Resolute Forest Products Inc.
Q4 2017 Earnings Call Transcript

Published: 2 Feb 2018

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products’ Fourth Quarter and Year-End 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, February 1, 2018 at 9 AM Eastern Time. I would now like to turn the meeting over to Silvana Travaglini, Vice President, Investor Relations. Please go ahead, Ms. Travaglini.

[Silvana Travaglini:]

Good morning. Welcome to Resolute’s fourth 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 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.

[Richard Garneau:]

Good morning and thank you for joining us today. In the fourth quarter, we generated adjusted EBITDA of $102 million, down from $118 million in the third quarter. For the year, adjusted EBITDA was at $364 million, compared to $263 million in 2016. Wood Products and Market Pulp segments have generated $329 million of EBITDA in 2017, $155 million improvement over last year. Our result in the fourth quarter were supported by stronger pricing in low segments and highest shipments in our market pulp and newsprint businesses, but we are negatively impacted by the ongoing restructuring at Calhoun; higher planned maintenance outages at several locations; seasonally higher fuel expenses; as well as higher fiber costs; and finally, seasonally lower shipments in wood products. An $8 million increase in the share-based compensation expense was also recorded as a result of the appreciation in our share price and continued performance. By segment, we reported adjusted EBITDA of $44 million in market pulp, an improvement of $17 million against the previous quarter, negative $1 million in – from our tissue operations, $65 million in wood products, down $8 million, $11 in newsprint, up by $1 million and negative $2 million and specialty paper down from $18 million in the previous quarter, which I will discuss momentarily. Pulp market remain solid during the quarter, as demand was strong and supply was limited by production disruption worldwide. Our realized pricing continued to rise, reflecting price increase announcements for all major grades over the quarter. Combined with higher shipments, our market pulp business realized one of its best quarter. The result of our Specialty Papers segment were unfavorably impacted by the ongoing restructuring at Calhoun, as well as several maintenance outages. We also slowed down production starting in December as a shortage of truck drivers and our winter conversions led to a lack of wood chips at our pulp and paper mills in Quebec. The restructuring and closure of our two paper machines, the [indiscernible] pulp facilities at one chip mills at Calhoun was complex. With mill wise seniority roles on the collective labor agreement, 63 people moved to new roles and 45 senior and experienced employees retired. Of the remaining operating all the workers, 45% have been in new roles for less than one year. This requires significant retraining and prevented that Calhoun from achieving targeted result in the fourth quarter. Incremental improvements are expected over the next several months, as we continue to optimize the cost structure and productivity. Let’s review our individual segments starting with market pulp. World shipments of chemical pulp grew 3% in 2017. Shipment to China and North America rose 6% and 2%, respectively, while shipments to Western Europe decreased 5%. Softwood shipments increased 3% globally, reflecting higher shipments to North America and China, both up 4%, while Western Europe remained flat. World shipments of hardwood rose 4%, led by an increase of 9% in shipment to China, while shipments to Western Europe fell 1%. North America was essentially unchanged. Given the strong fundamentals, our overall realized pricing increased again this quarter reaching $678 per metric ton and an increase of $28. Incremental market pulp at Calhoun, following the closure of two paper machines at the end of the third quarter, and no annual maintenance outages in the fourth quarter led to an additional 40,000 metric tons of shipments. Compared to the end of the third quarter, our finished goods inventory decreased by 11,000 metric tons and EBITDA increased by 63% to $44 million in the fourth quarter. Total tissue consumption in the United States grew 1.8% in 2017. Converted product shipments increased 1.9%, led by away-from-home volumes, up 2.9%, while at-home group 1.4%. Our overall pricing for the segment, which continues to include only the former Atlas tissue operations, increased by $50 per short ton in the quarter, largely because of product mix in our at-home grades. While shipments of away-from-home products and parent rolls remain comparable to the third quarter at-home volumes decreased. At Calhoun, we have achieved a significant quality milestone. We are now able to produce that tissue that is of equivalent quality to [attach through a fine] [ph] product. This allows us to better compete in the fast-growing premium private-label market. We have also established and implemented sales and marketing strategy, which includes broadening our product offering and quality tiers, rebranding as Resolute Tissue, and reinforcing the sales team to better align with our product offerings. These initiatives are beginning to yield a result with additional sales volumes secured for 2018. Also rising pulp costs have led to price increases being announced by most tissue producers from away-from-home products in the first quarter of 2018, and in an environment of increasing market pulp prices would benefit from our integration at Calhoun, as less pump is directly transferred into the tissue operation. U.S. housing start averaged $1,250,000 on a seasonally adjusted basis this quarter, up 7% from the previous quarter. Compared to 2016, overall U.S. housing starts were only 2% higher, but single family starts, which consume significantly more lumber increased 9%. During the fourth quarter, lumber prices continue to rise, reaching their highest levels in over a decade, due to supply constraints from a very active 2017 forest fire season in D.C. and marginally improving demand in the U.S. housing market. Our realized price rose to $430 per thousand board feet in the quarter, an increase of 6% compared to the third quarter. The reference price of random lengths #2 and better increased by 10%, while stud grades decreased by 4%. Our stud mill – our stud saw mills represent about 50% of our lumber production. For the year, average transaction price rose 