Resolute Forest Products Inc.
Q2 2015 Earnings Call Transcript

Published: 2 Aug 2015

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Second Quarter 2015 Earnings Conference Call. All lines have been placed 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, July 30, 2015, at 9

[Rémi Lalonde:]

Thank you, Simon. Good morning, everyone. 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 onto the webcast using the link in the Presentations and Webcasts page under our Investor Relations section of our Website, where you can download the slides. We provide additional financial and statistical information, including a reconciliation of non-GAAP financial measures, in our press release and in the slides. As always, certain subjects we will cover involve forward-looking information. Our statements are based on our current assumptions, beliefs, and expectations, all of which involve a number of business risks and uncertainties and accordingly can change as conditions do. Richard?

[Richard Garneau:]

Good morning and thank you for joining us today. We generated $89 million of adjusted EBITDA in the quarter, $25 million more than in the first quarter. Manufacturing costs were significantly lower, down by 35 million, as a result of the effect of spring temperatures, lower natural gas pricing, and better mill productivity compared to the first quarter. Shipments increased in each segment, but the benefit was more than offset by lower pricing, particularly in newsprint and wood product. By segment, we generated adjusted EBITDA of $38 million in market pulp, up by $13 million from the first quarter, $5 million in wood product, down by $8 million, $19 million in newsprint, up by $6 million, $36 million in specialty paper, up by $14 million from the previous quarter. Let’s review market condition and segment performance. Through June, world demand for chemical pump grew by 5% compared to the same period of 2014, including an increase of 12% in China, 6% in Latin America, and 1% in North America. Demand for softwood was up by 2%, and non-eucalyptus hardwood was 1% higher. Shipments of softwood grew by 8% to China and 2% to North America, but they were 4% lower to Western Europe. Eucalyptus grades account for almost all of the 8% increase in hardwood shipments, the supply of which has grown with the recent significant expansions of Latin American capacity. 70% of our shipments year-to-year have been within North America. The slowing pace of growth in China, the stronger U.S. dollars, and lower demand for printing and writing rates drive our average market pulp price down $67 per metric ton since its peak in the second quarter of last year. Compared to the first quarter of this year, our average transaction price for market pulp was down $8 per metric ton due to significantly lower realized price for softwood, which was only partly offset by higher realization for fluff and bleached hardwood kraft. But our shipments were 23,000 metric tons higher, mostly softwood. Lower costs due to better operating efficiencies and the effect of the spring quarter more than made up for the lower realized prices, contributing to an adjusted EBITDA margin of $108 per metric ton, we also reduced our finished good investment by 14,000 metric tons, which represent about four days of supply. We continue to believe that the underlying fundamentals will support stronger growth performance in the medium and long-term, but our near-term outlook is unclear. The trend in U.S. housing starts regained some momentum in the second quarter, following the harsh winter quarter, averaging at about 1.1 million on a seasonally adjusted basis, up by 16% from last year. Permits are also showing sign of strength, particularly in the second quarter, up by 19% compared to the same quarter of last year. Despite this progress, lower North American export to Asia and softer than expected demand pulled lumber prices down to multiple year lows in the second quarter. Our average realized price was $33 per thousand board feet lower compared to the first quarter. But, our shipments were 25 million board feet higher including volume from our refurbished igneous facility. I’m also pleased to note that our greenfield Atikokan sawmill is now in the startup mode. We expect to see these saw mills increase and optimize their production in the third quarter with their new team of employees. With the composite price below the $355 per thousand board feet threshold and hitting a low of $315 per thousand board feet, we paid about $1 million of export taxes under the softwood lumber agreement compared to no taxes in Q1. Under this agreement, the share of U.S. consumption for Quebec producers was limited to 4.8% in the quarter, and Ontario was 3.3%. In light of the pricing momentum of late and the recent encouraging housing data, our near-term outlook for lumber is more positive. This could then reduce the export taxes and increase the quota starting