Resolute Forest Products Inc.
Q2 2017 Earnings Call Transcript

Published: 6 Aug 2017

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Second Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded today, Thursday, August 3, 2017, at 9 AM Eastern Time. I would now like to turn the meeting over to Mr. Alain Bourdages, Vice President. Please go ahead, Mr. Bourdages.

[Alain Bourdages:]

Good morning. Welcome to Resolute's second 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. You will also - 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.

[Richard Garneau:]

Good morning, and thank you for joining us. We generated adjusted EBITDA of $83 million for the quarter compared to $61 million in the first quarter. Our results were supported by higher prices in our wood products and market pulp segments, but were negatively impacted by lower volumes and higher maintenance expenses, associated with planned mill outages. The combination of this improved operating performance and a significant reduction in working capital, has allowed us to increase cash flow generation this quarter. By segment, we generated adjusted EBITDA of $52 million in wood products, up by $23 million; $24 million in market pulp, an improvement of $9 million against the previous quarter; $740,000 from our tissue operations, a marginal improvement from Q1; $10 million in newsprint, down by $2 million; and $4 million in specialty papers, down by $12 million. Overall, underlying trends continues as we had expected during Q2. We saw steady improvements in demand fundamentals for our wood products segment, as well as favorable short-term dynamic in global pulp market. Our sales progress in tissue remains slow, but we are confident it will accelerate with the recent addition of Patrice Minguez to lead our tissue business segment. In paper, we continue to maintain our disciplined management approach, which we believe is critical in order to generate maximum value, given unfavorable global market trends. Let's review our individual segments, starting with wood products. Although average seasonally adjusted U.S. housing starts declined slightly when compared to the first quarter, underlying market trends continue to be favorable in our wood products segment. Overall, seasonally adjusted housing starts in the U.S. fell by 6%, with single-family starts declining by 1.8 on average, when compared to the first quarter. However, overall and single-family starts rose by 0.5% and 8.9% respectively, when compared to the second quarter of 2016. The uncertainty related to the imposition of contributing in antidumping duties by the U.S. on export of softwood lumber from Canada created unpredictability in the marketplace during the quarter. This had a positive impact on our realized pricing, which rose by more than 10% when compared to the first quarter, reaching $386 per thousand board feet. Despite log shortages that necessitated downtime in both the first and second quarters, operating cost per unit fell by $11 per thousand board feet, mostly as a result of improved log yield and better efficiency. Shipments remained strong at 509 million board feet, as finished goods inventories were drawn down. The combination of stronger pricing and lower costs pushed EBITDA up to $52 million. After the imposition of preliminary contributing duties on the company's export of softwood lumber to the United States of 12.82% in April, the U.S. Department of Commerce imposed additional preliminary duties for antidumping of 4.79% in June, for a combined rate of 17.41%. Jo-Ann will provide clarification on the accounting treatment of lumber duties in a few minutes. World shipments of chemical pulp grew by 1.8% in the quarter, compared to the same period in 2016. Shipments to North America rose 4.7%, while China and Western Europe declined by 2.1% and 1.4%, respectively. Specifically, for softwood kraft, shipments declined by 0.5% globally, with North America rising 5.5%, Western Europe declining 3% and China falling by 9%. For hardwood grades, we saw global shipments growth of 4.4%, mostly due to China, which recorded an increase of 5.5% during the quarter compared to Q2 of 2016. Shipments to North America rose by 2.8% over the same period, where - while Western Europe was essentially unchanged. As expected, our overall realized pricing for the segment increased during the quarter, rising nearly 7% to $632 per metric ton. As a result, market pulp sales rose by $4 million, in spite of a reduction in shipments of 17,000 metric tons due to annual planned outages at Calhoun, Coosa Pines and Dolbeau. When combined with softness in the recycle pulp market, the unfavorable volume impact on our result was about $4 million. Excluding volume and falling change, our manufacturing cost rose by $2 million, mainly due to maintenance during the outages. EBITDA reached $24 million, $9 million higher than the first quarter. In the second quarter, total tissue consumption in the U.S. grew by 1.9% against the same period last year. Away-from-home shipments increased by 2.4%, while at-home volume grew 1.2%. Although our tissue profitability only increased marginally when compared to the first quarter, we continued to make progress in our sales efforts. Realized pricing on our retail and away-from-home products have increased by 7% and 4%, respectively. However, those gains were offset by slight reductions in pricing from - for parent rolls. The delivered costs for the segment declined when compared to the previous quarter, falling $6 to $1429 per short ton despite an increase in shipments, and unfavorable sales mix limited our EBITDA to an increase of $240,000 from the previous quarter. We made $740,000 compared to $500,000 in Q1. Progress in Calhoun was slowed by lower-than-anticipated success rate on bidding opportunities, which was mostly tied to a number of delayed customer requests for proposals. We view this slow progress as a normal part of the sales ramp-up, and we are making all efforts to offset the challenges related to our market entry by offering premium products at competitive prices. North American demand for newsprint fell by 12.4% in the second quarter compared to the same period in 2016. Export declined 5.8% over the same period, as global demand went down 4.9%. Even as North American consumption continued to decline, the industry shipment-to-capacity ratio was 92% in June. As a result of the closure of our South Korea facility in March, and the continued deterioration of demand, our newsprint shipment fell by 46,000 metric tons when compared to the first quarter. Given the relative increase in higher-priced North American shipments in our newsprint portfolio, realized pricing remains substantially unchanged for the quarter. The delivered costs in the segment rose by $6 per metric ton compared to the previous quarter, as the combined impact of higher planned maintenance and lower volumes were offset