23%, or $73 per thousand board feet. On the other hand, shipments of wood product were down $65 million board feet from record levels in the third quarter reflecting slower seasonal construction activity, uncertainty related to the announcement of the final duty rates and lower production at the Thunder Bay sawmill as a result of the fire in the kiln boiler. In 2017, we generated a record of $219 million of EBITDA in our wood product segment. North American demand for newsprint declined 11% in 2017, driven by a 17% reduction in demand from newspaper publishers, while demand from commercial printer was up 2%. While the industry production was also significantly lower, down 12% including about 1 million metric tons of capacity reduction. Accordingly, the shipment to capacity ratio in North America increased to 94% for year. Global demand for newsprint was down 8% through November with Asia and Western Europe both down 7% and Latin America down 6%. For the full-year, export from North America declined in-line with global demand. In 2017, global capacity reductions of about 2.5 million tons exceeded declines in demand, resulting in favorable short-term market conditions for newsprint. Price increases were realized in the quarter and as publicly reported. We have announced further price increases in the first quarter both in North America and in export markets. Favorable market dynamics also led to 22,000 metric tons increase in our shipments or 6%, compared to the third quarter as we decreased our finished good inventory by 20,000 metric tons. In December, we announced the acquisition of the remaining 49% equity interest held by the New York Times in Donohue Malbaie, which owns the Clermont newsprint machine, one of the most cost sufficient in our network. Resolute continues to be a supplier of newsprint to the New York Times. North American demand for – on coated mechanical papers was down 9% in 2017. Demand for supercalendered grades continue to drive this decline decreasing 12%, while the demand for steno grades was down 4%. Overall, industry production for the year was down 11% maintaining the operating rate of 91%. The lower industry production volume includes the closure of two paper machines at Calhoun, probably offset by the restart of the paper machine at Alma for a net reduction of about 200,000 short-tons on an annual basis. Total mechanical demand was down 10% in 2017. North American production however was down 12% or over $300,000 short tons. And imports declined 4%. With the North American capacity closures, including our closure of PM2 at Catawba. The industry reached 95% shipment to capacity ratio in 2017. Although pricing gains were realized for coated mechanical and a standard in uncoated tissue grades. Our overall average transaction price for the segment remain unchanged, compared to the third quarter due to sales mix. As publicly reported, further price increases for all uncoated groundwood grades and uncoated freesheet has been announced for the first quarter. Given the restructuring in specialty papers and the production slowdown due to truck driver shortages, shipments were 36,000 short-tons or lower or 11%, compared to the third quarter and that finished goods inventory decreased by 20,000 short-tons. Lower volume and increase in cost led to a negative EBITDA of $2 million this quarter for the specialty papers. In January, the Department of Commerce announced the preliminary result of the countervailing duty investigation of import of uncoated groundwood grades from Canada requiring cash deposit at a rate of 4.42%, compared to an industry average of 6.53. Based on this rate, deposits could be as high as 20 million per year. Preliminary determination in commerce anti-dumping duty investigation are expected to be announced in March with final determinations for both investigations expected in late summer. Like the are capricious and arbitrary U.S. trade measures, the uncoated groundwood paper of preliminary determinations are without merit and in this case, particularly troubling. One petitioner with a single mill and a reported 260 employees is manipulating the trade law putting at risk over 600,00 just in the publishing and commercial printing industry. In the view of autonomies, it is an abuse of the trade laws for competitive advantage. For lumber the ITC confirm injury to the U.S. industry. And we resume making countervailing duty deposit at a rate of 14.7% since December 28, 2017. And continue to make anti-dumping duty deposits at the rate 3.2%. Commerce has also announced its preliminary result and its first administrative review of the countervailing duty order on less paper from Canada. While preliminary rate of 1.79% was determined for the company, which is a significant reduction from current rate of 17.87%. We continue to make our deposits at 17.87% until commerce issues its final result, which could be higher than 1.79% and is expected in May. During the fourth quarter, our cash duty deposit of $13 million were paid for the cumulative total of $75 million reported on our balance sheet. $49 million is attributable to supercalendered paper and $26 million to softwood lumber. Based on the current rates, our annual duty deposits on lumber and paper of that would be about a $125 million. By year end, we estimate that the company will have made a total of $200 million in deposit with the U.S. Treasury. On the sustainability front, we continue to have 100% certification of Resolute managed wood to internationally recognized forest management standard. And we have fiber tracking system, which has change of custody certification. Our commitments extend well beyond three-compliance with applicable forest re-regulations, which in Quebec and Ontario are already among the most if not the most rigorous in the world. Regarding our safety performance we achieved a world-class OSHA incident rate of 0.76, 0.66. We also reduced environmental incident by 40%. Special thanks go to the First Nations partners, Mayors and other community leaders, union representatives, customer and government officials who have stood by us and the principal possession we have taken against misinformation spread by activist and their threats and intimidation tactics. In 2017, our overall business and sustainability leadership has received significant recognition with over 25 awards and the sanction on original basis North American and global basis. I will now let Jo-Ann discuss our financial performance before I conclude with our priorities and outlook for 2018.

