Resolute Forest Products Inc.
Q4 2015 Earnings Call Transcript

Published: 5 Feb 2016

[Operator:]

Good morning, ladies and gentlemen, welcome to the Resolute Forest Products Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions]. Please note that this call is being recorded today Thursday February 4, 2016 at 9

[Remi Lalonde:]

Thank you. Good morning, everyone. 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 Web site or 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 or statements that are based on our current assumptions, belief 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 adjusted EBITDA of 276 million in 2015 compared to 356 million in 2014. Excluding non-operating pension expenses we benefited from a 148 million reduction in manufacturing costs and 171 million from the weaker Canadian dollar. But these items were insufficient to overcome the effect of lower pricing, which negatively affected earnings by 348 million. The negative impact of pricing by segment for the year was 16 million in specialty paper, 79 million in market pulp, 110 million in wood products, and 143 million in newsprint. Accordingly for the year our adjusted EBITDA was 13 million higher in market pulp and 37 million higher in specialty papers, but 63 million lower in the wood products and 48 million in newsprint. In the fourth quarter our adjusted EBITDA was 41 million, down from 82 million in the third. The variance reflects mostly lower selling prices again in addition to credits recognized in the third quarter. By segment in the quarter, we generated adjusted EBITDA of 30 million in market pulp down by 6 million from the third quarter, 3 million in wood product down by 15 million, 3 million in newsprint down by 3 million and 15 million in specialty papers down by 12 million. In the short-term, since the closing of the Atlas acquisition, our tissue segment was EBITDA neutral. Let's review market conditions and segment performance. World demand for chemical pulp grew by 3% in 2015, compared to the same period of 2014 including an increase of 11% in China, 2% in Latin America and 1% in Western Europe. World capacity grew by about 2% in that time, reflecting mostly the significant expansions of Latin American hardwood capacity. World demand for softwood was up by around 1% in 2015, this reflects a 3% increase in shipments to North America and 6% increase in shipment to China offset by a 4% decrease of shipments to Western Europe. In the same period demand for hardwood was up by about 6%, with shipments to China up by 17% and Western Europe up by 4%, but down by 2% to North America. All of the growth in hardwood demand over 1.2 million metric tons was in the eucalyptus grades, which represent about 70% of hardwood demand. The average transaction price in the market pulp segment decreased by $16 per metric ton in the quarter, with recycled bleached kraft down by 34%, softwood down by 18%, hardwood down by 12% and fluff up by 18%. The increase in fluff pulp pricing is mostly a result of geographic mix. Our shipments were 24,000 metric tons lower in the quarter due to softer market conditions. Accordingly, our finished goods inventory also rose by 13,000 metric tons from the very low level at the end of the third quarter. Despite the lower pricing, we still recorded that adjusted EBITDA of $89 per metric ton in the quarter, compared to $100 in the previous quarter. We believe in the underlying fundamentals and growth prospects for market pulp longer-term, but our near-term pricing expectation remain cautious. Despite that, our continuous pulp digester in Calhoun is now running and making a good progress towards reaching its expected normal operating efficiency. It should reach that level by the end of this quarter, which will give us additional capacity and lower mill wide costs. Again this quarter, US housing starts continued with their progress and recovery, averaging over 1.1 million on a seasonally adjusted basis. Actual start in 2015 was 11% higher than in 2014, but North American lumber markets continue to be under pressure, because of lower North American lumber and log exports to Asia this year. This push of average transaction price downward of $18 per thousand board feet in the quarter to a nearly five year low. For the year, the average selling price was $65 per thousand board feet lower than in 2014. Nevertheless, our shipments in the quarter rose by another 25 million board feet to 446 million, including production improvements at the Atikokan and Ignace saw mills in Northern Ontario. All together adjusted EBITDA in the quarter was slim at just $7 per thousand board feet, compared to $43 in the previous quarter. In spite of today's condition, I want to emphasize that we are confident that our asset base and competitive position will see us through this dip in the cycle. We remain optimistic longer term and with the progressive recovery of US housing starts and tightening Canadian fiber availability over time. We share the concerns of many, however on the state of free trade for North American softwood lumber following the expiration of the 2006 softwood lumber agreement last October. Our view is clear we believe in free trade including open and buyer free access to the US markets for all our products including softwood lumber, because everyone benefits from open and fair market driven competition. The US has agreed not to initiate trade action that would disrupt free trade during the one year standstill period after the expiration of the SLA. While some would have extended the SLA construct of managed trade, the U.S. has rejected the idea. Considering the truly market based system currently in place in Ontario and Quebec, we feel strongly that Canada should not initiate a move toward managed trade. These systems were either explicitly recognized by NAFTA binational panels as market determined, like in the case in Ontario or were recently implemented as a result of wholesale reform based entirely on leading example from the U.S. as is the case in Quebec. These extensive reforms must be recognized. In light of the recent progress toward broader international trade partnership, when it comes to softwood lumber there is every reason for