Resolute Forest Products Inc.
Q3 2014 Earnings Call Transcript

Published: 30 Oct 2014

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Third Quarter 2014 Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded today, Thursday, October 30, 2014 at 9 a.m. Eastern Time. I would now like to turn the call over to Mr. Remi Lalonde, Vice President for Investor Relations. Please go ahead, Mr. Lalonde.

[Remi Lalonde:]

Thanks, Simon and good morning everyone. Welcome to Resolute's third quarter earnings call. Today, we will 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. 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, everyone, and thank you for joining us this morning. Today we announced another good quarter. Adjusted EBITDA improved both sequentially and compared to the year ago period, thanks to our best wood product result in recent history even better than last quarter and continued strength in the market pulp business. We generated $112 million of adjusted EBITDA overall, it's $4 million more than the previous quarter and $8 million more than the same period last year. In market pulp, we generated $34 million of adjusted EBITDA, down by only $3 million from the second quarter. $32 million in the wood products, up by $9 million. $22 million in newsprint, down by $13 million, and $26 million in specialty papers, up by $7 million. Again, this quarter we recorded very strong lumber shipments matching the record levels of the second quarter as we benefited from capacity initiatives like the restart of our Maniwaki sawmill and also the refurbishment of our (indiscernible) sawmill. This time we also benefited from a 3% increase in average transaction price leading to our best wood products quarter since the 2007 start of the U.S. housing downturn and also the merger of our predecessor entities. We have just completed the construction of our Thunder Bay pellet plant, which is now in a ramp-up mode. It will produce 45,000 metric tons of pellets annually under the 10-year supply agreement with the Ontario Power Generation's Atikokan Generating Station, the largest capacity, 100% biomass-fueled, power plant in North America. This innovative project together with our other initiatives speak to the momentum we are developing in our wood products business. To that end, we are nearing the completion of our Ignace sawmill project which will begin to ramp up before year-end. And we are also on schedule with the construction of our Atikokan sawmill. The Igance sawmill will build its production and inventory gradually in the first quarter and will continue to improve production efficiency over the course of the year. Our high capacity planer mill in Atikokan will start to dress Ignace's lumber in the first quarter, with the ramp-up of its own sawline scheduled to begin in the second quarter. We expect these sawmills to start generating positive EBITDA as early as the third quarter of next year. This is a great time to be building momentum in the wood products business where we've seen sustained demand despite the slow recovery in the U.S. housing starts. We are also making very good progress on the $100 million upgrade to our Calhoun pulp mill, which include a world calls continuous digester and other wood chip processing equipment. We have started to build the foundation a few months ahead of schedule. When the project is completed in about one year, the mill will have significantly lower cost, 100,000 tons of additional market pulp available in better quality. There was also a positive development in our other businesses. Although we lost some overall pricing as markets absorb major new eucalyptus capacity, we significantly improved market pulp shipments compared to the disappointing levels of the first and second quarters. We also delivered in our commitment from last quarter to reduce finished goods inventory in a disciplined manner across all segments, especially in pulp where it's down by 21,000 metric tons. Overall, we cut finished goods inventory by $30 million. Despite taking newsprint downtime in the third quarter at some of our domestic-focused mills to maintain disciplined inventory level, year to date shipments of newsprint and especially papers outperformed industry trends compared to the same period of 2013 which demonstrated the strength of our asset base. Let's take a moment to review market conditions and segment performance. Total demand for chemical pulp grew by 1% through September, led by a 4% increase in China despite 1% drop in North American and European demand. Global shipments of softwood pulp were basically unchanged and up by 3% for hardwood grades, driven entirely by higher eucalyptus demand. In North America, year-to-date demand for softwood pulp was down by 5%. Hardwood demand rose by 5%, evenly divided between North American and eucalyptus grades. Our average realized transaction price slipped by $24 per metric tons or 3%, mostly because of lower average price for hardwood and recycle grades as markets absorb major new eucalyptus capacity. Overall shipments significantly improved from the disappointing levels of the first two quarters this year. They were up by 29,000 metric tons, or 9%, compared to the second quarter. Although the pulp market will continue to adjusted to the new capacity, based on the market's surprising resilience this year, our outlook had turned to cautious optimism. U.S. housing starts are higher this year, averaging about 1 million starts on a seasonally adjusted basis in the third quarter and at 16% better than the same quarter last year. Our average transaction price was $10 per thousand board feet higher, reflecting an increase in market prices from both stud and random length lumber grades. Shipments