Resolute Forest Products Inc.
Q4 2014 Earnings Call Transcript

Published: 5 Feb 2015

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Fourth Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, Thursday, February 5, 2015 at 9 a.m. Eastern Time. I would now like to turn the meeting over to Mr. Rémi Lalonde, Vice President and Treasurer. Please go ahead, Mr. Lalonde.

[Rémi G. Lalonde:]

Thank you. Good morning everyone. Welcome to Resolute's fourth 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 website, 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 include forward-looking information. Our statements are based on our current assumptions and expectations, all of which involve a number of business risks and uncertainties and accordingly can change as conditions do. Richard?

[Richard C. Garneau:]

Good morning and thank you for joining us today. Today we announced another good quarter by generating $106 million of adjusted EBITDA to bring us to $366 million for the year, even as the abnormally cold winter of 2014 set us back by $55 million in the first quarter. The market pulp and wood product segment generated $221 million of EBITDA in 2014, which represent a 30% improvement over 2013. For the fourth quarter we generated adjusted EBITDA of $27 million in market pulp down by $7 million from the third quarter, $27 million in wood products down by $5 million, $32 million in newsprint, up by $10 million, and $22 million in specialty papers, down by $4 million from the previous quarter. For the year, our adjusted EBITDA was $25 million higher in each of market pulp and wood product, but it was $47 million lower than specialty papers and $21 million in newsprint. The negative impact of the abnormally cold winter was about $27 million in newsprint and $20 million specialty papers. We grew lumber shipments by 105 million board feet in 2014, and we're on track to reach another 300 million of annualized capacity in 2015 with our two new Northern Ontario sawmills. The fourth quarter restart of the refurbished Ignace sawmills is going well. We are also on schedule with the construction of our Atikokan sawmills and the high capacity planer mill will start to finish Ignace's lumber in the next few weeks, and the sawmills will begin ramping up in the second quarter. Even though both mills will need a few quarters to work up to their expected productivity, we expect them to start generating EBITDA as early as the third quarter of this year. I will add that the Thunder Bay pellet plant, which has been operational since October has generated EBITDA after only two months of operations. We will continue to work to improve productivity to reach its production target. We are also making excellent progress with our continuous digester project in Calhoun, where we expect to start the ramp-up process in the fourth quarter; when the digester reaches capacity, we will have an additional 100,000 metric tons of market pulp available on an annualized basis. This world-class equipment will help to significantly lower the mill's overall costs and improve the quality of its products. Let’s review market conditions and segment performance. Total chemical pulp market grew by almost 1 million tons since 2014 and up by 2%. Latin America was up by 5%, China by 3% and the North American demand was flat and down by 1% in Western Europe. Overall, hardwood demand was up by 3% as the market absorb major new eucalyptus capacity. Despite this increase, softwood demand was flat. Our average transaction price improved by $30 million per metric tons in 2014 or 6% reflecting stronger market prices for softwood and fluff grades, and, to a lesser extent, recycled grades. Shipments, however, were 200,000 tons lower, or 13%, this is in part due to more internal consumption including Calhoun hardwood redirected to make paper grades higher up in the value chains as well as a production slowback in recycled bleached kraft pulp and equipment failures. We continue to believe in the global pulp market fundamentals and the way we fit into it, particularly with our competitive assets, even as prices started to come off their recent highs. 2014 housing starts were 9% higher in U.S., so exceeding the 1 million starts levels for the first time since 2007 and despite wood shortages affecting certain area of Québec. Our lumber shipments rose by 105 million board feet in the year or 7% to 1.6 billion. This reflect the first stages of all initiatives to grow capacity in line with the gradual recovery in U.S. housing starts, including the 2013 restart of the Maniwaki sawmills and the replacement of the Comtois sawmills, sawline, as well as other capacity enhancement initiatives. Despite significant fluctuations in the last two years, the average transaction price for 2014 was essentially unchanged compared to 2013. Market prices for dimensional lumber trailed off toward the end of the year, but we remain cautiously optimistic in our outlook for 2015. Although demand for building products is particularly sensitive to macroeconomic factors, we've seen sustained lumber demand despite the slow recovery in U.S. housing starts. We continue to believe that the wood products business is a great area in which to grow. Total 2014 North American demand for newsprint was down by 9% for the second consecutive year, though demand from commercial printers was 3% higher, demand from newspaper publisher was down by 12% from last year. Global demand for newsprint was down by 7% with Latin America down by 9%, Asia down by 8% and Europe down by 6%. The lower demand in China and the strength of the U.S. dollars against the euro and the rapidly the evaluating Russian currency have made it difficult for our North American newsprint to compete in Asia as European and the Russian producers have used their currency advantage to gain market share. Accordingly, North American export to Asia have growth by 