[Jo-Ann Longworth:]

Thank you, Richard and good morning everyone. Today we reported a 2017 net income of $12 million or $0.13 per share, excluding special items, compared to a net loss of $12 million or $0.13 per share in 2016. Earnings increased by $24 million on sales of $3.5 billion that were unchanged, compared to 2016. The more significant special items pretax included closure and related costs of $111 million, mainly related to the impairment of assets at Coosa and closure costs following the paper machine closures at Catawba and Calhoun. $27 million of start-up costs, primarily associated with Calhoun tissue and net gain from disposal of assets of $15 and non-operating pension and other post-retirement credits of $12 million. Net income in the fourth quarter was $14 million, or $0.15 per share, excluding special items. This compares to a net loss of $7 million, or $0.08 per share in the fourth quarter of 2016 and net income of $31 million in the previous quarter. Special items in the fourth quarter included $13 million gain from the sale of our Mokpo assets, start-up costs of $9 million, including $2 million associated with the restart of paper machine #9 at Alma and $5 billion of closure costs. Total sales in the fourth quarter were $898 million, $13 million higher than the third quarter. Pricing increased in most of our segments up by $28 per metric ton in market pulp, $50 per short ton in tissue, $25 per thousand board feet in wood product, and $14 per metric ton in newsprint. In total, higher pricing positively impacted results by $29 million compared to the third quarter. Benefiting from incremental pulp production at Calhoun and no annual pulp outages during the quarter, pulp shipments increased by 40,000 metric tons, despite some transportation issues. Although production capacity was lower in newsprint due to the paper machine closures in Calhoun, sales volume was up by 22,000 metric tons, as we reduced finished goods inventory by 20,000 metric tons. On the other hand, shipments in wood products were down 65 billion board feet, mainly due to slower seasonal construction activities. Specialty paper volume also declined by 36,000 short tons, following the restructuring initiatives in Calhoun. After removing the effect of volume and foreign exchange, our manufacturing costs increased by $6 million from the third quarter. This increase reflected mainly higher maintenance costs, largely planned outages at several facilities, an increase in fuel expenses mostly on seasonal usage and higher fiber and operating costs in our Wood Products segment, offset in part by the benefit of lower fixed costs, following the paper machine closures at Calhoun. Compared to the third quarter, market pulp all-in delivered cost improved by $12 per metric ton, mostly because of higher shipments, offset in part by an increase in planned maintenance outages. With higher pricing in volumes, EBITDA rose by 45% to $113 per metric ton. Despite the reduction in cost in our Tissue segment, which were unfavorably impacted in the third quarter by Hurricane Irma, the delivered cost remained essentially unchanged due to lower volume. In Wood Products, the delivered cost increased by $27 per thousand board feet in the quarter compared to the previous, resulting mainly from the higher fiber cost and lower volume. With realized prices increasing by $25 per thousand board feet, EBITDA remained relatively unchanged at $139 per unit. Newsprint delivered costs was $540 per metric ton in the fourth quarter, up $14, due to higher maintenance costs, mainly from equipment failures and lower contribution from cogeneration assets due to the planned annual outage at our Thunder Bay mill, partly offset by the benefit of lower fixed cost following the closure of paper machines at Calhoun. Although costs were higher, EBITDA per metric ton remained largely unchanged at $27 due to higher prices. The delivered cost in specialty papers rose by $64 per short ton to $703, due to several maintenance outages, as well as the costs related to the restructuring at Calhoun. Lower volume and higher costs reduced EBITDA to negative $2 million this quarter for short – or $7 for short ton. Our selling, general and administrative expenses were higher in the quarter, mostly due to an $8 million increase in our share-based compensation expense, as a result of the company’s performance and increase in share price, which rose 119% during the fourth quarter. Our distribution costs were also $4 million higher in the quarter, largely due to the various transportation issues related to the shortage of truck drivers, particularly in Quebec. During the quarter, our cost position – our cash position, excuse me, decreased by $32 million to $6 million. We repaid $51 million under our revolving credit facilities, bringing our total repayments since the end of the first quarter to $99 million. Total debt was reduced to $789 million at year-end and liquidity rose to $418 million. We have continued to deleverage repaying another $30 million so far in 2018. Capital expenditures were $28 million for the quarter, $8 million more than in the previous quarter. At $164 million for the year, including $90 million the Calhoun tissue project, we came in below the 2007 target of $185 million, largely due to the timing of project expenditures. The total project costs for Calhoun tissue remains as previously disclosed at $295 million. For 2018, we expect to invest $200 million in capital expenditures, including several investments to improve productivity and yields at our sawmills, as well as increase our pulp production capacity. In December, the company became the sole owner of Clermont – of the Clermont operation by acquiring the remaining 49% interest in the Clermont newsprint machine for $15 million. We also sold our permanently closed newsprint mill in Moscow for $18 million. Pension contributions were $23 million in the quarter, compared to an expense of $7 million. For the year, we made $132 million of pension contributions and $11 million of OPEB payments, compared to an associated expense of $29 million consistent with our earlier guidance. Total pension contributions decreased by $30 million, when compared to 2016, as a result of our voluntary exit from the Quebec funding relief regulations and other steps undertaken to optimize our pension contributions. For 2018, we expect to make pension contributions of $125 million and hope that payments of $15 million, a further reduction when compared to 2016. Despite the decrease in the applicable discount rates and the unfavorable currency impact, the net pension and OPEB liability on our balance sheet increased by $14 million at year-end to $1.3 billion, largely the result of strong asset returns and our ongoing pension contributions. Based on the current applicable funding regulations, our funding deficit is $518 million lower than our net accounting liability. The enactment of the U.S. tax reform in December did not have a significant impact on our 2017 financial results, and does not impact our cast tax position. We still do not expect to pay cash income taxes over the medium-term. I will now turn it over to Richard for concluding remarks.