were unchanged, thanks to sustained demand despite a slow recovery in U.S. housing starts which is still well below what many analysts see as a normalized level. Further to a 13% reduction in the second quarter, we cut finished goods inventory by an additional 19% this quarter. Last quarter we talked about the growing outbreak of spruce budworm in Quebec boreal forests. This is not the first outbreak. The previous one started in 1968 and die out in 1992. The latest one started around 2006 and it is spreading somewhat more quickly. Rather than provide incentives towards affected forests while the timber is still usable, the provincial government has directed harvesters to area where the species mix is not as attractive and where the quality of the infested timber has already declined to a level where it's impacting quality and efficiency at sawmills as well as pulp and paper mills. The poor timber quality in the affected areas has also resulted in increase in (indiscernible) on top of the cost escalation on the other new forest renewal in the province. With the rate of the infestation spreading, it is important to note that standing timber losses will be impossible to avoid given the escalating wood costs that are already affecting Quebec industry competitiveness. The provincial government should focus on market-based solutions to contain timber losses, such as encouraging salvage harvesting in affected areas before the timber dies and allowing its auction process to set the price. Total North American newsprint demand was 8% lower through September. Demand from publishers was 11% lower but demand from other users was 3% higher. Global demand was down by 7% through August, including a 4% drop in Western Europe, 8% drop also in Latin America and also 8% down in Asia. As a result of industry capacity reductions, the North American shipment to capacity ratio was 91% through September, down only 1% from the year ago period. Resolute average transaction price in the quarter slipped by less than 1% from the second quarter as a result of continued pricing deterioration in certain export markets. Our year-to-date shipments were unchanged compared to the same period last year. Compared to the second quarter, our shipments were 27,000 metric tons or 4% lower, mostly because of market downtime and wood shortages in our domestic-focused mills. Accordingly, our domestic shipments returned to 50% of total shipment volume compared to 60% in the previous quarter and 56% in all of 2013. Finished goods inventory fell by 19,000 metric tons in the quarter or 13%. Recent demand trends are forcing us to respond with targeted market downtime initiatives, particularly at some of our Québec mills struggling with the high wood costs and wood availability issues resulting from the implementation of the forest tenure system. As a result, we have announced 30 days of downtime at our Amos mill starting on October 31, and the periods of extended market related outage for two of the three paper machines at our Baie Comeau mill starting on November 30. Contrary to what some have reported, we are not indefinitely idling the Baie Comeau machines. Again, the outage is related to the implementation of the new forest tenure system. Going forward, we are confident that Resolute's operating platforms have the scale, financial strength and cost advantage to withstand market challenges. But in the nearer term we expect that downward pricing pressure could increase. North America demand for uncoated mechanical paper was down by 3% through September. Demand supercalendar grades, which are 25% of our capacity paper shipments, was 2% lower. Total standard grades were down by 1%, though shipments of super-brite and hi-brite which are another 25% of our total specialty paper shipments, increased by 5% and 1% respectively. The industry shipment to capacity ratio for all uncoated mechanical papers was 91% through September, unchanged from the year ago period. Resolute shipments of uncoated mechanical papers in the same period were essentially unchanged. Demand for coated mechanical papers was down by 7% through September and as a result of recent closure announcement, the industry shipment to capacity ratio was at 90%. Although it was 93% in the same period of last year. Our own shipments of coated mechanical paper, also about 25% of our total specialty paper shipments, were down by 7% year-to-date. Mostly as a result of weather-related product disruption and also the mechanical failures in Catawba during the first quarter. Our average transaction price for the segment slipped less than 1% in the quarter, which reflects mostly erosion in higher end white papers. Our shipments rose by 2% or 11,000 short tons in this seasonally stronger quarter, especially on the higher end of the grade spectrum. Finished goods inventory rose by 7% to meet the expected continuation in seasonal demand. The pace of price declines in coated mechanical and supercalendar grades is leveling off. We are optimistic that the recent industry capacity rationalization announcements will help to ease some of the pressure the industry experienced this year as a result of weak operating rates. As we announced a few weeks ago, we completed closure of the Laurentide mill this month which will reduce our annual supercalendar grades production capacity by 210,000 short tons. The future will have its challenges, this is a certainty. But I am very confident that Resolute is in an excellent position to face them. We will continue to develop our lumber and pulp businesses by maximizing the advantages we have today. And we will always push ourselves to make our paper business more efficient. Jo-Ann will now review our financial performance.