in August. We’re confident that the underlying fundamentals will support stronger performance in the medium and long-term and that our asset base will help us to capitalize on the future growth. North American demand for newsprint dropped by 12% through June but production fell by 16%, contributing to an elevated 91% operating rate for the first half of the year. Global demand for newsprint was down by 10% through May, with drops in all major regions, including Asia down 9%, Western Europe down 10%, and Latin America down 13%. Market pricing conditions since late 2014 have reflected the increasing challenges for North American producers in the global newsprint business will freeze an accelerating pace of global structural decline, currency disadvantage in export markets because of the strong U.S. dollars, and a very low operating rate outside of North America. Industry exports were down by 17% year-to-date, which represent over 300,000 tons annually. Our own newsprint shipments were 14,000 metric tons higher this quarter compared to the first quarter, mainly because of higher shipments to Latin America. The average transaction price slipped by a third [ph] of $17 per metric ton, but our costs improved by $31, largely as a result of lower steam and power cuts as well as lower prices for natural gas. Despite the very challenging environment, we delivered an adjusted EBITDA margin of $35 per metric ton in the quarter. Even as conditions in the newsprint business continue to deteriorate, we expect to run our network to capacity, as we believe that our asset base gives us a competitive edge to weather the tough conditions. The recent demand decline for uncoated mechanical papers in North America accelerated in the second quarter, dragging the year-to-date figures to 13% compared to 2014. This drop is reflected in each upgrade. Supercalender is down by 11%, and standard grades, which include our super-brites and hi-brites, are down by 13%. The industry shipments-to-capacity ratio was 89% for the first half of the year, down by 1% when compared to the same period last year. Coated mechanical demand was down by 6% through June, where the shipment-to-capacity ratio was 92% compared to 88% in the same period of last year. The weaker euro contributed to a 51,000 short tons increase of imports from Western Europe year-to-date. Our shipment of specialty papers were 6,000 short tons higher in the quarter, but the average transaction price slipped by $10 per short ton, reflecting mostly lower prices for supercalender, super-brites, and hi-brites. Despite these challenges, our costs were significantly lower, down by $40 per short ton due to lower steam costs as well as better efficiencies and productivity compared to the first quarter, which helped to contribute to an adjusted EBITDA margin of $93 per short ton. It is worth mentioning that our Cariba mill in particular had an excellent quarter, following the mill management successful implementation of improvement initiatives. We expect a modest seasonal uptick in specialty paper shipments, especially later in the third quarter, but the weak euro and the accelerating pace of demand decline in North America could put pressure on selling prices. The Department of Commerce has now issued its preliminary determination in the countervailing duties investigation of imports of supercalender paper from Canadian producers. Commerce calculated preliminary subsidy rates of 20% for Port Hawkesbury paper, 2% for Resolute, and 11% for Irving and Catalyst. Our position is that we receive negligible assistance. We have fully cooperated with the investigation. And as soon as we are required to do so, we will start to meet the cash deposit for shipments to the U.S. from our Canadian mills. For Resolute, this represents approximately 1 million per quarter. Next week, Commerce will conduct a verification of our data as it works to issue its final determination for all Canadian producers in October. Resolute will continue to fully cooperate with the investigation. Our continued focus on costs helped to deliver solid results, considering the challenges that we continue -- that continue to pressure our industry. Our competitive and diversified platform allowed us to weather the tough condition, including the cyclical headwinds we face in our growth businesses as well as increasing difficulties in paper grades, especially newsprint. We are working to maintain our competitive edge by focusing on the proven Resolute operating model in everything we do and pushing to optimize the asset base in order to maximize the utilization of our most cost-effective mills. We will continue this focus as we execute our growth strategy that will build the Resolute of the future with projects, like the tissue manufacturing and converting facility scheduled for ramp up in 2017 and our ongoing capacity building initiatives in pulp and paper. Jo-Ann will give you our financial performance.