17% in 2014. Furthermore, consumption in Latin America has also declined as a result of their weaker currency and softer macroeconomic conditions, the trend accelerated in the second half of 2014. The net result has been lower in exports volumes out of North America a more competitive domestic environment, this lead to a 4% reduction in the average transaction price for 2014 compared to 2013 down by $25 per metric ton. Despite these headwinds, our overall shipments were down by only 1% this year. Our international shipments were down by 9% for the reason I mentioned, but at the same time we grew domestic shipments by 5%, this shows Resolute's platform is well positioned to compete in this challenging market. For the communities and the people I think that there is no good point to close a mill. Although, our recent closure announcement have been difficult 0.5 million tons of Newsprint capacity and 200,000 tons of specialty papers capacity. We immediately improve our competitive position; streamlining our production to adapt the changing market dynamics we are able to optimize assets by maximizing the utilization of our most cost effective mills and also reduced fixed cost and avoid costly and an efficient rotating downtime strategy. North American demand for coated mechanical papers was down by 5% in 2014. Demand for supercalender grades which is about 27% of our specialty shipments was down by 2%. Total standard grades were down by 4%, but shipments of super-brite and hi-brite which are another 34% of our total specialty paper shipments were unchanged. The industry shipment to capacity ratio was 91% for the year down by 1%. Coated mechanical demand was down by 5% for the year, but shipment improved significantly in Q4. After the pressure on the industry this year as a result of lower operating rates buyer began to restock inventories in anticipation of possible price increases with the higher operating rates. When adjusted for the late year capacity closures, the shipment-to-capacity ratio was 94% for the year up 1% from last year. Our overall shipments of specialty papers were 59,000 short tons lower, or 3%, as a result of weather-related production disruptions, mechanical failures in Catawba, and lower production following the closure of our Fort Frances, and Laurentide. The average transaction price was $29 per short ton lower, or 4%, most of which was due to the significant erosion in coated mechanical paper prices in the first nine months of the year due to the excess supply. We expect the recent positive price momentum for coated and supercalender grades to carry into the first quarter, which otherwise tends to be a seasonal low. I would like highlight some of the other key achievement this year. First, I'm proud to announce that in 2014 we beat the ambitious safety target we set for ourselves, achieving an OSHA incident rate of 0.83, even better than last year's world-class rate of 1.02. This accomplishment reflects our employees' focus, dedication and vigilance, for which they deserve our recognition. Safety is our first priority, and we all strive for zero injury. Second, we work with all unionized employees and their union leaders store the mutually beneficial renewal of our U.S. and Canadian collective agreements earlier this year. By working together with the shared goals of Resolute long-term success we helped that to reinforce our position as a financially strong and reliable suppliers for our customers. Third, we reduce mill environmental incidence by 19% this year. This is encouraging progress considering that we felt slightly short of our 10% improvement target last year. Building on this success we’ve already set a new target to reduce incidence by [indiscernible] 2015. Fourth, we can confirm that we have surpassed our greenhouse gas emission reduction target. Having reduced emission by 6% to 7.5% compared to the year 2000 baseline. And there is more to with capacity adjustment. Overall 50% of the improvement comes from reduction energy consumption, fuel switching and fuel mix improvements. As a member of the WWF's Climate Savers Program we’re happy to say that we have exceeded the 65% commitment we made to WWF two years a head of schedule. Finally, we remain on course with our sustainability initiatives. In addition to developing information resources such as BorealForestFacts.com and the Resolute blog, we launched the Southern Boreal and Boreal Forum social media platforms. These French and English sites provided a forum for fact-based discussion considering sustainable forestry practices and the help to ensure that individual and community voices are heard particularly when it comes to the importance of forestry to northern economies. We are not intimated by attacks from misinformed and misleading activists. When their arguments have failed on their merits, some have resorted to customers intimidation with a threat of economic harm and that is as unfortunate as it is unproductive. We always said that sustainability rests on three pillars, economic, social and environmental. And we are very pleased that others have recognized a significance of Resolute’s sustainability leadership and our achievements including ranking in the best 50 Corporate Citizen in Canada by Corporate Knights, being also named to the 2015 Clean50 for leaders who have made the greatest contribution to sustainable development or Clean Capitalism in Canada, and receiving the New Economy Magazine’s global award for the best forest and paper solutions. We make sustainability an integral part of the way we do business building on the third party certification for 100% of our management to at least one of three internationally recognized sustainable forest management standards. The forestry regulation in Quebec and Ontario are among the most if not the most rigorous in the world. I will now have to invite Jo-Ann to review our financial performance.