[Jo-Ann Longworth:]

Thank you, Richard and good morning everyone. Today we reported net income of $17 million for the third quarter or $0.18 per share, excluding special items. GAAP net loss was $116 million. Special items included on a pre-tax basis, $85 million of accelerated depreciation and other closure related costs almost all of which related to the permanent closure of the Laurentide mill; a $50 million write-down of our investment Ponderay Newsprint Company, an unconsolidated partnership in which we owned a 40% interest and act as managing partner; and $17 million of foreign currency translation losses. Out of the total, $133 million in the special items, less than $20 million is expected to require cash outlay, most of which will be for severance. Total sales were $1.1 billion in the quarter, up by $5 million from the second quarter. Thanks to increased shipments, offset in part by lower overall pricing. Market pulp shipments improved significantly from the first two quarters. There were up by 29,000 metric tons or 9% compared to the second quarter. Shipments were also 2% higher in specialty paper mostly due to seasonality. They were unchanged in wood products, matching the record levels of the second quarter. But shipments slipped by 4% in newsprint largely because of market downtime in our domestic-focused mills. A $10 million unfavorable change in pricing is due mostly to lower average transaction price in market pulp down by $24 per metric ton mainly in hardwood and recycle grades. Offset in part by continued strength in the wood products where realizations were up by 3% due to strong pricing for both stud and random length lumber grades. We said last quarter that we would work to reduce finished goods inventory in a disciplined manner and we have. We cut inventory by 19,000 metric tons in newsprint, 21,000 tons in pulp and 30 million board feet in lumber. After we are moving the impact of higher shipments, overall manufacturing cost improved by $5 million which was due to the favorable effect of the recognition of energy incentives and tax credits, lower labor and steam costs, and lower overall maintenance cost in part due to timing. Partially offset by lower contribution from our cogen facility, particularly Thunder Bay, as a result of a longer than expected annual outage as well as turbine damage and lost production caused by multiple power transmission disruptions to the mill. And finally, higher storage inventory write-downs associated with closure. The cogeneration assets that sell power to third parties helped improved EBITDA by $8 million in the quarter but was $6 million less than in the second quarter because of the Thunder Bay outage and turbine repair. Market pulp delivered cost fell by $7 per metric ton or 1% compared to the second quarter due mostly to the higher volume despite some increases in maintenance cost. Delivered cost in our wood products segment fell by 4% to $337 per thousand board feet, mostly because we recognized additional tax credits in connection with infrastructure investments. Newsprint delivered cost was 2% higher or $14 per metric ton, mostly because of the lower cogen contribution which was partly offset by the recognition of an energy savings incentive in the U.S. Southeast. The delivered cost in specialty paper fell by $23 per short ton from the previous quarter mostly because of maintenance timing. We incurred $85 million of accelerated depreciation and other closure related costs in the quarter, almost all of which were related to the Laurentide mill. This compares to $52 million in the second quarter on the permanent closure of an idle machine at the Catawba mill. We also wrote-down our investment in Ponderay Newsprint Company $50 million. Cash and cash equivalents were largely unchanged, up $2 million to $265 million. Balance sheet working capital was $704 million as of September 30, up $9 million or 1% from the previous quarter. This reflects a $30 million reduction in finished goods inventory, offset by a seasonal increase in raw materials inventory and the reclassification to current assets of a $22 million receivable from a 2001 sale of U.S. timber assets. Net cash provided by operating activities in the quarter was $58 million compared to $63 million in the second quarter. We made $60 million of capital expenditure, $14 million more than the second quarter mostly because of increased spending with the completion of the Thunder Bay pellet plant and the final stages of our Ignace and Atikokan sawmill projects. We are also picking up spending as we are ahead of schedule on the Calhoun pulp digester project. For all of 2014, we expect to spend approximately $230 million of CapEx including $160 million on value creating projects. Availability under our ABL credit facility at the end of the third quarter was $572 million for total liquidity of $837 million. Our quarter-end net balance sheet pension and postretirement benefit or OPEB obligation were $56 million lower than the second quarter reflecting the favorable effect of contributions and foreign exchange translation, offset in part by the re-measurement of a pension plan liability in connection with the Laurentide closure. As usual, we will re-measure balance sheet, pension and OPEB obligation at year-end based on the then applicable assumptions, including discount rates and higher life expectancy. The prevailing interest rates are now lower than they were as of December 31, 2013. Should they remain at today's level, the change to the balance sheet pension and OPEB liabilities at year-end could be significant. Generally speaking, we expect that for every 50 basis points change in the applicable discount rate will result in an approximately $300 million change it to pension and OPEB obligation. Total pension contributions were $55 million in the quarter, up $14 million from the prior quarter. The increase reflected mostly the timing of U.S. plan contributions. The associated pension expense was $8 million consistent with each of the first two quarters. For 2014, we expect total pension contribution to be approximately $165 million with an expense of $30 million. It's worth repeating that this year we modified our U.S. OPEB plan to encourage greater participation in a Medicare exchange program available under the U.S. Affordable Care Act. In addition to securing high quality healthcare for participants, this modification along with similar initiatives undertaken since mid-2013, helped to reduce our U.S. OPEB liability on the balance sheet from $250 million to only $82 million as of September 30, 2014. The annual expense has also dropped by $16 million.