by reduction in fixed costs, associated, again, with the closure of Mokpo and seasonally lower energy costs. This led to a reduction in EBITDA of $2 million down to $10 million. North American demand for uncoated mechanical papers was down by 9% in the quarter compared to the same period last year. Markets for supercalendered papers led to this client, dropping 9.2%. The industry shipment-to-capacity ratio was 91% at the end of June, as production declines outpaced demand reduction. Market conditions in coated mechanical grades continued to deteriorate. North American demand fell 8.5% during the quarter compared to the same period last year. Production and imports also fell by 11.3% and 2.3%, respectively. These sustained demand declines continued to affect our performance during the second quarter. Our overall segment pricing fell by $8 per short ton, as pricing weakened across our rates offering. Shipments were lower by 15,000 short tons due mostly to decline in coated and white paper grades. The combination of volume reductions as well as higher maintenance and chemical usage translated into an increase in our segment delivered costs of $26 per short ton. EBITDA was $4 million compared to $16 million in the first quarter. 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 $3 million for the second quarter or $0.03 per share excluding special items. This compares to a net loss, excluding special items, of $30 million in the previous quarter and net income, excluding special items, of $2 million for the same period last year. Closure costs - special items included closure costs, impairment and other related charges of $65 billion, of which $55 billion was due to the impairment of assets at Coosa Pines, and $9 million related to the indefinite idling of a paper machine at Catawba. There was $9 million of inventory write-downs related to the closures, and startup costs of $7 million associated with the Calhoun tissue project. These items were partially offset by foreign currency gains, nonoperating pension and OPEB credits, and other income, totaling $6 million. Total sales in the quarter were $858 million, $14 million below the first quarter. Overall pricing positively impacted our results by $30 million, primarily in wood products, where prices rose by $36 per thousand board feet, and market pulp, where we made gains of $39 per metric ton. Tissue pricing also increased by $4 per short ton, while newsprint declined marginally, and specialty papers fell by $8 per short ton. Shipments of wood products exceeded 0.5 billion board feet for the fourth quarter in a row, at 509 million board feet. Annual planned maintenance in virgin pulp and weak market demand for recycled pulp pushed volumes down by 17,000 metric tons. Following weakening demand and capacity curtailments, newsprint, especially paper shipments, declined by 46,000 metric tons and 50,000 short tons, respectively. Tissue continued its slow improvement, recording an increase of 1,000 short tons when compared to the first quarter. Excluding foreign currency and volume impacts, our cost of goods sold increased when compared to the first quarter. Major items included reductions of $7 million in purchased energy and $4 million in fixed costs associated with the closure of Mokpo. However, these were more than offset by higher maintenance costs of $8 million and reduced contribution from cogeneration operations of $5 million, both mainly due to annual maintenance outages. Market pulp's all-in delivered costs was up by $8 per metric ton, largely due to higher planned maintenance expenses, and lower volumes. However, pricing gains were more than sufficient to offset those elements and EBITDA rose from $42 to $71 per metric ton. Although still disappointing, results at Atlas continued to improve. Thanks to a combination of higher prices, particularly in converted products, increased shipments and lower costs, EBITDA edged up from $36 to $48 per short ton. In wood products, the delivered costs fell by $11 per thousand board feet, due largely to better log yield and efficiency. With prices increasing $36 per thousand board feet and shipments rising by $4 million board feet, EBITDA increased by $45 to $102 per thousand board feet. Newsprint delivered costs rose by $6 per metric ton to $525. This is mostly explained by lower volume, and higher planned maintenance costs, which were only partially offset by lower energy expenses and reductions in fixed costs associated with the Mokpo closure. Pricing remains substantially unchanged, resulting in EBITDA per metric ton of $25, down $2 from the previous quarter. In specialty papers, the delivered costs rose by $26 per short ton, mostly driven by higher chemical costs, as well as maintenance outages. EBITDA per short ton fell to $11 from $44 in the first quarter. We spent $47 million on capital expenditures in the quarter, $33 million of which were spent on the Calhoun tissue project. We remain on target to meet our overall 2017 CapEx of $185 million. During the quarter, we generated $99 million of cash from operations, $138 million more than in the first quarter, which is mostly explained by the higher EBITDA and a reduction in our working capital. With the tissue project winding down, this allowed us to make debt repayments of $41 million during the quarter. As a result, our total debt as of June 30 was reduced to $840 million. With a cash position of $44 million and total availability under our credit facilities of $370 million, liquidity at the end of the quarter improved from already solid levels to reach $414 million. Similar to the duty deposits associated with exports of supercalendered paper to the United States, the company is recording lumber duty deposits in other assets in the consolidated balance sheet. Consequently, EBITDA, as reported for the wood products segment, does not include any amounts related to softwood lumber duties. Total countervailing duty deposits of $11 million were recorded on our balance sheet during the second quarter, of which $7 million were attributable to supercalendered papers, and $4 million to lumber. Total cumulative deposits of $43 million are recorded in other assets on the balance sheet. We made contributions to our defined benefit pension and OPEB plans totaling $31 million in the quarter, which resulted in a $40 million reduction in the net pension and OPEB liability on our balance sheet. Given that we finalized the 2017 annual contributions to our Québec Pension Plans only in July, contributions for the first half of 2017 were unchanged compared to 2016. However, our contributions will be reduced by approximately $30 million in the second half of the year, including a retroactive reduction of $10 million for the first half. Pension contributions for the third and fourth quarters are expected to be $41 million, and $23 million, respectively. I will now turn it over to Richard for concluding remarks.