[Jo-Ann Longworth:]

Thank you, Richard and good morning everyone. Today we reported 2014 net income of $46 million or $0.49 per share, excluding special items compared to a $107 million or a $1.13 per share in 2013. Sales were $4.3 billion, down 5% from last year and net income in the fourth quarter was $36 million or $0.38 per share excluding special items up 13% from the fourth quarter of 2013. GAAP net loss was $277 million in 2014 or $2.93 per share including $278 million of pretax closure impairment and other related charges most of which was accelerated depreciation taken for our Laurentide and Iroquois Falls mills in Canada and a paper machine in Catawba. The other 2014 special items pretax included $61 million write-down related to our Ponderay Newsprint Company joint venture and $32 million non-cash loss on the translation of Canadian dollar, net monitory assets and a $17 million stores inventory write-downs related to mill closures. Of the total $323 million of special items on an after tax basis only $49 million are cash related. GAAP net loss was $109 million in the fourth quarter or $1.15 per share. Special items pretax included a $131 million charge related to closure cost mostly accelerated depreciation at Laurentide and Iroquois Falls and $18 million non-cash loss of a translation of Canadian dollar net monitory assets and $11 million write-down related to our Ponderay joint venture. Only $27 million of the total special items of $145 million after tax are cash related. Total sales for the fourth quarter were $1.1 billion down by $41 million from the third quarter. Newsprint shipments were up by 2%, but we shipped 3% fewer tons of market pulp mostly because of a shipment delay at year end and 4% fewer tons of specialty papers due to seasonally lower white paper sales. Wood products shipments were also down by 8% from the record high achieved in the third quarter reflecting seasonal construction activity. Overall, pricing was unfavorable by $8 million mostly because of the $12 per metric ton reductions in newsprint pricing. Our manufacturing costs were better even after adjusting for the positive effect of the weaker Canadian dollar and the lower shipment volumes. This reflected the favorable effect of seasonally lower power costs in the U.S. southeast, lower fixed cost with the closure of the Laurentide well and additional tax credits in connection with infrastructure investments, offset by higher fiber and operating cost in our wood products segment and the recognition in Q3 of an energy savings incentive. The weaker Canadian dollar had an overall $14 million favorable effect on our results this quarter compared to the third quarter. For the year the lower Canadian dollar improved our results by $98 million. The cogeneration assets that sell power to third-parties helped improved EBITDA by $8 million in the fourth quarter unchanged from the previous quarter due to the timing of annual maintenance. For the year, cogen contributions improved EBITDA by $43 million, $3 million less than in 2013 which reflected the negative impact of the weaker Canadian dollar. Although the full year of operation from the Thunder Bay cogeneration facility contributed an additional $10 million Dolbeau, operational difficulties and equipment failures and Saint-Félicien. And in Thunder Bay a longer than expected annual outage as well as turbine damage and loss production caused by multiple power transmission destructions to the mill. Compared to the third quarter, market pulp delivered cost rose by 2% to $655 per metric ton mostly because of lower contribution from the Saint-Félicien cogeneration facility in connections with the mill’s annual maintenance outage. In wood products the delivered cost per unit was $5 per thousand board feet lower or 1% at $332. Newsprint delivered cost fell by $27 per metric ton or 5% to $555 per metric ton due to the favorable effect of the weaker Canadian dollar seasonally lower power cost in the U.S. Southeast and a higher contribution from the Thunder Bay cogeneration facility. In the third quarter Thunder Bay cogeneration was affected by a longer than expected annual outage and other power disruptions as I described earlier. The delivered cost in specialty papers was $706 per short ton, essentially unchanged. Operating cost per unit were favorably affected by the weaker Canadian dollar and the elimination of fixed costs associated with the Laurentide mill which was closed in mid-October. But the benefit was offset by the absorption of fixed costs over the seasonally lower shipment volumes. I will add that while it’s still early, so far