[Richard Garneau:]

Thank you, Jo-Ann. We had established four priorities area for 2017 and our actions in those areas have delivered important benefits. The impact of our operational improvement efforts are cleared in our annual result, particularly in our Paper segment. The capacity closures closures and restructuring initiatives undertaking – undertaken at several mills that contributed to our improved profitability this year and we expect additional benefits in 2018 from the current restructuring at Calhoun and the restart of paper machine number 9 at Alma. Our 2017 results also benefited from the incremental production in market pulp and wood products, resulting in part from the strategic investments we have over the last several years. For our tissue operations, we achieved a required improvement in product quality, and with our new experience tissue team, we have redefined our sales and marketing strategy. We are now well positioned to benefit from the growing demand for premium product label tissue products. In terms of financial flexibility, we have continued to deleverage. Since the start-up of the Calhoun tissue machines at the end of the first quarter of 2017, we have reduced our borrowing by $99 million, including $51 million in the fourth quarter of 2017, despite making due to the deposit of $48 million in 2017. Our belief in the important and value of free trade is unchanged, and we continue to defend that position deploying major efforts to mitigate the capricious and arbitrary U.S. trade measures. We applaud Canada for taking an increasingly firm principal possession in its approach to trade with the U.S., demonstrated most recently by their WTO complaint, challenging a hose of measures and consistent with the U.S. obligations under the WTO. For 2018, we have established three corporate priorities. First, we will complete the ramp up of our Calhoun tissue operation and continue to secure business through superior quality and broadened product offerings. Second, we will focus on our capital spending on improving the overall productivity and yields at our saw mills and increasing our full production capacity. Finally, we will continue to reduce costs and complete the optimization of the specialty paper operations following the two paper machine closure at Calhoun and the restart of paper machine 9 at Alma. While we have implemented measures to mitigate the impact of driver shortages, we expect this transportation issue to continue to affect our business and result in 2018. We remain cautiously optimistic about our pulp business, given the impact of any incremental demand from China, due to a reduction in import licenses from recovered paper and the limited capacity additions forecasted to come online active Q2. As publicly reported, we have announced further price increases in the first quarter. Our short-term perspective in tissue remain the same. Our leadership team is focused on improving our market access and benefiting from our integrated pulp to offer high-quality products in an environment of increasing market pulp prices. We expect to see result of those efforts in 2018. In wood products, we expect lumber markets to remain generally favorable given the expected demand growth in the U.S. We anticipate that this segment will continue to be a key contributor to our overall profitability. Industry capacity reductions in both newsprint and specialty grades have exceeded the ongoing demand declines in the past year. As publicly reported again, we have announced price increases in Q1 for newsprint, uncoated groundwood paper and uncoated free sheet. And as you know well aware this morning at press releases, today marks an important day of transition for Resolute as well as a personal milestone for me. After seven years serving as President and CEO, I have determined that now is the right time to handover the responsibility. I take pride in what we accomplished together over the past years. Today, Resolute is a stronger and more sustainable organization, and our share values are truly part of the organization’s culture. This is a challenging industry, and we have built a dynamic and resourceful team and a more resilient and competitive operations. Our strategic path is clearly defined, and, I believe, the future holds great promise. I’m pleased the Board of Directors have selected and appointed Yves Laflamme as Resolute’s new President and CEO. He is the right man and the right time for the company. He has a wealth of experience, the necessary leadership skills and a proven track record of success. I’m considering the Resolute is in good hands, while I move to a new chapter in my life. Yves?