the U.S. and Canada to respect the founding principle of the North American Free Trade Agreement. We recognize that getting there will not be easy but it is very important that we not allow the process to be used as a disguise means of rebalancing industry competitive forces in light of the recent weakness in the Canadian dollar, which itself reflects macroeconomic dynamic far beyond the scope of just softwood lumber and could change just as quickly. Canada must also recognize the evolution of the industry and its players in the last decade, including cross border ownership by certain Canadian producers who now control over a 5 billion board feet of production in the U.S. southeast with their 30 saw mills. North American demand for newsprint fell like 10% in 2015. The component effect of lower global demand and the strong U.S. dollars pushed North American export down by 15% in the year, leading to a reduction in total shipments from North American mills by 12%. But production was also significantly lower down by 13% including half a million ton of capacity closure late in 2014. This led to operating rates of 92% on average in 2015 in North America, but pricing still held. Through November, global demand was down by 9% with drops in all major regions including Asia down 9%, Western Europe down 8%, and Latin America down 9%. For the full year North American export to Latin America dropped by 16% and to Asia by 18% again reflecting the effect of lower global demand and weaker global currencies. Nevertheless, our shipments were 34,000 metric tons higher in the quarter. The increase was due to seasonality and also downtime taken at that Thorold mill in the third quarter to minimize our exposure to elevated power costs in Southern Ontario. The average transaction price for newsprint continued its 2015 downward momentum, falling another $14 per metric ton to $484. Prices haven't been this low since 2009. Our view is that this pricing momentum amplify as it was by the effect of weaker global currencies as post transaction price down to level that exaggerate actual market condition including relatively strong operating rates. We therefore announced for the first time in nearly six years two incremental newsprint price increases in North America, effective as of January and February, which we are implementing. With our lower cost network we remain EBITDA positive, despite a tough pricing environment. More broadly speaking we are confident that we have the asset base, the service model, the financial strength and a mindset to compete in this challenging environment. 2015 demand for uncoated mechanical paper was down by 12% in North America. Supercalendered grades were down by 10%, and standard grades including all higher brightness grades were down by 12%. Overall production in the year was down by 13%, leading to a relatively strong operating rates of around 91%. The lower industry production volume includes the closure of Laurentide supercalendered mill was competitive and that was mainly affected by the heavily government support restart of the Port Hawkesbury mill at the end of 2012. Since November, we have been making cash deposits at the punitive rate set by the U.S. Department of Commerce in connection with its investigation of SC paper from Canada. We have consistently said that our production of SC paper in Canada has received negligible if any, direct or indirect subsidies and that we should not be subject to countervailing duties. We are confident that the facts support our case and that the legal process will treat the matter fairly. Through year-end we had made $4 million of deposit, it's important to know that we do not expense the deposits, because we expect to recover them once the matter is resolved. Coated mechanical demand was down by 10% in 2015, and down 18% in the fourth quarter alone, compared to the same period last year. North American production, however was down by 12% or about 360,000 metric tons. With the North American capacity closures the industry sustained a 95% operating ratio in 2015. But the Western European producers took advantage of the weak euro to increase their exports to North America by 44%, cutting the domestic supply-demand balance by 104,000 metric tons in this declining market. Across all non-newsprint mechanical grades, the average transaction price was slightly lower in the quarter and shipments decreased by 12,000 short tons, an increase in manufacturing cost also trim EBITDA margin to $38 per short ton. Finally, I want to talk about our recent acquisition of Atlas Paper Mills. Atlas manufactures a range of tissue product for the away-from-home and private label at-home markets including recycled and virgin paper grades covering the premium, value and economic [indiscernible] With this transaction we gained an immediate possession in the growing North American consumer tissue market of nearly 10 million short tons. We are further integrating our U.S. pulp into tissue, higher value added product, we are adding proven tissue industry experience to our team. We are also uniquely positioned to generate synergies and capitalize on the related benefits, mostly by optimizing Atlas pulp supply with our strong U.S. market pulp network, and pressing ahead with opportunities to maximize its converting capacity. In fact, we are already well advanced in the integration process having run a number of successful trials using Resolute kraft and recycled pulp. In 2015, U.S. shipments of converted tissue products were 2.1% higher than in 2014, with at-home up by 1.7%, and away-from-home up by 3%. In the same period, the consumption of parent rolls grew by about 1.4%. Tissue operating rates in the U.S. were essentially unchanged compared to 2014. Our tissue segment will grow as we drive synergies and improve market penetration with Atlas. And as we ramp-up our world-class tissue manufacturing facility in Calhoun, starting in 2017. We continue to expect the Atlas asset to generate approximately $23 million of annualized EBITDA with synergies. Clearly we have preferred a stronger finish to the yield than circumstances allow, but I don't want it to overshadow the outlook accomplishment the Resolute team achieved in 2015.