[Jo-Ann Longworth:]

Thank you, Richard, and good morning, everyone. Today, we reported second quarter net income of $7 million excluding special items, or $0.07 per share. GAAP net loss was $4 million, or $0.04 per share. Starting this quarter, we changed our presentation of pension and OPEB costs to include the net financing and re-measurement components of pension and OPEB costs as a special item adjustment to our non-GAAP performance measures, such as adjusted EBITDA. These pension and OPEB costs represent almost all of the $11 million of special items in the quarter. The recurring operating components of pension and OPEB costs, like current service and amortization of prior service credits, continue to be allocated to the operating segments and are reflected in our adjusted EBITDA. We believe that removing the net financing and remeasurement components of pension and OPEB costs from adjusted EBITDA better reflects our ongoing operating results and improves their comparability between periods. This change will therefore be more useful to investors, and it is also consistent with a number of our industry peers. We applied the change retroactively. Without it, adjusted EBITDA in the quarter would’ve been $77 million compared to the $89 million we reported. Similarly, by making this change, our adjusted EBITDA in Q1 becomes $64 million compared to $50 million we previously reported. We included an appendix to show the impact of the change by period and by segment. Total sales in the second quarter were $926 million, $6 million more than the first quarter. Shipments improved for each of our segments by 25 million board feet in wood products, 23,000 metric tons in market pulp, 14,000 metric tons in newsprint, and 6,000 short tons in specialty papers. But, pricing was lower across each of the grades, $33 per thousand board feet in wood products, $17 per metric ton in newsprint, $10 per short ton in specialty papers, and $8 per metric ton in market pulp. Costs were significantly lower this quarter, down by $38 million after adjusting for the higher volumes and the effective currency. The improvement reflects the effect of spring temperatures, lower natural gas pricing, but more importantly, higher mill productivity. Although the Canadian dollar was slightly stronger on average compared to the first quarter, we benefited from a $12 million tailwind because of the currency lag effect on inventory costs, mostly in the wood products segment. Cogeneration assets that sell power to third parties added $13 million of EBITDA in the second quarter, a $1 million improvement from the previous quarter. Compared to the first quarter, market pulp’s all-in delivered cost fell by $46 per metric ton, or 7%, to $585, due to better operating efficiency and seasonal factors as well as the higher shipments. The delivered cost in wood products fell by $15 per thousand board feet or 4% to 327, mostly because of the lagging effect of the weaker Canadian dollar on inventory costs as well as better fiber recovery overall and higher production efficiency. Newsprint delivered cost fell by $31 per metric ton or 6%, largely as a result of lower steam and power costs as well as lower prices for natural gas. The delivered cost for specialty papers fell by $40 per short ton, or 6%, due to lower steam costs as well as improved mill efficiencies and productivity compared to the first quarter. Cash and cash equivalents were $303 million at quarter end, and our net debt remains very low at $294 million. We took advantage of the recent stock price underperformance to buy back 3.2 million shares of our stock under the renewed share repurchase program. This represents 3.4% of our total shares outstanding, for which we spent $37 million in the quarter. It was an opportunistic move that does not compromise our ongoing value-creating initiatives to build capacity and markets with future growth opportunities, as we continue to execute on our growth strategy, including the expansion into tissue and a pulp digester project in Calhoun as well as the two new sawmills in Northern Ontario. Net cash provided by operating activities in the quarter was $61 million compared to $29 million in the previous quarter, most of which is because of higher EBITDA and also a decrease in working capital, due in large part to the seasonal reduction in log inventory. Capital expenditures were $39 million, in line with the first quarter. As we previously announced, we expected -- we expect our rate of CapEx spending to increase in the second half of 2015 as we ramp up construction for the tissue project. This project is expected to cost approximately $270 million, including $90 million in 2015 and up to $160 million in 2016. We spent about $4 million so far this year. Accordingly, we anticipate to have total CapEx, including the tissue and other value-creating projects of approximately $290 million in 2015. Pension funding was $34 million compared to $27 million in the previous quarter. As we noted last quarter, the increase reflects $9 million more for U.S. pension plans due to timing. We expect contributions to increase to approximately $57 million in the third quarter, but to fall to $27 million in Q4. The third quarter will include $14 million for the third quarter and fourth quarter contributions to U.S. plans and additional contributions of $15 million related to machine closures under the special funding relief measures in Quebec and Ontario. In total, for 2015, we continue to expect $145 million of pension contributions and $16 million of OPEB payments versus $81 million of related expense. This compares to 2014 pension contributions of $164 million and OPEB payments of $19 million versus a combined expense of $26 million. The increase in pension and OPEB expense relates to the $330 million remeasurement of balance sheet net pension and OPEB liability in 2014. Because of the changes we described today to the presentation of our pension and OPEB costs, the impact of this remeasurement as well as net financing costs no longer appear in adjusted EBITDA. Availability under our new and more flexibility ABL credit facility at quarter end was $468 million for total liquidity of $771 million.

[Rémi Lalonde:]

Thank you, Jo-Ann. Simon, why don’t we open the call for questions, please?