[Yves Laflamme:]

Thank you, Richard, and good morning. So well, Richard, not so quickly, Richard with that new chapter. We look forward to having you in our generous council and support now that you are officially a value advisor. I’m certainly honored to take on this leadership role at Resolute. I have been with the company and its predecessors for 37 years. With that, I have a good deal of knowledge and I’m excited to face challenges and take advantage of the opportunities that lie ahead. Thank you, Richard, for your incredible contribution to Resolute [indiscernible] impact as in many respects that redefined the company. Under your leadership, we have been a organization that is both profitable and sustainable, meeting the needs of customers, while creating shared value for so many other partners and stakeholders. You are led by example, and you are all – we are all grateful beneficiaries. So thank you very much, Richard.

[Silvana Travaglini:]

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

[Operator:]

Thank you. At this time, we will take any questions you may have for us today. [Operator Instructions] Your first question comes from Paul Quinn with RBC Capital Markets. Please go ahead.

[Paul Quinn:]

Yes. Thanks very much and good morning.

[Richard Garneau:]

Good morning.

[Jo-Ann Longworth:]

Good morning.

[Paul Quinn:]

Well congratulations Richard, on an amazing career and I’ll miss you honesty and more importantly, your passion. I thought you’d never retire.

[Richard Garneau:]

Well, it was my intention. But sometimes in your life, you have to review your priorities.

[Paul Quinn:]

Okay. Just maybe a couple of questions on the company’s starting with the pulp segment. We saw December 20 stats, it looked like things are in balanced conditions, but of course, we got the Chinese New Year coming up and thing it sounds like and it looks like the price momentum has slowed a bit. What is your read on the overall market?

[Richard Garneau:]

Well, I think that the – we will start firstly on domestic. I think that, I would say, a bit more capacity announcement for the first quarter. But after that, I think that we’re basically going to benefit from this market. And we haven’t really have, at this point, a clear indication of the important license from China. But if there’s really reflection AT apply, this 0.5% flash limitation, I think that there are certainly more demand that is going to come from China, and I think that it’s going to benefit our Pulp segment, but I would say, the industry as a whole.

[Paul Quinn:]

Okay. And then just switching over to tissue, you described that you’ve got more volume secured in 2018 here. Just wondering, what the quantity of that volume is? And when you’re going to be integrating the Calhoun asset into the Tissue segment?

[Richard Garneau:]

Well, yes, I’m not going to confirm volumes. So at this point, I think, we’ve made progress, Patrice Minguez, our President of the tissue operations is the road on Coosa all the time now and has been meeting with customers. We have secured additional volume. And I think that it’s going to start to show up. So I think that the other programs also that we made at Calhoun, because it’s a new machine, it’s a new operation. And finally, the – also the manager that is in charge of the machine at Calhoun that used to work with Patrice Minguez has succeeded that to be able to produce bath tissue that has the same quality characteristics and the tissue made on that machine. So I think it’s a breakthrough for us. And now we have – we are able also to maintain a higher production, because we had some issues – we had to correct all issues at the mill that were not resolved. So I think that certainly I’m looking at 2018 as the year, where our follow-up operations at Calhoun are going to benefit. And you know, the pricing announcement on pulp, I think, the machine – the tissue machine that gets flush pulp directly from the mill is going to add an advantage. And now on the quality side, we have resolved the issue that we had. So I think that we’re going certainly to see a ramp-up into volume, where last year, we had certainly some challenges. But – and I think the other point I want also to have that is also had it to the sales team and we knew how important it is to have the right guys and to have the right relationship with customers. And we’re also making progress on this side with the – while beefing up – beef up – we’re beefing up the team on sales.