[Jo-Ann Longworth:]

Most importantly, while our long-term goal will always been zero, we reached a world-class OSHA incident rate of 0.66 this year, which is below our excellent rate of 0.82 in 2014. We reduced environmental incidents by 53% compared to 2014. And we began reporting our sustainability performance in accordance with the rigorous Global Reporting Initiative's G4 reporting framework. We are among the first in our industry globally to report under this gold standard reinforcing our position as a sustainability leader. On the corporate side, we took advantage of our strong financial position and attractive market conditions to refinance our ABL Credit Facility with one that gives us more flexible terms and conditions, improves pricing, extends maturity and immediately lowers our cost of capital to better support the execution of our growth and diversification initiatives. And we repurchased 5.5 million of shares of our own stock representing about 6% of the outstanding amount.

[Richard Garneau:]

And as our transformation initiatives, we increased the capacity along the [Indiscernible] business with a start-up of two sawmills in Northern Ontario and the completion of a 100 million project to build the continuous pulp digester and it's on time and on budget. We also announced and began construction toward a 270 million project to build a world-class facility to manufacture a retail premium product label tissue products in Tennessee. We acquired the Atlas Paper to gain immediate access to the tissue business, capture synergies and bring proven management experience to our whole tissue expansion, and we also maintain our focus on reducing costs including 37 million due to asset optimization initiatives and 25 million from lower costs associated with maintenance and higher productivity. We also benefited from lower natural gas, chemicals and other commodity related costs of about 16 million. I can go through the list in details, but you can see here that we've also received a number of a key recognition this year. This include a number of awards for the significant investment we've made with our environmental stewardship and sustainability initiatives with particular focus on developing the communities where we operate. This is the objective reality, a reality that clearly comprised with affection irresponsibility that pedaled by certain misinformed and misleading activists from the [indiscernible] far from the facts on the forest soil. I can tell you from the firsthand experience that this is especially upsetting to the hard working communities including our First Nation partners would have been of this natural resource. Jo-Ann will now review our financial performance.

[Jo-Ann Longworth:]