[Richard Garneau:]

I would like to elaborate on the progress achieved on our priorities for the year. Other than the challenges we continue to face in our tissue business, which we are addressing with concrete actions, we believe we achieved important success so far in 2017. First, our operating performance improved when compared to the second half of last year, particularly in our market pulp and wood products segment, where productivity metrics are stronger in the second quarter. On lumber duties, we continue to defend our interests. Even if our combined rates for conservating and antidumping duties is less than our largest competitors, our view remains that softwood lumber exports from Canada - from Central Canada to the United States should be free of any trade barriers. Finally, with $41 million of debt repayment in the second quarter, we reduced our leverage and expect to further improve our financial flexibility before the end of the year. Our market outlook remains unchanged from the last quarter. In pulp, we are cautiously optimistic that market condition will remain relatively favorable at least through the third quarter, and our scheduled outages are nearly complete with only Saint-Félicien left in the third quarter. In tissue, sales remain our top priority. With new leadership, I'm confident that our progress will accelerate in the short term. With underlying fundamentals continuing to strengthen, we anticipate that wood products will continue to perform well in the short term. In our paper segment, ongoing global demand declines are expected to continue. Finally, although the relative strengthening of the Canadian dollar will relieve some of the competitive pressure on our U.S. facilities, we expect that current trends affecting the value of the Canadian currency will have an unfavorable impact on the Canadian facilities' costs in the short term.