[Paul Quinn:]

Okay. And you mentioned the away-from-home price increase in Q1, and the fact that you guys are so much insulated on the significantly higher pulp prices year-over-year. Have you seen anything on the consumer side in terms of a price increase or de-sheeting that would help offset some of the cost inflation like the industry has seen?

[Richard Garneau:]

Well, we haven’t seen the price increase announcement. But I think that the pulp cost is going eventually to trigger up maybe some announcement. But it’s a very difficult to – we are going to wait and see what the other market is going to react to that.

[Paul Quinn:]

Okay. And the last question I had was, it seemed like the contribution from the Cogen was down about 10% year-over-year. Is there anything going on there that I should note, or is that expected to come back up to like?

[Richard Garneau:]

Well, it’s maintenance, so we had the cold outage at Dolbeau, so – and also at Thunder Bay, and Thunder Bay, you know it’s where we had the big turbine 55 megawatts, Dolbeau is about 23%, 24% so we had that – those two were affected in the fourth quarter because of maintenance that we have to make on the turbines.

[Paul Quinn:]

Excellent. Best of luck in your retirement, Richard.

[Richard Garneau:]

Thank you.

[Operator:]

Your next question comes from Hamir Patel with CIBC Capital Markets. Please go ahead.

[Hamir Patel:]

Well, congratulations Yves. And Richard, we’re certainly going to miss your strong voice in the industry. Richard, I’ve thought, perhaps we’ll start some of the operational issues that you mentioned for the quarter. And hoping, you might be able to quantify for us the lumber business, what was the EBITDA impact from that the kiln fire you had at Thunder Bay, and then also in specialty, what was the impact to EBITDA from the restructuring at Calhoun and on newsprint, the equipment failures that you guys highlighted?

[Richard Garneau:]

Okay. Well, let’s start with the Calhoun restructuring. Just to give you an idea, so it’s a – it’s the only mill that we have and it’s [indiscernible] that with the mill [indiscernible] it’s not by department as you usually see in pulp and paper mill or even studded wood in sawmills. So – and what happened with that, so we closed two machines, we closed the TMP facility, and we closed also one of the log line and chip mill plant. So that has an impact on about 200 people that were affected by that in terms of possession reduction. So now what happened, with the mill wise is that the employees basically began bid on jobs anywhere where they believe that well, they are going to like it, so it’s there. It’s really – they have choice. So – and obviously, now what happened with the key department like the recovery board or the power board, if you look at the pulp mill and you look also at the machines, the pulp dryer plant machine before. So we have – when you look at the key possession, we have 45% of the possession basically that all have been filled with people that have less than one-year experience. So you can imagine, you have to learn and even though we provided training, we provided the manual. We have done a job in advance to make sure that we would mitigate the impact. But I think that there is nothing better than while on the job and you have to learn and sometimes, when you have, for example, a preview or mechanical breakdown, they have to learn how to react to that. So I think that is the difficulties that – we knew that, we would have. But I think that that’s – it’s a bit more complex because of the many employees basically that have to relearn the skill and experience, well it’s the sum of your errors, so and I know what it is, so it is the way. It’s the reason why we had some difficulties in the quarter. But I think that we’re going to certainly see incremental improvement in the first quarter and second quarter. So I think that there’s good progress that have been achieved. On the truck driver side, I think that it’s – certainly, there was a shortage, but we’re not the only one that is facing this reality. I’ve seen article into the Wall Street Journal also indicating that there is a shortage, but it’s not only driver. So we have a labor shortage and the small Northern communities, we knew that we would eventually have a challenge. But I think that this one was not anticipated and was not as really important as we saw in the last two weeks of December and the early January. So I think that with that put in place basically a strategy, where we have now using larger trailers to haul the chips to the paper mill. We’re using the road – the Woodland road that are larger, but to be able to use this large equipment and with also have the special hiring program to try to attract more people in working, because it’s all sub-contractors. So all the transportation is done by contractor. So we’re working with them to give them our support to address the issues that we have to address. And don’t forget also that this has been – we’re trying to address it by increasing also the volume that could be delivered to the pulp and paper mill by rail. But the mills are better equipped to receive truck, so it’s difficult with the rail, because it’s an extra operation. So – but I think, that’s certainly what the rail delivering chips, it’s going to help. And we’re going to continue to work to address this issue and try to have training program to have more of the driver. What is the other question? So I think that I…

[Hamir Patel:]

Yes. I mean, I was trying to get – I’m just trying to understand if you were to look at the sort of operational issues that you pointed to the fire at the Thunder Bay sawmill, the restructuring in Calhoun and some of the equipment failures in newsprint, you sum them all up. What do you think was a drag to EBITDA in Q4?