Thank you, Richard, and good morning, everyone. Today we reported a 2015 net loss of 24 million or $0.26 per share excluding special item, compared to net income of 39 million or $0.41 per share in 2014. Sales were 3.6 billion, down 14% from last year. GAAP net loss was 257 million in 2015 or $2.78 per share, including a 176 million non-cash impairment charge in connection with the write-down of assets at our Catawba mill. 2015 special item, pre-tax also included 66 million of non-operating pension and OPEB costs, of the total 233 million of after-tax special items only 5 million are cash related. Net loss in the fourth quarter was 26 million or $0.29 per share, excluding special items, compared to net income of 35 million or $0.37 per share in the fourth quarter of 2014. GAAP net loss was 214 million in the quarter or $2.39 per share including the 176 million impairments. The other fourth quarter special items pre-tax included 27 million of non-operating pension and OPEB costs and acquisition related costs of 4 million for Atlas. Of the total 188 million of special items after-tax only 2 million were cash related. Total sales in the fourth quarter were 894 million, down by 11 million from the third quarter. Pricing slipped across each segment, down by $16 per metric ton in market pulp, $18 per thousand board feet in wood products, $14 per metric ton in newsprint and $3 per short ton in specialty paper. In total, the lower pricing unfavorably affected results by 22 million compared to the third quarter. Shipments of newsprint increased by 34,000 metric tons in the quarter and wood products were up by 25 million board feet. But shipments of market pulp were 24,000 metric tons lower and specialty papers 12,000 short tons lower. The overall impact of volumes was neutral on earnings in the quarter and the weaker Canadian dollar was a small benefit. Fourth quarter results included $11 million of sales from the tissue segment in the short period since the Atlas acquisition in mid-November. After removing the effect of volume and foreign exchange, our manufacturing costs rose by 44 million from the third quarter. This increase reflected mainly a $14 million non-cash settlement charge related to annuity purchases for certain inactive U.S. employees, a $13 million unfavorable variance due to the credits recognized in the third quarter, and $8 million of cost of goods sold for Atlas. The settlement charge was applied against the corporate and others segment and is considered a special item for purposes of adjusted EBITDA. The cogeneration assets that sell power to third-parties helped to improve EBITDA by $8 million in the fourth quarter, slightly lower than the previous quarter. For the year, our cogens improved EBITDA by $43 million or C$55 million. This is C$9 million better than in 2014, and reflected mostly an 18% improvement in Saint-Felicien generation. Compared to the third quarter market pulp all-in delivered cost was down slightly as the $7 million improvement in manufacturing costs was largely offset by the effect of the third quarter property tax credit. In wood products, the delivered cost rose by $16 per thousand board feet, due to that unfavorable variance with the third quarter recognition of additional tax credit in connection with infrastructure investments. Newsprint delivered cost stayed low in the quarter falling another $8 per metric ton, largely because of the higher shipments. In Specialty papers, the delivered cost rose by $26 per short ton, due to the transition process for Calhoun's new continuous digester as well as its pre-startup. And also some operational inefficiencies at Catawba. The delivered cost in the tissue segment was $1,569 per short ton. We recorded $173 million of closure related costs in the fourth quarter and a $181 million for all of 2015. In both cases, mostly because of the non-cash $176 million impairment of Catawba assets. Our selling, general and administrative expenses were $11 million higher in the quarter, because of timing, costs associated with the acquisition of Atlas, as well as its SG&A. Our cash position fell by $177 million in the quarter, which reflected the lower EBITDA, the $156 million acquisition price for Atlas, and an $18 million increase in capital expenditures to $62 million, partially offset by a favorable change in working capital. Accordingly our net debt increased to $533 million at year-end. We've recognized $59 million of balance sheet goodwill with the acquisition of Atlas in the fourth quarter. Our CapEx spending in the year was a $185 million, including $45 million for the continuous pulp digester project, net of support under existing business development programs. $43 million for the tissue project and $21 million for the new Ontario sawmill. The total spending is however short of our earlier guidance, the difference is due to the timing of spending and does not reflect any change in scope for our key projects. Indeed, a good part of the shortfall is being pushed into 2016, where we expect to spend about $300 million in CapEx, net of support under existing business development program. This includes up to a 165 million on the tissue project and 65 million on other value creating projects. Pension contributions were 27 million in the quarter compared to an expense of 36 million. For the year, we made 143 million of pension contributions, and 13 million of other post employment benefit payments. Compared to an associated expense of 94 million, this is consistent with our earlier guidance except that the expense also reflected the 14 million non-cash settlement charge in the fourth quarter for annuity purchases for certain inactive U.S. employees. The annuities were purchased by the effective U.S. pension plan as an opportunistic initiative to lower insurance premium. The lower pension contribution in 2015 were mainly because of the weaker Canadian dollar. For 2016, we expect to make pension contributions of 165 million and OPEB payments of 16 million. The increase in pension contributions reflects first $13 million increase in U.S. plan contributions compared to 2015, where we had the benefit of accelerated payments that were made in 2014. And second due to the prolonged low interest rate environment, we will be required to make a supplemental contribution in Canada of $18 million, which is essentially designed to prevent the payment of benefits from further depleting the planned solvency ratio, as we've previously outlined in our disclosures. The net pension and OPEB liability on our balance sheet fell by 438 million at year-end and now sits under 1.2 billion. The liability decrease in 2015 was largely the result of favorable currency impact and increase in the applicable discount rate and our regular contributions. With the presently undrawn ABL, we retain very strong liquidity of 502 million to support our continued transformation, building on the Atlas acquisition and the completion of our continuous pulp digester to scale up in tissue with our Calhoun expansion coming on stream in 2017. We funded the Atlas purchase price of 156 million including working capital from cash on hand. As we said before, because of the significant capital expenditure commitments for our continued transformation strategy, we are currently exploring finance opportunities to maintain the very high liquidity levels that we favor. But by having such a strong ABL already available, we plan to be very selective about any financing opportunity we pursue. We are confident that the attractive payback on our growth projects will allow us to work our leverage back down to even more conservative levels in fairly short order. I'll mention in closing that we now have U.S. operating losses carry forward of about $2 billion, and over 3 billion of undepreciated capital cost mainly in Canada. The U.S. NOLs don't begin to expire in any meaningful way until 2022, and we're comfortable in our ability to maximize the use of these tax attributes.