[Richard Garneau:]

Thanks, Jo-Ann. Simon, please open the call for questions.

[Operator:]

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

[Sean Steuart:]

Few questions. Jo-Ann, can you quantify the energy savings incentives and tax credits this quarter. How much was that figure?

[Jo-Ann Longworth:]

The energy incentives were $6 million and the construction credits were $3 million.

[Sean Steuart:]

And how was that compared to the previous quarter?

[Jo-Ann Longworth:]

The previous quarter included none of those.

[Sean Steuart:]

Okay. And that was all in the newsprint segment?

[Jo-Ann Longworth:]

No. The energy incentives were in newsprint while the tax credits were in wood.

[Sean Steuart:]

Okay. I guess just more generally, Richard, can you speak to the positive cost trend you have seen in the specialty paper segment, especially this quarter, we were certainly encouraged by it. Can you just go into a little bit more detail on what's driving that and your views on sustainability of the trend?

[Richard Garneau:]

Well, I think that certainly the Catawba mill has run better in the third quarter. And also at Calhoun where we could use hi-brite, that super hi-brite, is also running better by a third of start up. And our Canadian mills, especially Alma on the uncoated free sheet substitute has had a pretty good quarter. I think that when you look at the next quarter and the trend, certainly in Quebec there is some challenges on the wood side but I think that we are going to continue to make progress in our two specialty mills, in Catawba and Calhoun. Catawba, we continue to see improvement on run ability. We had quite a few evens of equipment failures and metal fatigue and we have put in place a special maintenance program to bring back the -- to make sure that we won't see these failures into the future and I think that now we are starting to see the benefit of it. So I am confident that we are going to see the benefit obviously at, (indiscernible) and also to have the orders to continue to run. But on this side I think that certainly the announcement of capacity closure is certainly going to help to have a better balance between supply and demand and we should be able to see operating rates going forward certainly in the fourth quarter.

[Operator:]

Your next question comes from the line of Bill Hoffman with RBC Capital Markets. Your line is open.

[Bill Hoffman:]

Richard, I wonder if you could talk a little bit about your thoughts for 2015, especially in the newsprint business as well as the specialty papers business. Just as you see the operating rates currently running close to 90% range with the expected demand coming into next year. How do you think the market will develop and do you see more closures on your front?