[Operator:]

[Operator Instructions]. Your first question comes from the line of Sean Steuart with TD Securities. Your line is open.

[Sean Steuart:]

Impressive progress on the cost side this quarter, couple questions. Just wondering in light of Calhoun, Richard, if you can speak to, I guess broader growth ambitions for the Company. You previously talked about wanting to continue to grow in the lumber side potentially and in pulp. Does this project curb your appetite for future growth? How do you think about what other opportunities are out there for the Company on that side?

[Richard Garneau:]

Well, I think that when you look at Calhoun, it’s project that is going to take a couple of years to complete. So, I think that we still have the flexibility to do other projects. So, I think that we hadn’t abandoned a nearby [ph] our plan to grow in pulp and also in lumber. So, I think it’s a question of opportunity to make sure that we can find assets at the right value. And I think that the history of the last few years has just shown that being patient, you can find the right opportunities. So, I think that this project is certainly in our mind, management mind. It’s going to be a stepping stone for probably ours because, obviously, Calhoun has specific advantage, but U.S. South mills when you look at Catawba, there’s also very, very, very good assets. And I think that, even when you look at Coosa Pines also in Alabama, really well positioned for the future. So, and we still have in mind the greenfield sawmills into the US. I think that now is not the time to -- really to look at it. I think that we have to digest. There are two already start at Ignace and the Atikokan, we’re in the process of starting up also. So, and I think that we had three projects also in Quebec that -- where we have replaced equipment to improve lumber yield, lumber recovery. So, I think that is still -- we still have plan. And I don’t think that Calhoun is going to prevent the -- if we have good opportunity and at the right price, we’re certainly going to take advantage of them.

[Sean Steuart:]

Is it conceivable you could start spending on a potential second tissue project before Calhoun’s finished or would you want to get that out of the way first and ramp it up?

[Richard Garneau:]

I think I would not close the door to anything at this point. But I think that obviously we want to be successful with this one. And our team, our tissue business team is working diligently on Calhoun. But, I think that does not -- I think that the door is still open if there is the right opportunity at the right price in the right circumstances. I think that the -- we’re going to look at it.

[Sean Steuart:]

And last question from me. I’m wondering if you can comment a little bit on offshore newsprint markets. It seems like there’s a bit of disconnect from country to country. We’ve seen pressure in Latin America, at least in U.S. dollar terms. And it seems like slightly better pricing in China. Can you just give a little bit of context in what you’re seeing in offshore markets?

[Richard Garneau:]

It is difficult anywhere when you look at the offshore market. I think that the strong U.S. currencies make it very difficult to compete. I think that with the weak euro and also the Russian currency being also weak, I think that it is difficult really to maintain the volume. But as you’ve seen this quarter, we were able to increase the shipments and it was because of Latin America. And certainly, we feel we have this advantage. We’re right on the river, but Atikokan there is all export now, and it is certainly an advantage also in terms of supply chain because we can -- we have this flexibility to ship significant big vessels, up to 25,000 tons, and basically deliver to various ports along the way in Latin America. So, I think that this advantage is significant. So, certainly, all that the economy in Brazil because it’s one of our largest markets, is going to improve, but we’re working on our cost side, and these mills are in Canada also. We have certainly the advantage also of the weak Canadian dollar. So, still certainly not high optimism, but I think that we’re still optimistic and that we’re going to maintain our shipments. And I always assume that at some point, it’s going to get better in terms of the -- on the economic side of these countries where we sell our newsprint.

[Operator:]

Next question comes from the line of Bill Hoffmann with RBC Capital Markets. Your line is open.

[Bill Hoffmann:]

I just wonder if you’d talk a little bit further on potential M&A. Obviously, you’ve made a big commitment here on the tissue side but just with the other segments of your business likely needing additional consolidation, any thoughts on the M&A side, especially in the pulp business?

[Richard Garneau:]

Again, I think that it’s -- we’re going to look at the opportunities. And I think that, when you look at our financial strength, and I always repeat that we can basically wait for the right alternative. We’ve been looking around but so far, we haven’t seen an opportunity at the right value, at the right price. And there is nothing worse than overpaying for assets. And I think that when you don’t want to overpay for assets and I think that you get penalized when the companies obtain overpay for assets, get penalized. And I certainly I will be very cautious about it and looking around. And I think that there’s still a potential. There’s the potential for us, but at the right condition. And we haven’t found anything at this point.