[Jo-Ann Longworth:]

Well, I think the way to look at it is the Thunder Bay kiln was 10 million board feet, we were down 64 million board feet. So I wouldn’t suggest that’s a large portion. And again, I’m going to focus on two things, specialty papers, because of these issue that we started to subscribe, it was down $20 million. And we had $8 million of adjustment in our SG&A, because of this seller, mainly because of this stellar price performance during the quarter. So if I had to sum up Q4 versus Q3, those are the two major items. Obviously, we would like our price – our share price to go up again in Q1 to get that type of share price adjustment in SG&A, but it’s not expected. And certainly for specialty project, as we wrap up and continue to the difficulties at Calhoun, I see no reason why we get to similar levels in specialty project as we’ve see in prior quarters.

[Hamir Patel:]

Great. Thanks for that Jo-Ann. And perhaps a question for Yves. On the priority slide, you talk about improving output this year for both lumber and pulp. Just curious what level of production you’re targeting for both segments and given your background in the wood products business, just curious what you think is the potential for the Eastern Canadian industry in both Ontario and Quebec to ramp up production from here?

[Yves Laflamme:]

So you mean on lumber?

[Richard Garneau:]

And pulp.

[Yves Laflamme:]

And pulp?

[Hamir Patel:]

Yes.

[Yves Laflamme:]

Yes. So as far as Eastern Canada, we see a potential to ramp up production with other productivity, of course, and as was mentioned, we’re investing to have a better yield on lumber. So it means that less the byproducts and more lumber. So as far as having – increasing more than that, the restriction is mostly on the wood supply. As you know that, we have certain limit as what – how much of volume we can proceed. So as a company, we still have an interesting gain to get with the new assets we have in Ignace, Atikokan in Northwestern Ontario. So I believe, we can do better on that side and increase production on lumber. So on pulp outlook, of course, we believe that we can increase some volume for the Saint-Felicien pulp. We are going to work on it and there’s more frequently U.S. So we believe that we can do better and more volumes that could be put in the market from our asset in the US.

[Hamir Patel:]

Thank you. That’s helpful. Any numbers you can put around that the volume uplift in both segments?

[Richard Garneau:]

Well, the –if I may jump in. Steve, on pulp, we produce about 0.5 million tons per quarter so or slightly less. So I think that’s what we have planned for Saint-Felicien Calhoun we haven’t reached again the full potential on the pulp mill itself and we have some investment to make on the pulp dryer to increase the capacity. So if you – Calhoun is a special situation and we use to have three paper machine and pulp dryer. And the pulp dryer was used basically as the sewing machine to – when the machine we’re not using the pulp just like pulp, so the pulp dryer was drying the excess. But now that we have only one machine, the pulp dryer has to run basically the – after the – by a moderate and between 500 and 600 tons per day, we’re not there yet. And obviously, when you push the equipment, you just realize that there were some issues that you have to address. And there was some reliability item, because obviously when used machine not full-time, there was some work that was not done. So that we’re in the process of addressing. And I think that it’s going to with the efforts that we are now – that we are – we focus on this piece of equipment, especially with a good market condition that we have on pulp. We’re going to push and accelerate, speed up the defects on the pulp dryer to increase the production. So we have the capacity in to the pulp mill. So we have to get this machine ready and running to where the potential is.

[Hamir Patel:]

Great. Thanks for that, Richard. That’s all I have. All the best in retirement.

[Richard Garneau:]

Thank you.

[Operator:]

Your next question comes from Roger Spitz with Bank of America. Please go ahead.

[Roger Spitz:]

Hi. Thank you and good morning. Firstly, could you tell us the balances on each of your senior secured credit facility and your ABL credit facility at both December 31, 2017. And also as of, I guess, today, since you are repaid a further $30 million, I just want to know how those split up? Thank you.

[Jo-Ann Longworth:]

Okay. Hi, Roger, it’s Jo-Ann. How are you.

[Roger Spitz:]

Great.

[Jo-Ann Longworth:]

Okay. I’m just trying to put through on that, sorry, it’s not.