[Richard Garneau:]

Well, it's not an easy question to answer on this one. Let's talk with the specialty side. I think that certainly I am a bit more optimistic on this side. You know what happened was, like we quoted the announcement, two mills that we do want to close permanently. So I think that certainly it's encouraging on this side. When you look at the segment, hi-brite and the super hi-brite, so we went up in the third quarter. And I think that going forward, our uncoated free sheet substitute should continue to benefit. So I think that it's cheaper alternative to uncoated free sheet and I think that with Alma and Calhoun that we can certainly, we feel optimistic that we are going to be able to basically to serve this segment. And we also believe that the demand should continue to grow. On SC, on glossy paper, I think that, again, in this segment we have seen the results of this quarter. I think that the fourth quarter should show some positive sign. But it's more just like overwhelmed on this side really to see what's going to happen in 2015. I think that probably flat to slight decline. So it's what we see on this side. Regarding newsprint, when you look at the strength of specialty in North America, the third quarter was down 9.7% and when we also look export, export is also down by 6%. So we see certainly more pressure on this side. Well, also I think that I should not use the word of optimistic here. We are hopeful that this slide is going to moderate somewhat but I think that it is certainly a segment where you need to have very competitive mills and the concern that we have, especially at some of the mills in Quebec where we had to take specific downtime because of wood shortage basically. So with the new stumpage, the new system, the new tenure system the operating cost is going up. But I think that what is more difficult is the planning. The planning now is done by the government and very often we don’t have the blocks ready for harvest, so it's not in the right location. We have no people to build the road in advance and we had interruption at one of our sawmills in Maniwaki. We had to take downtime at Gatineau. Gatineau is a very competitive mill. The same thing at -- well the announcement in Amos is directly related to wood shortage at our Senneterre sawmills and we have a shortage of chips. And (indiscernible) is also related to the difficulties that we have with the implementation, the application of the new tenure set on that. Baie Comeau, just to give you an example, we are now at the beginning of the season with harvesting in the north, where predominantly it's Black Spruce. And now the government has directed us to go into the area that are affected by the budworm and in this area, that is south, closer to the mill and the (indiscernible), there is a high percentage of balsam. And you know balsam is not a strong fiber when its green and you can imagine when it's dry and dying that we have difficulties to make newsprint with it. So that’s the reason why we made this decision and we expect that we are going to be able. Basically when this wood is -- what we or that the government is going to come with to basically sell these blocks on the [outside] (ph) market and the market is going to determine basically the price of stumping. But again, newsprint, the trend is down and likely we are going to see more capacity closure. But we feel we have the very competitive mill facilities and if we can find a way with the government to address the wood availability issue and also really have a market-based approach to deal with the budworm, spruce budworm in taxation. I think that certainly our overall competitive position is going to be improved.

[Bill Hoffman:]

Thank you, Richard. It was extremely helpful. Just one another from a strategic standpoint. We are constantly about acquisitions as a strategy to build out, call it on the lumber and the pulp side divisions. Could you just talk about what you are seeing out there from a pipeline standpoint and your willingness to be aggressive to acquiring these end markets.

[Richard Garneau:]

Well, we are certainly looking for opportunities. I mentioned that in the last conference call on lumber and pulp. So I think the difficulty is really to find the right one. The one with the synergies, that one that we truly believe that we can have values. So we have the focus on lumber and pulp. And I think as I mentioned also in the last call, that we are also looking at a Greenfield in sawmills in the U.S. Southeast. As you know we have -- we are looking at three potential locations and obviously having a sawmill that is close to a paper mills, are significant synergies when you are able basically to build close to the pulp mill. So it is still in the process to being analyzed and as I said, the three locations are -- we are looking for the best location that will provide the best return and also where we have plenty of wood. Where the growth ratio is highly positive and where the pulp mill or the paper mill is going to benefit.

[Operator:]

(Operator Instructions) Your next question comes from the line of Stephen Atkinson with Dundee. Your line is open.

[Stephen Atkinson:]

When you look at the pine beetle infestation in BC, basically it started in Tweedsmuir Park, which was a government park and a lot of writing about how the government were afraid to, or shall we say were concerned about harvesting because you would have the environmental movement getting upset. And so that eventually of course we had this matter of devastation and then if you look at Southeastern BC, like the Kootenay, where whenever they saw, shall we say a tree that we affected, they would harvest it. So I guess one my concerns is that with the spruce budworm development, do you think that, given that you have, shall we say Greenpeace showing up at your door quite often. Do you think that that would be blocked if you were to try and harvest?