this winter we've not seen a repeat of the same harsh conditions we experienced at this time last year, which caused a material increase in energy costs, production disruptions, equipment failures and distribution constraints. We also implemented a number of measures to reduce our exposure to these types of events. We incurred $131 million of accelerated depreciation and other closure related costs in the quarter, related to the permanent newsprint capacity closures announced for Iroquois Falls, Baie-Comeau and Clermont. Closure costs also included the remaining portion of accelerated depreciation associated with the closure of the Laurentide mill in mid-October. This quarter we wrote-down our investment in Ponderay by a further a $11 million to zero. In addition, to $50 million write-down we took in Q3. Cash and cash equivalents increased by $72 million in the quarter, to $337 million bringing our net debt down to $260 million at year end. Net cash provided by operating activities was $106 million in the quarter, rounding at the year at a $186 million. Despite the $41 million of cash used in the first quarter largely because of the abnormally cold winter. Balance sheet working capital decreased by $25 million in the quarter to $679 million which reflected a two day improvement of days sales outstanding. A $38 million reduction in finished good inventory and $22 million received in connection with the sale of U.S. timber assets securitized in 2001. This was partially offset by the update to our deferred income tax balance sheet classification between current and non-current. A $32 million reduction in accounts payable and accrued liabilities and $17 million seasonal increase in raw material mostly logs and mill storage. Capital expenditures were $51 million in the fourth quarter, $9 million less than in the previous quarter. CapEx for the year was a $193 million which was below our earlier guidance, because of the timing of projects. For 2015, we expect to spend approximately $200 million of CapEx including a $130 million on value creating projects. Pension contributions were $29 million in the quarter, with a $7 million expense. For the year pension contributions were $164 million with an associated expense of $29 million inline with our previous guidance. After rising interest rates helped to reduce the net pension and other post retirement benefits or OPEB liability on our balance sheet by nearly $700 million in 2013 interest rates shifted downward in 2014, finishing the year even below 2012 levels. But thanks to strong asset returns, the favorable currency impact and amendments to our OPEB plans, our balance sheet net pension and OPEB liabilities increased by $330 million in 2014, to $1.6 billion, when compared to the $2 billion in 2012. The increase also included the significant impact of longer life expectancy assumptions in both Canada and the U.S. Despite this increase in the liability, we expect our funding levels to come down by about $20 million in 2015 compared to 2014, to approximately $145 million, due to the impact of the weaker Canadian dollar. We are required to amortize this increase in the liability, which will result in an increase of our pension and OPEB expense by approximately $55 million in 2015, which, given the volatility of interest rates, could reverse in subsequent years. Although the higher expense does not have a cash impact, it creates headwind for our EBITDA expectations in 2015. I want to emphasize that our capital structure is flexible and conservative. Our financial strength gives us the ability to look at a range of appropriate opportunity and the patience to make sure the related valuations are right. Availability under our ABL credit facility at year end was $521 million for total liquidity of $858 million. For the last three years we’ve maintained a net debt to EBITDA ratio of around 0.7 times. We also hold substantial tax attributes including U.S. operating loss carry forward of about $1.8 billion or $700 million after tax. Canadian operating loss carry forward of about $175 million for a net of around $50 million. Over $3 billion of undepreciated capital cost mainly in Canada for a net benefit of almost $1 billion and other attributes including R&D expense pool and tax credit carry forward for over $300 million after tax. The U.S. NOLs don’t begin to fire in any meaningful way until 2022, despite the accounting valuation allowance we recorded in 2013 which as we said at the time was based on a strict application of U.S. GAAP. We are comfortable at this point in our ability to maximize the use of these U.S. tax attributes.