[Bill Hoffmann:]

And then, Jo-Ann, just get if you’d talk a little bit more about the pension if you look into 2016. I know, obviously, we don’t know the interest rate environment. But, are we still going to have the same drag on cash in 2016?

[Jo-Ann Longworth:]

In 2016, obviously, no, we haven’t done the numbers yet for 2016. But there has been some talk in Quebec and there’s a proposal to change the way funding is calculated in Quebec. And the major change of that is going to a return on assets interest rate, which would be we’ve returned about 9% over the last couple of years. I think they’ll be more conservative, more in the 6% to 7% versus as you know in Quebec, the solvency rate, which is a point-in-time rate for high-quality treasuries plus a small margin, which today runs about 2.5%, 3%. So, by changing that methodology, two things will happen. One, the deficit will be largely -- or the amount to be funded will reduce substantially, number one. And number two, the funding will become much less volatile because of short-term changes in interest rates. We have not had a complete look at this new funding requirement in Quebec. We’re waiting for the regulations. But certainly, from the medium to longer term, it will reduce volatility and likely reduce in the medium term our contributions. But again, it has not received approval yet. We’re expecting that to occur for January 2016.

[Operator:]

Your next question comes from the line of Stephen Atkinson with Dundee Capital Markets. Your line is open.

[Stephen Atkinson:]

First of all, Richard, I read that the University of Calgary Haskayne School of Management recognized you for your strong principle stand against attackers on ethical conduct. So, felicitations. Can you talk about the status with the Greenpeace?

[Richard Garneau:]

Well, I think that, well, it’s in the court, as. And I think that Greenpeace has used, well, bully tactics. I think that already the when you look at and it’s all public information. So, they had their motion stricken on the intentional interference in the Superior Court. They appealed, and they were unsuccessful. They went to the Divisional Court. And they again, they appealed and wasn’t successful. They appealed again at the Court of Appeals. And I think that it’s just moving on in the court system. And I think that we’re considering that in the maybe in the next few weeks, if not few months, that the discovery process is going to take place. So, and that eventually in 2016, the it’s going to be in front of the court. So, I think that we’re still considering that, when you share misinformation and when you practice intimidation and threat and when you lie, at some point, I think that the rule of law is going to apply. And I just hope that, you have, at some point, to be accountable for what you say and what you publish and what you share with the people. So, I think that is where we stand. And the people from the Boreal, the communities in the Boreal, there’s 30 mayors that were in Ottawa to raise the issue with the attacks by the activists. And they received 500 resolutions from communities, northern communities in Quebec and Ontario, denouncing these, well, school bully attacks on the Boreal Forest. And I become sometime emotional about it because, in Quebec and Ontario, we all the industry has to apply the same laws and regulation. And the enforcement is very stringent. So, if and when you read what these people say that we destroyed, we degrade the forest, I think it’s just untrue. And the government, I think it’s an attack on government. The government would not allow that to take place. And I think that it is the reason why the northern communities said that they want to be at the table. And we have offered that to the activists and the NGOs. So, let’s bring the First Nation, and let’s bring the communities that are going to be impacted by the decisions eventually when policies, policy decisions are going to be made. They should be at the table. And it’s the government that should be at the table also because they’ll have to implement the decisions that are going to be taken. So, it’s at the end, this offer is still on the table. And I think that the mayors and the First Nation and even Chief Klyne has said that the Greenpeace is not talking for the First Nation. So, we just hope that it’s going to take place. And again, on this one, I saw yesterday a press release that was published by Greenpeace and that, when they say that the Boreal Forest is largely unprotected, it’s exactly -- it is what is in writing. And I would like just to use this example to say that it’s lie because 43%, well, more than 40% of the dense Boreal Forest in Quebec and Ontario is off limits to the industry. So, saying something like that is just misrepresentation. So, it just shows that how far that they can go to intimidate customers.

[Stephen Atkinson:]

Has the Ontario government participated or been useful or helpful?