[Remi Lalonde:]

Jonathan, let's please open the call for questions.

[Operator:]

[Operator Instruction]. Your first question comes from Bill Hoffmann with RBC Capital Markets. Please go ahead.

[Bill Hoffmann:]

Jo-Ann, can you talk a little bit more about what you're thinking about from a financing standpoint either through general scale, structure maybe if you do project financing and also what you consider to be your minimum liquidity requirements on an ongoing basis?

[Jo-Ann Longworth:]

As far as -- let's start with the minimum liquidity, we don't target a minimum liquidity. We take a look basically of what our capital expenditure programs are and having a buffer because as you know we are in the midst of transforming the company. As far as the types of financing, we're looking at pretty much all options. As we said before, we do have the availability under the ABL we are not rushed to do any type of financing, this is solely for the purpose of improving our liquidity. And as we've said we spent a little over 150 million on Atlas and certainly we wouldn't do any financing exceeding that amount.

[Bill Hoffmann:]

Okay. Thank you. And I have question for Richard, just looking forward here in 2016, just given the weakness in specialty paper markets as well as newsprint. Can you just talk about your thoughts on your mill system and whether you have further thoughts on rationalizations?

[Richard Garneau:]

Well, Bill, when we look at the operating rate they are still in the 91%, 92% range, so it is and when you look at the supply demand balance and the closure that we've done and the other closures that have been done by other industry players, I think that certainly on newsprint, we believe that the implementation of the $4 per ton is a given and certainly expect that it's going to stand. On rationalization I think that certainly we're looking always looking at it side-by-side, we don't want to have that plan in a short-term, it's all related to demand, obviously, if we see another of that significant dip in demand we may have to review it. But at this point I think that we feel strongly that our network is a [passion] and that we're going to continue, but I think that overall, you have to look at the supply and demand and I would not allow any other closure in 2016. But again, we really have to look at that slowing demand and I just want you to also to look at the high operating rate 92%, normally prices are supposed to remain stable and they went down significantly. So, I think that, that slower [Indiscernible] of the weak Canadian dollars but we had seen a reversal lately from 68 to 72, so I think nobody can really forecast where it is going to be.

[Bill Hoffmann:]

And any thoughts on this specialty markets, I mean I know you're trying to raise prices here in newsprint, but specialty markets including coated and the SC grades both continuing to be pretty soft, and obviously seasonally they are. But any thoughts on the potential improvement or recovery in this markets this year?

[Richard Garneau:]

Well, again, when you look at the operating rates that was 91% on quarter-on-quarter. So, but I think that the main factor in 2015 was really the significant increase in imports from Europe, because of the weak euro. So again, when we look at our mills, SC mills in Canada, well obviously they were impacted now by this countervailing duties, the deposit that we have to make, but are they already well positioned to compete. And I think that certainly we don't expect to see a decline in the double digit. So what we expect to see a slowdown and reduction in demand, so that could help. But again it's a situation that we follow very closely that and going to make a decision when it's needed, but it's already looking in the market and [indiscernible] has a significant impact on the import volumes and it's very difficult to predict.

[Bill Hoffmann:]

Thanks. Just last question, on the lumber market obviously with the SLA and through the standstill period, it appears that there is the markets are staying well supplied on the lumber side. So do you think that that's going to continue to constrict or limit the capability as we end up with tighter market conditions this year?