[Richard C. Garneau:]

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

[Operator:]

[Operator Instructions] Your first question comes from the line of Bill Hoffman with RBC Capital Markets. Your line is open.

[William H. Hoffmann:]

Yes, thank you, good morning. Richard, I wonder if you could just talk a little bit about the newsprint markets, specialty markets, and coated markets, your outlook here for 2015 and how you expect maybe the trade flows to change especially in newsprint or the change in CEDAR.

[Richard C. Garneau:]

Well, I think that one you look at the North American demand certainly was down 9% in 2014 and we expect the likely the same decline in 2015, we was encouraged through to see the commercial printer that’s up by 2%, but obviously the newspaper publishers well its hard with the significant decline of 12%, certainly when you look at the global demand for newsprint with the global demand of 7% even Latin America was down, but we know about the economy difficulties in Latin America, Europe is also down as well as Asia and it is a reason why we basically made the decision to close capacity to be able to eliminate the fixed cost and to basically optimize for us to be stable on the segment of our business that is declining. So I think that obviously we know that its related to advertising and circulation and we still have some hope that obviously Latin America that eventually is going to stabilize at a point, because I was in Brazil a couple of weeks ago and the circulation is basically remaining the same, but they – last page they have less advertising and so they explained it to its related to the economy. So and I don’t know what is the situation in China, but the news that we see that also there are some pressure on their economy, so certainly is see a relation between the economy and lower demand. So I think that’s certainly we are taking measure to streamline our operation and so that we produce our investment in the most efficient [indiscernible] serve the market and where that can fit and to be able to manage this difficult situation.

[William H. Hoffmann:]

Especially on the newsprint side, I mean price obviously are sliding here a little bit. Do you expect to be able to stop that?

[Richard C. Garneau:]

To stop?

[William H. Hoffmann:]

The prices from sliding.

[Richard C. Garneau:]

It’s a question that I want to able to answer, I think that the currency down as you know and when you look at Russia we saw a evaluation of weakening of the currency of 45%, we know that as its down not only in Russia but also in Europe they are using part of their currency evaluation to gain market shares and we are seeing the impact in – in also in Latin America. So I don’t think as long as we have this very high volatility that we have seen lately and that we have courtiers that are – producing countries that benefit from very weak currency, I think that its going to be very difficult to have a stable pricing environment.

[William H. Hoffmann:]

Okay, thank you. Just shifting - a few other questions and then I'll pass it on. But one, the coated paper markets, obviously with the Verso new page/catalyst, all those transactions being done and everybody trying to get prices up early in the year here, do you feel like markets are firm at this point in time and do you expect some balance? And then sort of the follow on to that is, with the dollar as strong as it is, can you just talk about whether you're seeing import pressures because of the strong dollar in the coated market?

[Richard C. Garneau:]

We see certainly some pressure, by some imports that’s coming to the domestic market but I think that certainly when you look at the operating rates with the closure announcement its large and don’t forget that the advantage of the North American producer of supply chain. So with better - to take advantage of - we are flexible to respond to demand. So I think that even though there is certainly pressure from imports I think that the outlook is certainly a lot more positive now that it was a few months ago. So they can you’ve seen pricing announcement and - for the first quarter, then do what’s seasonally it’s a low point in the first quarter. So to indicate that’s the market is tight and that the operating rates would really reflect what situation is.