[Alain Bourdages:]

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

[Operator:]

[Operator Instructions] Your first question comes from the line of Hamir Patel with CIBC Capital Markets.

[Hamir Patel:]

Richard, I just wanted to start on the lumber side. There's been some media report suggesting a quota deal might be close. If we do get a quota, how do you think Canada should allocate the quota between the various provinces? And kind of related to that, do you think there is potential for Québec to change their stumping system back if they are not getting any credit for the changes that they've made since 2006?

[Richard Garneau:]

Well, Hamir, thank you for the question. I think that it's rather difficult to answer this question. So I think that this question of allocating if there is a quota, of allocating the quota by province should be discussed before any deal is caught between U.S. and Canada. And I am not aware of any discussion between the province and the federal government on this one. Maybe there are discussions, but I'm not aware. And on the second question on the forestry regime, I think that Québec did exactly what the coalition was asking for. They modified the forestry regime basically to make it completely market, and I have mentioned that many times, so it's never about the system that they have in many U.S. states where we have pulp and paper mills. So I still believe that Québec is not going to change their forestry regime. They feel that it's a completely market. The Premier of Québec has been very clear about it, and to my knowledge, unless he has changed position, I don't think that he has changed positions. So he still believes that Québec should have free access to the U.S. market. And I still believe that this should happen and I am still going to repeat what I've said many times in Ontario, which is the only province that got the ruling from the Chapter 19 Panel, that confirmed that the [indiscernible] users were not subsidized with the wood that they got from the public lands. And I think that for Central Canada to reason that Resolute still has this position and hopefully we're going to get there someday that we should have unfettered access to the U.S. market for Central Canada.

[Hamir Patel:]

Next question I had was, a couple of months ago, you announced you're collaborating with Stone House to explore converting [indiscernible] to containerboard. Do you have any update as to how that study is proceeding? And if the conversion did go ahead, would that be a Resolute business going forward? Or would that just be an asset sale to this third-party?

[Richard Garneau:]

No. I think that the discussion that we had with Stone House so that we would basically sell the mill to Stone House, and they would proceed with the conversion. So they are still working on it. And we're expecting one way or another that Stone House is going, hopefully, by the middle of this month to finalize, probably their financing, and that we can conclude on the disposal of this mill.

[Hamir Patel:]

And are you sure given the demand declines we're seeing in graphic papers, do you have any other machines that you think would be attractive conversion candidates that you would be open to selling?

[Richard Garneau:]

Well, it's certainly a consideration that we have. We don't have any plan to convert machines. So I think that as we've said before, so we're trying, basically, to produce what we can sell to our customers and monitoring the situation. So I think that certainly, with our tissue project, we don't have the liquidity to embark into a major conversion at this point in time. So we are focused on optimizing what we - our metric and hopefully that we're going to maintain profitability in these segments.

[Operator:]

Your next question comes from the line of Sean Steuart of TD Securities.

[Sean Steuart:]

Couple of questions. I know you have a new management in place with the tissue division. Wondering, Richard, if you can give us a little bit more context about how you expect volumes and sales to ramp up going forward? I gather it's been a little bit frustrating to this stage, but how should we think about those shipment numbers coming up over the next few quarters?

[Richard Garneau:]

Well, I think that the change in leadership is certainly going to help to grow the sales, and we have added also sales people. I think the major item is the request for proposals that we thought that we would be able to participate and there's many of them that have been delayed. And we expect that at the end - by the end of the year that we should have at least participated to this request for proposal and that we should be able to gain more volume. So I think that, certainly, the addition of Patrice Minguez - I think that he is a very successful entrepreneur that sold his company back in 2012 and has decided to join Resolute, and I think that certainly, with the contact that he has on away-from-home and also on the retail side that is going to provide more momentum to develop our sales and shipments. So it's momentum that we're looking for here and having the experience and having someone that has the privileged relationship with many retailers is certainly going to help. And I think that on the quality side, the sales that we presently have that we expect that are going to - already to grow in August and September, I think that we can certainly build on this premium quality product that we have with our NDT machines.