[Richard Garneau:]

I do not think so. I think that when you look at this infestation here in Quebec, I am just going to follow up on your lead on BC. I think that BC understood quite early into the process that the wood didn’t have the same values and they decided to bring the stumpage down to $0.25 per cubic meters. And they also understood that you have to harvest it, because if you don’t harvest the tree, you can imagine that they are all doing to die. They are going to issue greenhouse gas and they are going to basically, when it's dead, they are going have, well, a windstorm and you have all the trees that are going to go on the ground. If the government is not going to be able to reforest, it's going to take a lot more time to have new trees to capture carbon again. So I think that when you look at it, I don’t know what kind of argument the activist could have on this one. I think that it is in the interest of the province. It is of the interest of employees and communities to see this wood, this affected wood to be harvested first. And I think we need to have an incentive for this wood because its effect you have to -- and don’t forget, this infestation started in 2006. We are now almost in 2016 and we just realize, there are some people who are just realizing that there is an issue with the dryness of the wood and that the wood is dying. So I think that government should basically, instead of directing where to go and also directing the value of stumpage. It's the market that should basically set the price because the decision that we made at Baie-Comeau to use this one, the government put some blocks that were affected by the budworm on the market. They just refused the offer, the market offer. Then they decided to put it back into a guaranteed volume and with very high stumpage that does not represent, it's not market and we are not able to make newsprint with dying balsam fir and spruce. So it's the reason why we had to announce this downtime outage at Baie-Comeau and we just hope that we are going to find a way to -- or the government to buy this wood at market. Considering that it has less value that it's going to have an impact on our harvesting cost and I think that you can figure that one out. If you have, let's' say 10% of the trees that are there, you are going to have to leave them on the block and you have less productivity per kilometers of road. It's going to cost more to transport it to the saw mills. You are going to have more blockages in the sawmills. The value of the products are going to be degrade. And when you get in to the paper mill with this lower quality wood and so you need to spend more on power. You need more chips, more tons per ton of finished paper. You need kilowatt-hour per turn and you need to bleach more. So it's a very simple equation that’s easy to understand. But I think that -- and we are trying to make sure that everyone understands the impact of it. But I think that there is a solution and better to order it quickly. And you know between 2006 and 2016, it's already a long time. So normally, certainly in our business we don’t have that much, that long to react and make a decision and act on corrective action.

[Stephen Atkinson:]

Thanks. That’s good. Can talk about currently the rate of replanting and the rotation rate?

[Richard Garneau:]

What do mean exactly there is a replanting...?

[Stephen Atkinson:]

Well, the idea being that when you harvest the amount another way, what is the rotation based on? Like is it a hundred years?

[Richard Garneau:]

Well, it depends on the location. It's between 75 and 100. And obviously if you help you nature when you harvest and clean it up and fill the forest, you replant, it's a lot faster. And I think that, you see also, I think on the slides you have the kind of practices that we have. And what is left is really trees, living trees and they are all just helping to basically what I would see that all just flying when you have a good wind, they are flying and you have natural regeneration in 70% of the area that are harvested. And the other 30%, the government reforests. And normally it's quick. So I think that certainly one of the strength of the boreal forest is the practices are very strong. Governmental regulation enforcement is also very very strong. And you can see on the right, what kind of forest you have. This one is in very good condition. It's very healthy. Next quarter we are going to put a picture of what it looks like to have balsam fir than white spruce that is affected by the budworm.

[Stephen Atkinson:]

Okay. So in terms of the new lumber mills, what is timing of the startup?

[Richard Garneau:]

Well, the Ignace is going to start up in the fourth quarter and the Atikokan is going to be at the end of the second quarter or early in into the second quarter of next year. The planer mill also at Atikokan is going to start up sometime into the first quarter, what I mentioned here. And what we expect as shipments in 2015 at Ignace, because we are going to start at the end of fourth quarter we should have about 65 million of shipments in 2015. Atikokan, it's only going to be 47 on a capacity of 150 and Igance with capacity of 115, we are going to have it in 2016.