[William H. Hoffmann:]

Thanks. And then a final question. In 2015 do you think Resolute will make some strategic acquisitions to continue to help diversify your business?

[Richard C. Garneau:]

Well, it’s a really good question and I think that everyone realize that we have a very strong financial position, but I think that it provides certainly a lot of flexibility to look at the range of the appropriate opportunities and short fall that we haven’t seen anything that basically need of valuation target. So this I think that eventually and we want to make sure that we are going to [indiscernible] for any assets and with this opportunities that we look going to continue to look at them, but just going to make sure that the valuation all right. And it is the really the strategy that we have and 2015 could provide that trend also opportunities at the right multiple.

[William H. Hoffmann:]

Great thank you.

[Operator:]

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

[Stephen Atkinson:]

Thank you. Good morning. I saw an announcement that the Rain Forest Alliance had reached a legal settlement with Resolute Forest Products. Are you able to talk about that?

[Richard C. Garneau:]

Well, I think that we are going to basically to have a new audit, we have six months to do it and I think as I’ve said - I saw that I would like to go on this one. So it’s going to be a review and we are going to hopefully be able to maintain our FSC certification for these two certificates.

[Stephen Atkinson:]

Okay. And another question on environmental lobby groups, if you don't mind. The Forest Leadership Council refused to renew tenure because of the - well, Canadian government negotiations regarding with First Nation. Is there any update on that?

[Richard C. Garneau:]

Well, I’d like to maybe try to answer your questions on this one on the FSC. Well, I’d like again to repeat what I said that, you have the laws and regulation and enforcement among the more rigorous in the world and I think that has been confirmed by [indiscernible] and you are right there is a dispute in Northern Quebec between the government and the First Nation. Resolute is not involved in the dispute and I think that there is also a situation with the Caribou Habitat Conservation Plan that is one of the reasons that we had that certificates that were we work and one that was suspended. So I think what I’d like to see is that the, it’s the government that determined to decide on laws and regulations. And the government is severance, so government dislikes and there is two very strong act in Ontario and Quebec, in Ontario the forest is tend to be [indiscernible]. And I say it’s really difficult to understand, because the FSC President, the FSC Canada President mentioned during the holiday that FSC standards that ask more than the laws and regulation of the province. So I think that, a company like Resolute by law we have to make sure that we follow that we apply in our practices the laws and regulation with province and if we don’t respect that, so we are going to be subject to penalty, and the other point that I think is so interesting to mention. So when you look at the stats on FSC. Canada has 310 million acres of timberland and there is only 18% that is FSC certified and that there were 40% this is at the [CSC] certified. So it means SFI another simplification like the CSC and when I look at the U.S., so U.S. United States of America they have 305 million acres, only 5% is FSC certified and there was more than double that amount this is SFI certified and other certification. When I look at Germany it’s another interesting one, so they have 11 million acres and only 8% is certified FSC, if you look at Finland with 22 million acres only 2% that is certified FSC. No way its 4% the certified FSC with 10 million acres and in Canada, and Quebec and Ontario its 82%, but when we look at BC. BC is the largest solid wood and also the important producers of pulp and paper and they only have 4% certified FSC. So I think that we have put to everything into the context, and we have to answer the question why we are the targets here especially when there was a dispute between the government and the first nation, we have nothing to do with the Caribou Habitat Conservation Plan and I would like to also, on the Caribou just make a comments. So there is two significant Caribou in Quebec, one at George River and you can Google it, it’s easy to Google it and you will see the this herd 20 years ago there were 800,000 Caribou and well they made an inventory this year and it’s down to 14,200 and it’s [indiscernible] in the North and there was no disturbance at all, no disturbance at all and they are not surviving, so question we don’t know why. And there is another one also in Northern Quebec [indiscernible], I am just going to just to help our English friends the Leaf River, you can Google it, it’s very large old river and just have the report over the holidays where the population of the female, now especially we are saying that they are not in good health. So I think that those questions that certainly could be asked here and we are listening some of this questions that you have to put everything into the contract and it’s difficult to understand and [indiscernible] because of climate change, because of nutrition, because of something else. I think that certainly I’m not a specialties, I’m not able to answer the question, but I could just read that and I think that’s certainly of interest of other people.