[Richard Garneau:]

I think that those government now and also the federal government now has starting because it’s an attack on them. It’s an attack on government. It’s not attack on the Crown forests in Ontario and on the same laws in Quebec. And even the federal government, if you look at the joint press release two weeks ago by Minister Redford and Minister Morrow, they were really clear. So, they want to defend the forest practices. They want to make sure that everyone in the world knows that in Canada we have sustainable practices. And they want also the world and the customers to know that the laws and regulation are enforced and that they are really doing what the laws basically asked them to do. And yes, they are doing more and more work on this because they realize that this attack, basically, it suggests that are disappearing. And I think that they are taking note of this, and they are going to defend their laws and regulations.

[Stephen Atkinson:]

Thank you. And congratulations or thank you for taking the stand. In terms of the -- on slide 11, there’s a table that shows the improvement from cogen and in the second quarter, it moves up to $13 million. Is that sustainable?

[Jo-Ann Longworth:]

Yes, it’s sustainable. But, just remember it depends on when we take our annual outages. So, our annual outages are basically complete for Thunder Bay anyway. But, Saint-Felicien has their annual outage at the end of the third quarter.

[Stephen Atkinson:]

Okay. But, nevertheless, the trend is upwards.

[Jo-Ann Longworth:]

The trend is upward. They are operating better, yes.

[Stephen Atkinson:]

Okay. Are they?

[Jo-Ann Longworth:]

Particularly at Saint-Felicien.

[Stephen Atkinson:]

Okay. Are they full capacity, or there’s still some room to come?

[Jo-Ann Longworth:]

Well, like I said, in quarter two, Thunder Bay had their outage.

[Stephen Atkinson:]

Well, that answers that then. Thank you. In terms of digester project, I’m wondering if you could walk me through the process in the sense that you find you have the digester running, the paper machine making more paper. And then I was thinking on the tissue. Would you be running the box plants, like would you be buying jumbo rolls and optimizing the box plants, like would there be a contribution from that?

[Richard Garneau:]

No, there’s no box plants, only the…

[Stephen Atkinson:]

Okay.

[Richard Garneau:]

The digester project, we’re going to have out between -- close to 100,000 tons more of pulp that we’re going to be able to dry on the machine. And there is an excess of about 60,000 tons that, if we would not have the tissue project that would have been left this capacity unused. So, the tissue machine is going to use this extra pulp capacity and obviously higher quality. This continuous digester is going to have a significant impact on the cost side. So, it’s going to bring the cost down. And so, even though that we said that it’s going to have the positive also benefit on the manufacturing cost and Calhoun profitability overall. And all the parent rolls that are going to be produced on the tissue machine are going to be converted onsite. So, we’re going to have three converting lines. So, the state-of-the-art, so the most recent technology, to convert this about 65,000 tons of tissue that -- and 60% is going to be bath tissue and 40% towel. But everything is going to be integrated from the start. And the plan that we have obviously the converting line are going to be ready probably four, five to six months before the tissue machine itself. We’re going to buy dive [ph] and enroll in the market to ramp up the converting lines. So, when we get the premium quality tissue from our machine, it’s going to be ready to go.

[Stephen Atkinson:]

Sorry. I meant to say tissue line. I was -- I had a couple packaging companies report. So, apologies for that. I meant to say tissue converting line. So, that I found it very interesting, the comment about the changes in Quebec on the deficit. So, on the pension deficit. So, are you able to tell me what the deficit is in Quebec versus Ontario?

[Jo-Ann Longworth:]

We’re not there yet, Stephen. The regulations are still being developed. And obviously, these are changes in Quebec’s rules for funding, not Ontario. So, we’re still in the process of working through that.

[Stephen Atkinson:]

Now, but Ontario is also looking at some legislation or changes?

[Jo-Ann Longworth:]

Not at the current moment, no.

[Stephen Atkinson:]

And so that in terms of Atikokan, when do you expect to be at full operation?

[Richard Garneau:]

I think that the I think the ramp up could be a bit longer than we thought because we have a new all the employees, basically some came back, but they’re all new. So, we have the same thing that we’re going to ramp up the production, we have to provide the training and the -- what is difficult now to find is the people, the trained people that are in short supply, in the smaller northern communities. We are making progress. So, I think that it’s the reason why we said that we’re going to optimize. But we have to do that with a new crew or a new set of employees. I think that we’re making progress. But it’s always the point to have everyone trained. But we’re happy with what we have seen so far at both sawmills.

[Operator:]

The next question comes from the line of Paul Quinn with RBC Capital Markets. Your line is open.