[Sean Steuart:]

Got it. Hamir asked a question with respect to your thoughts around selling assets for conversion to its packaging. But with respect to the acceleration that we've seen in demand declines for newsprint and groundwood paper, how much of that do you think is just an acceleration of the structural trend versus, a little bit of, I guess, near-term noise that's driving it? Just broader thoughts on the pace at which demand is falling off here for polishing paper.

[Richard Garneau:]

Well, when you look at the - I think that certainly, the closure of the mills in the world and even in North America followed the decline in demand. So when you look at newsprint in June, so the shipments-to-capacity ratio is 92%. So I think that, certainly, with the -- we expect that the same decline is going to continue. And when you talk about conversion, a thermo-mechanical pulp basically is impossible. You cannot use this pulp to make paperboard or linerboard or medium. So I think that we have to find other ways and that we have any [indiscernible] as we speak and he happens to be able to address the issues of this decline in demand. So - but again, I think that it is a rather difficult situation. What is helpful is certainly in Canada we have [indiscernible] mills or printing and writing mills are all very competitive. So we'll continue to compete and try to address the issues of this decline - declining demand.

[Sean Steuart:]

Understood. Last question for Jo-Ann. You guys gave a lot of detail on segment cost trends, but overall, how much did the maintenance across your business affect costs this quarter? Can you give us that number?

[Jo-Ann Longworth:]

Yes. We talked about it earlier. It's about $8 million across the segments, plus another $5 million because of the co-gen.

[Sean Steuart:]

Got it.

[Jo-Ann Longworth:]

The annual outage affected the co-gen revenues as well.

[Operator:]

[Operator Instructions] Your next question comes from the line of Charan Sanghera of RBC Capital Markets.

[Charan Sanghera:]

Richard, a quick question for you, just touching on the softwood lumber dispute. You noted in your press release that you see some dissipating uncertainty and can we read into this that maybe possibly you think an agreement is coming soon? Or is it more benign and you're talking about uncertainly in terms of pricing may be?

[Richard Garneau:]

Well, I'm not sure that I get the question. Could you just clarify, please?

[Charan Sanghera:]

Just on the press release you mentioned that there is a dissipating uncertainty in terms of the lumber markets, or in terms of the softwood lumber dispute. Are you - can we read into this that you think that maybe an agreement could be coming soon, maybe before and after negotiations start?

[Richard Garneau:]

Well, the uncertainty is more around the duties itself. So I think that now we have the preliminary duty, and I think that by the end of August, we know that the Commerce is not going to come with the final determination. And we know now that the pricing has been probably - we've benefited somewhat from higher pricing because of this very high CDD and ED. So there's some uncertainty around that. But we expect that when the duty is stopped - they stop collecting the duties that likely the price could be readjusted downward, and I don't think that it has any bearing on the deal itself. So there was a lot of discussion into the newspaper about a potential deal and a quota deal, but, quite frankly, I'm not aware of anything. I know that probably there are discussions, but it's between the governments of Canada and the U.S. And again, I think that this situation is, to a certainly extent, is kind of unsettling because you just don't know how the market is going to react. We're still at 1.2 million housing starts, so there is not much that has been done on this side. We know that the consumer and those people in the U.S. are complaining that the lumber price is really high, and that it's affecting the buyers or the consumers, or I guess that it's all going to be taken into account at some point by both governments, when they have their discussion. But, hopefully, it's going to be resolved one way or the other, hopefully, before the end of the year.

[Charan Sanghera:]

Okay. Got it. Thanks for the color. Maybe just go into the pulp market. You mentioned that your outlook is relatively unchanged for pulp, maybe for the balance of the year. But what about maybe a little bit further into the future, maybe early 2018, with the expected industry capacity? Could you add some color on what you think or how do you think that will play out with pulp markets?

[Richard Garneau:]

Well, certainly, with the addition, the new capacity coming onboard in early 2018, could certainly add an impact on the market. So I think that well, the capacity addition in 2017, there is always issues when you start a new mill, so we could have certainly - we didn't expect that the market this year would be strong as it is now. So there is delay in the ramp up, and I think that, that could also happen in 2018, but it's all the capacity that has been announced on the market at full production. Yes, it is going to put pressure on price.

[Operator:]

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

[Alain Bourdages:]

That concludes our presentation for today. Thank you for joining us, and have a great day.

[Operator:]

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