[Roger Spitz:]

Jo, I’m going to ask my second question while you look that up.

[Jo-Ann Longworth:]

Okay, go ahead.

[Roger Spitz:]

In the Tissue segment, the sales and EBITDA is only for Atlas tissue. Can you say which segment the Calhoun tissue is – results reported? And what was the Q4 2017 sales and EBITDA of the Calhoun tissue business?

[Jo-Ann Longworth:]

Hi, Roger, it’s Jo-Ann, again. Yes, actually the Calhoun tissue business is included cost net of sales in our start-up expense, which was $9 million for the quarter, $2 of which was Alma, so the rest was Calhoun tissue mill.

[Roger Spitz:]

Got it.

[Jo-Ann Longworth:]

Okay. And just your question, the borrowings, sorry, the borrowings for the ABL…

[Roger Spitz:]

Yes.

[Jo-Ann Longworth:]

…were $61 million as of December, sorry.

[Roger Spitz:]

Yes.

[Jo-Ann Longworth:]

And for the farm loan a total of $129 million, including the term loan 46.

[Roger Spitz:]

Okay. And…

[Jo-Ann Longworth:]

I don’t have the information on how those were affected with the $30 million of repayments in January and we’ll talk to you about that maybe a little later?

[Roger Spitz:]

All right. Thank you very much. I appreciate it.

[Operator:]

Your next question comes from Sean Steuart with TD Securities. Please go ahead.

[Sean Steuart:]

Thanks. Good morning and congratulations, Richard and Yves. Couple of questions. Sorry to dwell on this. But the specialty papers cost inflation we saw this quarter you addressed most of it related to Calhoun. And Jo-Ann you suggested you would expect to see it normalized back to previous quarters levels maybe the Q3 level in due order. And just to focus on that a little bit, is that something we can expect over the first couple of quarters of 2018? Do you have any perspective on how long that might take?

[Richard Garneau:]

Well, it’s going – we’re going to see the improvements of – and obviously, we’re spending a lot of time on training and the retraining. And I think that I mentioned that it was going to be incremental. But I think that by – I’m confident that that at the end of second quarter that everything should be in place. So that all of the – all the training and the – really the retraining, because obviously when we have operation issues of the – our managers are also making sure that the people that are working into a control room that they get the right training and share all the information. So I think that with the number with 45% that has less than a year or so. i think as you can see how much effort is needed to address this. But I think, that it’s going to be done maximum six months to have the business skills basically and they’re going to see the experience, but other than going to see the skill to be able to operate it efficiently.

[Sean Steuart:]

Okay. Thanks for that detail. Also question, you mentioned the various price increased initiatives newsprint, obviously, in North America, but you mentioned offshore markets as well. I’m just wondering if you can provide a little bit of detail on what you’re focusing on in terms of magnitude and timing in offshore markets?

[Richard Garneau:]

Yes. So Jo-Ann is just looking at the – well, I think that we have that. It’s not $40 that has been announced for some of the great, and we also announced $22 on newsprint and that is going to be in February. So that overall, I’m just looking at the numbers now, because there are so many increases in announcement that we have made that [indiscernible] affected, okay. So when we look at that at March, for example, so on average, it’s – when I look at newsprint, it’s going to be US$22, that’s we’re going to benefit in March on onboard and mechanical, again, we’re talking about $25 between $25 and $30 and $40 depending of the grades. So it’s all on FCA and FCB and white paper. So overall, a lot of increase here to add on call. But we also have increased in February. We have another $20 on northern softwood. We have $10 on the softwood from the South. On the hardwood, we have $30 of both North and South and we have $40 in February on [indiscernible]. So all this detail are going to be implemented, so I think February and March.

[Sean Steuart:]

And just for the offshore markets specifically newsprint, Richard, is that broad-based across all your export markets you’re looking for price hikes?

[Richard Garneau:]

Well, in Asia, for example, we see – so I think that we are expecting $50 and in Canada, it’s $40, in Europe it’s between $30 and $35 and $40, and $15 to $18 in the UK, and Latin America was also $40, $15 Asia, $40 Latin America and Europe between $35 and $40 and UK between $15 and $20.

[Sean Steuart:]

Excellent. Thanks for all that detail. You don’t have to go through that stuff again next quarter. Thanks very much guys.

[Richard Garneau:]

Thank you. Someone else is going to do it.

[Operator:]

There are no further questions at this time. I’d like to turn the call over to the presenters.

[Silvana Travaglini:]

So that will conclude our call for today. Thank you.

[Richard Garneau:]

Thank you.

[Operator:]

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