[Operator:]

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

[Paul Quinn:]

Just a couple of questions on wood products. What is the current mix shift between stud and random length and how is that mix going to change with the start of Ignace and Atikokan.

[Richard Garneau:]

Well, Ignace is a stud mill and Atikokan is the random mill. So you have 150 million at Atikokan and 115 at Ignace. So it's not going to change that much, maybe 1% point or 2 but it's going to remain basically at the same level.

[Paul Quinn:]

Okay. And then anything you can give us on the pellet plant, sort of financial contribution from that plant going forward. Is that material at all?

[Richard Garneau:]

I am going to leave it to Jo-Ann to answer this question. It is as you know 45,000 tons and I don’t remember...

[Jo-Ann Longworth:]

When it's fully ramped up, it should add about $5 million to annualized EBITDA.

[Paul Quinn:]

Great. That’s very helpful. And then you guys have got some experience now in some Greenfield building of sawmills. We have got other companies that have bought existing saw mills and fixed them up. As you grow in lumber, based off your experience, what is the best way to grow that segment going forward?

[Richard Garneau:]

Well, I think we are looking at both. Obviously, I had mentioned the Greenfield and the three locations that we are looking at, but we are also looking at existing sawmills and their location obviously, because as you are aware, we are presently more focused on the integration with paper mill. But I think that going forward we know that it's a business that we know well and acquiring existing sawmills and improving sawmills over time is also an option that makes sense that we are going to process also. It's part of the mix of the analysis and the opportunity that we are looking at.

[Paul Quinn:]

Okay. And then just on the market pulp side, the $24 quarter-over-quarter price drop was a lot higher than I expected. Maybe you can give us an update on your mix between softwood and hardwood there because I thought it was about 80% softwood so I wouldn’t have expected that drop. Or maybe you can just give us a little bit more detail as to why it dropped so much?

[Richard Garneau:]

Well, when you look at the [RBT] (ph) or recycle is about 18% and hardwoods about 10%. So you really, it is this portion of about 30% that we have seen a price decline and it's all related. If you look at both, it's all related to the eucalyptus coming on board, if I could use this expression. So it is this 30%. And hardwood also, at Calhoun, with the restart of paper machine number five on hi-brite, where we have lower shipments. And also in [RPK] (ph).

[Paul Quinn:]

Okay. And just the last question. Just on the spruce budworm. What do you expect the overall future impact on your lumber pulp and paper operations in Quebec to be ?

[Richard Garneau:]

Well, fortunately it's affecting mostly balsam fir and white spruce. And when you look at the boreal in the north, there is less of it. So I think that now the infestation is (indiscernible) on the Quebec north shore, and that is in the area where the government has directed us to go. It's about 30% balsam fir. And obviously, normally we always control the mix of species to limit the percentage that we put on -- that we sent to the sawmills, to have the right mix at the paper mills. And now at 30% we just cannot produce a newsprint that is strong enough to meet the specification that is requested by our customers. So overall, I think that it's manageable but you have to go quickly in the area that is infested. It started in 2006, as I said, so we have to go and harvest while the trees are still, there is some green in the trees. And you understand that it's an infestation that is completely different from the pine beetle in BC, where the beetles basically stays under the bark. The spruce budworm basically eat the leaves of the fir and the white spruce and the trees die very very quickly (indiscernible).

[Paul Quinn:]

Thanks for that. No, we have experienced this first budworm out here as well. Just 2015 CapEx, you have any kind of rough idea as to what that will be?

[Richard Garneau:]

I think it's going to be around $230 million. Jo-Ann, can you confirm?

[Jo-Ann Longworth:]

We are still working on that but we are expecting this year to be $230 million of which $160 million is for value creating projects. We haven't completed our plan for 2015 but I don’t expect it will be much lower.

[Operator:]

There are no further questions at this time. I would turn the presentation back over to our presenters.

[Remi Lalonde:]

Well, thank you very much everybody for joining us today. I think we will leave it there. Thank you.

[Operator:]

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