[Paul Quinn:]

Just a couple questions. We’ve seen a West Coast permanent closure on newsprint. Just wondering, in your minds, how much more is needed to balance the market in North America? And where do you think that’s going to occur, in Canada or the U.S.?

[Richard Garneau:]

Well, I think that there was probably 0.5 million tons of excess supply as we speak. So, it’s very difficult to try to guess who is going to close capacity. I think that certainly, I can speak for Resolute. So, we have closed the capacity. And we don’t have any intention to do more than we have done at this point. So, I think that you probably have as good a view that I can have on the next shoe to drop.

[Paul Quinn:]

In terms of the wood product side, maybe you could you mentioned the quota that you’re I guess under in Eastern Canada there doesn’t seem to have an effect on the quarter’s shipments but maybe you could help me better understand that and then what your expectation is in terms of lumber pricing for a post-SLA world in October.

[Richard Garneau:]

I think that it has an impact because of the during the quarter, that was 30% of the U.S. consumption instead of 34%. So, I think that when you look at the percentage share of the U.S. consumption, BC at 60%, 61%. So, it’s the number that I have. So, obviously the same for Canada, in Quebec and Ontario, it is small compared to the BC production. So, I think that, certainly, when you look at pricing, seems that the export to Asia from the West Coast, U.S. and Canada, seems to get better. So, I think that less volume from Canada should be exported to the U.S. And so, it’s the reason we said that we’re certainly a bit more optimistic on lumber because of the well, you look at the housing starts 1.1 million. The permits also are higher. So, I think that there is reason here or indications that the market is going to get better. So, we’re awaiting for this 1.3 million, 1.4 million housing starts. So, I think that probably now, we’re closer to that that we have ever been since 2011. So, I think that I certainly believe that this segment, even though we pay taxes and we were limited on the volume that that’s going to get better. And with the expiry in October of the softwood lumber agreement and no appetite from the U.S. and Canadian government to negotiate a new deal, then I think that our position as a company and the association in Quebec, so we wanted to -- we were supporting about an extension of the agreement but with the express condition that the working group that were supposed to be put in place in 2007 to look at the condition to be able to take advantage of the excess rent subject to putting this or at least pointing the members of this working group for Canada. And I think that they would have been able if they would have pointed their members to use also the arbitration clause if one party does not abide by the deal, so you can seek arbitration of the session. But I think that now, it’s probably too late. And we’re going to likely, because there is a standstill, one-year standstill, so likely going to have access the market for one year. And that’s the forecast that we’re looking or the expectation that we have that the housing starts could be in the 1.3 million, 1.4 million. So, I think that the market should be good enough to really dealing maybe action from the U.S. Coalition for Fair Lumber Imports.

[Paul Quinn:]

And just lastly, I too applaud your efforts I guess the environmental campaigns against Resolute. Just wondering, in your view, how material has been the impact on the Company?

[Richard Garneau:]

Well, it is material. I don’t want to mention the numbers. But, I think that we are accumulating it. But when this case finally gets to the court, we’re going to have all the backup information data. And to some extent, it’s not too complicated when you look at selling price. And now, we know that we have some markets that we don’t have access to. So, we have to ship a longer distance that you pay more for transportation. There is some customer basically that are just afraid and intimidation and threat and they are afraid of the bully. So, we all know that we all went to school one day. And sometimes you have a choice or you just bury your head in your hand, and you walk by or you decide that it’s enough, enough. And I think that in our case, I think that now we just support the provincial governments and even the federal government and also the support of mayors, support of First Nation. And also, there is more and more people that are -- that see that that campaign is just intimidation and threat and misinformation. And I think that there is a lot of fulsome that we need basically. And our employees, the reason very often when I visit the sawmills or was in the operations, so, how come they are allowed to lie on the facts? And I think that this end, I don’t feel that -- I just feel that we have to do it, that we have to defend the reputation of our employees, our communities that are affected by them and also that we have to work with our First Nation partners. So, hopefully, we’re going to see a resolution to this. But we don’t have any intention to back down.

[Operator:]

[Operator Instructions] I’m showing no other questions at this time. I'll turn the call back over to our presenters.

[Rémi Lalonde:]

Thank you, Simon. It sounds like people are on vacation. So, thank you everybody for joining us today.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.