

Just had a couple questions; one on softwood lumber. I know you expect the rate to be zero, but given the politics of the file, what was your expectation on the preliminary CVD? Did it come in the range that you thought? And your discount offs some of the Western producers. Is that the amount that you guys were kind of expecting?

[Richard Garneau:]

Well, the – I was expecting sort of a lower rate than that. I was expecting that the auction system in Québec would be use and as you’re probably aware they use Nova Scotia as a benchmark, benchmark that apparently cannot be verified and its confidential. What I knew at this point looking at the details of how they came to the margin, commerce came to the margin, they didn’t basically use – there is variance of 60 million. So they have under estimated our stumpage and really that caused by 60 million. So our margin should be lower than that. And also they had also countervail power, so green power that is not at all use into the manufacture of the lumber, so I think that I’m confident while assuming that there is no politics, I’m confident that our rate is going to be significantly lower by one they come with the final determination.

[Paul Quinn:]

Okay. And then, from the last time that we saw this final determination, rates came down through litigation over time. But it seemed to take at least two years. Do you expect the same timeline on litigation on the file to be able to ultimately reduce the final rate?

[Richard Garneau:]

Well, I think that we have obviously to wait for the final determination, so I think that certainly we will have an opportunity to verification to have discussion with the commerce auditors, so the discrepancies that I just referred to are going to be taken into account. I can tell you that it’s going to reduce the rate. I think that we certainly going to have discussion on a green power in Quebec. It’s not related to lumber at all. So when you look at trade laws [ph] and the statutes and regulations. So I think that it’s not defensible and I think that the other one is the benchmark. So Nova Scotia wood or timber is completely different from Québec and Ontario. And I think that we have vetted [ph] system, auction system, more than royalty [ph]. It’s in fact ahead, slightly over 45% of the wood in Québec that is sold through auction or brought from private timber land owner, so I think that we should certainly see the final determine, the reduction. And I think that I would like to mention that back in 2005, I knew it’s a long time ago, but the residual value system in the field was to determine that they are were no subsidies. So I think its matter of – certainly a matter of discussion, certain discussions that we’re going to have between now and the final determination and before we talk about litigation, so I think we have wait. And final determination is probably going to November, so we’ll have to live with these uncertainties for some months.

[Paul Quinn:]

Okay. And then, if I can just move on to pulp here, we were kind of disappointed with your realization in the quarter, wondering if there's anything unusual. And then, second part is you described China growth is, I think you had it at 18.7%, I’m just wondering how sustainable you think that is going forward?

[Jo-Ann Longworth:]

Hi, Paul, it’s Jo-Ann. On the pulp pricing in Q1 the issue there is it bit complicated, but you had prices rising in the fourth --- sorry, decreasing in the fourth quarter, rising in the first quarter. So if you average them out, the comparison unfortunately this is not a strong as what actually occurred during the first quarter. And secondly, you’ve got lags on the pricing in certain of our contract of a month to two months. So we are expecting that the several price announcements we made in the first quarter we’ll see the bulk of that in the second and third quarter.

[Richard Garneau:]

And Paul, when I look at December and March, so we saw an increase of $15 and its lag, so I think that in the second quarter we’re going to basically get benefit of the price increase net of the discount.

[Paul Quinn:]

Okay. And then just a reference to that China growth almost 19% and the global growth that you pointed out over 6%, how sustainable do you think that is going forward. I mean, a number of analysts, including myself, expected pulp pricing to come down to get to the capacity additions coming forward. And that thing that we got sort of -- we weren't quite aware of is the significant growth in China and other places. Do you think that's sustainable?

[Richard Garneau:]

Well, it’s a very difficult to forecast. As you know we all thought that we would see a very slow growth in China in the first quarter and we were all surprised. So certainly trying to forecast what they -- how much they’re going to buy and consume forward is very difficult. But what I could say, I think that there is certainly now we’re going to enter into more downtime, annual maintenance downtime, certainly in North America. And I think the other factor Paul, that you aware is that, our large new pulp mill didn’t start as fast and we know how difficult it on to start-up equipment and to get up to the design capacity and get the quality. So I think that and well, certainly when I look at it for the second quarter and maybe the third that we’re going to continue to see a strong number, so I think that there is probably, its a subconscious optimism here if I can see, but I think the pulp market is certainly increasing.

[Paul Quinn:]

Okay. And just lastly, turning to newsprint -- you described the operating array at 92% for the industry. What is that for Resolute? And we've also seen, because of the sort of weakening price at Wescare, we've seen a price increase announcement from NORPAC and others. And what's the pricing situation in the East Coast?

[Richard Garneau:]

Well, it’s certainly under pressure with the demand decline and I think that now with the price increase announcement in the west, so I was getting closer in terms of pricing between the east and west. I think that this 93%, so what’s reflect the machine closure, a permanent closure that happened [Indiscernible] with all in other companies also that their capacity out and converted that to other products. So I think that normally at 93% and the reason that we put that in our script is that 90% you should see stable pricing. And well, in the past at 93% [ph] we the industry enjoyed price increase, but I think that to the [Indiscernible] down what we had in the past and I think that with the decline its continue to decline 10% per year, so its only going to force the industry to supply and demand – to adjust the supply to a demand.

[Paul Quinn:]

Excellent. Thanks, Richard and Jo-Ann. And look forward to improvement in Q2. Thank you.

[Richard Garneau:]

Sure. Thank you.

[Jo-Ann Longworth:]

Thank you.

[Operator:]

And there are no further questions. At this time, I’ll turn the call back over to the presenters.

[Richard Garneau:]

Thank you for joining us today. Have a good day.

[Operator:]

And this concludes today's conference call. You may now disconnect.