[Richard Garneau:]

Well. When you look at lumber, I think that we are certainly expecting a fair improvement in the housing starts, so 1.1 million, expect that it's going to go up to 1.2 million, 1.3 million. We knew that in Canada, there was certainly constraint on the log supplies, there is less logs available and it's true in the west and also in the east. So, I think that certainly more optimistic on this side, and I think that the drop in pricing last year, that was certainly significantly affected by the Asian market. So, Western and North America didn't ship as much as they used to China and Japan, and that had an impact again back on the U.S. market. So, we expect that the situation is going to come back to more normal level in China and that's going to have a positive impact on the North American market. Obviously in Central Canada we have our national market is the US and I want to emphasize that we have in Quebec and Ontario our forestry regime that are market oriented. And certainly well this is at standstill and free trade access to the US market until October, back of this year and it's most welcome. So I hope that, well as a country and especially because we have our forestry regime in Quebec especially and the same structure in many of the U.S. states and the [indiscernible] state and also the federal forest we have an auction system that basically in the province sells the wood market and should be recognized and should at least it's my hope should give access to the U.S. market, should have free trade for Central Canada, Quebec and Ontario.

[Operator:]

Your next question comes from Kasia Trzaski with TD Securities. Please go ahead.

[Kasia Trzaski:]

This is Kasia calling from TD. I'm filling in for Sean. Just a few questions which are really simple around Calhoun CapEx. Alright, 270 million in total, you said you spent 43 million in 2015 and you expect to spend a 165 million in 2016, so does that make….

[Remi Lalonde:]

Kasia, we can't hear you very well, can you back up a couple of seconds?

[Kasia Trzaski:]

Calhoun tissue project total CapEx of 270 million. And you said you spent 43 million in 2015 and you expect to spend a 165 million this year. So that leaves 62 million for 2017, do I have that right?

[Jo-Ann Longworth:]

Yes.

[Kasia Trzaski:]

And presumably would that be kind of weighted to the first quarter, potentially first half of 2017?

[Jo-Ann Longworth:]

First quarter.

[Richard Garneau:]

Yes. First quarter.

[Kasia Trzaski:]

First quarter. Okay. Perfect. And then when that machine starts up in Q1 '17, will that startup be weighted more towards the later part of the quarter?

[Jo-Ann Longworth:]

It would be more weighted to the later part of the year. It will be certainly not like our current continuous digester which we plan to ramp up in a quarter. We will have to ramp up to market, it will probably take us a better part of the year to 18 months.

[Richard Garneau:]

And it is also going to take some time to ramp up the machine, it's a new piece of equipment, so you have to really increase production slowly. So it's normally the tissue machine takes 9 to 12 months for it to get to the maximum production, maximum capacity of the machine. So, I would expect that by the end of 2017, that will be able to produce the 60,000 metric ton or 66,000 short tons of capacity.

[Kasia Trzaski:]

Sorry, I don't know if I quite got that. At the end of the year, you said you expect to be at the annual run rate of 60,000 tons?

[Richard Garneau:]

Yes.

[Kasia Trzaski:]

Okay. And to startup of the actual machine, do you expect that to be early on in the quarter or towards the end?

[Richard Garneau:]

At this point, we have the startup at the end of the first quarter, but similarly in the process of that, that would go into normal as we start the erection of the machine.

[Operator:]

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

[Hamir Patel:]

Richard, on the lumber side, what do you estimate your market share is in both Ontario and Quebec, and is there any consensus forming amongst the producers in either province from the trade file?

[Richard Garneau:]

When you look at the Quebec and Ontario market share, in Ontario it's less than 3% of the U.S. consumption, and in Quebec it's about 4%. So, if you add those two together, it's about 7%. So, most of the lumber is from the west from BC and Alberta. And Ontario used to have, before the SLA in southern states, a market share of 3.34%, but Ontario was, as you're probably aware, the chapter 19 panel determined that Ontario was de minimis, and so when you have the strength on the export side and you pay tax, so it has been very [diminishing] for Ontario. And in Quebec used to be 4.8% the market share of the Canadian market that [indiscernible] but Quebec was at 4.8%, and now its way below that. And we all know that Quebec changed the forestry regime, I think that we have certainly made a lot of comments on it. So, it's truly market, it's a regime that is exactly similar to most of the U.S. states that have public land with an auction and also same system that the land is owned by the U.S. federal government. So, we feel very strongly that this should be recognized and should give the -- well, the historic market share access to Quebec and Ontario, so the 4.8% of the market for Quebec and the 3.4% for Ontario.

[Hamir Patel:]

Okay thanks, that’s helpful. I guess what I was trying to get out more is your market share within the province amongst the lumber producers in both provinces?

[Richard Garneau:]

Well, it's very difficult really to figure that one out, what it is coming to. We know that we export 45% of all production, 50% to the US, but our market share, there is staph basically that will allow us to determine what it is.

[Hamir Patel:]

No. I guess more just in terms of production capacity?

[Richard Garneau:]

Well, production capacity is about 2 billion. Well, we have more capacity, but we don't have the wood to operate it. But I think the wood that we have allocated that we can produce about close to 1 billion board feet in capacity.

[Hamir Patel:]

Right, but in terms of productive capacity amongst the various producers in each province, how much is Resolute?

[Richard Garneau:]

Well. I think that Remi probably can provide that, but I think that the, there obviously are quite a few private -- they just don't share their production capacity, but I just don't know what it is.

[Hamir Patel:]

Okay.

[Remi Lalonde:]

We're the biggest producer in Eastern Canada, but I can give you the breakdown after the call, Hamir.

[Hamir Patel:]

Okay. Fair enough. And just a final question for Jo-Ann, on your NAFTA claim that 70 million claim that you guys have on the specialty side related to Port Hawkesbury. Can you give us a sense as few of the timing of how that process is expected to play out?

[Jo-Ann Longworth:]

I think actually, Richard is better able to answer that.

[Richard Garneau:]

Well. The -- we're going to have a review and it's going to take a year or so, we had the result that was basically determined in November, so we're going to have review in November next year. And we expect that it has to go to the panel, who again interact with my team panel and that's probably going to take us ready to get resolved.

[Operator:]

[Operator Instructions] Your next question comes from Benoit Laprade with Scotiabank. Please go ahead.

[Benoit Laprade:]

First question for Jo-Ann, just clarify how much of your of the 180 million pension and OPEB payments or contribution would actually be captured in cost of goods sold versus how much will be only on the cash flow statement?

[Jo-Ann Longworth:]

You're talking here about 2016?

[Benoit Laprade:]

Yes. Correct.

[Jo-Ann Longworth:]

Okay. So, we have about just a second, yes, it's 94 million.

[Benoit Laprade:]

Of cost?

[Jo-Ann Longworth:]

I'm sorry 94 million was 2015, we have 50 million in 2016, and the 165 million is the pension contributions and 15 million of OPEB payment, that's the 180 million, yes.

[Benoit Laprade:]

And on the CapEx, I know it's early, but how should we think of 2017. I guess, pro forma Atlas and the tissue project being completed, what type of maintenance CapEx for, pro forma for Resolute should we think of?

[Jo-Ann Longworth:]

Well. As we said this year we have about 300 million of total CapEx for 2016. We're predicting 165 million for tissue and 65 million from other value-added projects. So that leaves about a 170 million, sorry, 70 million of about of maintenance that's the number we're in range usually is between 70 million and a 100 million.

[Benoit Laprade:]

And maybe the last one for Richard, turning back to the SLA expire, is there any discussions, any action going on behind the scene, as we're sitting here today?

[Richard Garneau:]

Well, I think that those bureaucrats [indiscernible] are having discussion with the U.S. [indiscernible], but we don't know exactly what is the [indiscernible] of these discussions. Obviously, they have also able to talk to the other producers and they open the process also to have discussion with the various provinces, so I think that you probably seen the comments from the administration of forest in BC, but in Quebec and Ontario, I'm not aware that this province basically have made their production known to the federal government. And we know how difficult it is on the softwood lumber, because the land is owned by the province so the province, determine the forestry regime, and it's the federal that determine or negotiate with the other countries the necessary conditions. So it's always a touchy to ready to have all the information on this one, and I'm sure that there is certainly discussion, but for the time being until October, we have, it's standstill and it's free trade, and hope that will, we're going to be able to make it in a straight decision in Quebec and Ontario that the regime are truly market oriented.

[Operator:]

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

[Remi Lalonde:]

Thank you, Jonathan. And thank you everybody for joining us today.

[Operator:]

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