[Stephen Atkinson:]

Well, thanks. So moving on, can you talk about the spruce budworm, whether anything's being done with regards to the infestation?

[Richard C. Garneau:]

You need the spruce…

[Jo-Ann Longworth:]

Spruce budworm.

[Richard C. Garneau:]

The spruce budworm on the north shore, so you knew that this infestation restored some seven or eight years ago. About 20% of the wood supply on the north shore that is balsam and the balsam is affected primarily by this insect and the nest one is the white spruce, we obviously are seeing now significant back on our cost, because there are some blocks where we have up to 50% of the wood that its mainly balsam that affected and we are still paying the full stumpage on very low quality woods and you know when you have dry wood – when you have wood that is affected, its lot less productive for the harvester for the constructors, I think with that cost you need to build more roads more kilometers or more miles of roads to get the same volume of wood. Transportation is also the truckers are not getting the same because they are paid on weeks, so when the wood is dry they receive less, there is more breakage into the saw mills and it costs more also at the pulp moll, because you have to bleach the stain, you need more energy and you have – you need also more woods. So the year is not the same. So we are having discussion with the government, we tried to have recognized the significant impact and to try to find out a way to - but we count on this woods and that the stumpage rate is finally stumpage grade finally enter the value of the wood. Now this volume is now reflecting the value of the wood and it is reasonable why you would decide that – probably one of the reasons why we decided that I thought one of the reason why we decided to close the machine and they can move on the machine at sawmills and there is a lot of wood into the area. So I think the government should accelerate the process to recover more wood that is started to be affected, because [indiscernible], so it’s going north and eventually as the other one the one that affected the province in 1968, it’s going to affect a lot of woods and again working with the government and hopefully it’s going to be reflected in some market. We have 25% of the wood that is sold on the true auctions and should be reflected the value the wood, voice of the wood should be reflected into the auction when this wood is sold through auction.

[Stephen Atkinson:]

Thanks so much. Thanks, Richard.

[Operator:]

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

[Sean Steuart:]

Thanks. Good morning, everyone. A couple of questions. Richard, with respect to the balance sheet strength and your growth ambitions, and I guess I'm focusing specifically on lumber, can you give us your updated thinking around greenfield potential for sawmills in the U.S. south relative to the M&A environment? And I guess I'm focusing specifically on lumber opportunities.

[Richard C. Garneau:]

Well, we’re still looking at it now. We have identified certainly, working on three locations, because I mentioned in the last call that the sawmills was close to the pulp mills that we have over at Catawba or Calhoun or at Coosa Pines and even in Mississippi or Canadian auction. So there is wood that is available and we continue to ready to look at it, to look at the permitting that we need on the environment and to look at [indiscernible]. So I think that’s within the - certainly in 2015 we are going to make a decision on this. So the energy just continues and we are starting to operate well, what we are going to do and I don’t know what we’re going to do with it. And as I mentioned financial strengths something that we could afford and the benefit also this integration with all pulp mill is not in significant.

[Sean Steuart:]

Okay, thanks for that. And my second question is I'm wondering if you can give us some insight on what's happening with recycled pulp markets right now. I guess given the relative strength we've seen in hardwood grades over the last few months versus soft wood, any detail you can give us for recycled pricing?

[Richard C. Garneau:]

Certainly on soft wood the demand has been flat last year there was no more demand for hardwood. I think in 2015 – we are cautiously optimistic on the pulp side, so I think there is no review significant capacity on softwood and I think that I don’t see – there is some weaknesses on price adjustment lately I think the - I don’t see a big slide on this side. On the recycle I think it’s important to mention it so we’ve been taking downtime on the recycle and also sell back the two pulp mills the two recycle pulp mills. I think the situation that we see it, we don’t want to see an improvement I think that’s 2015 is certainly going to be another difficult one on this side. So that’s good change, but we are not, we are less optimistic on the recycle.

[Sean Steuart:]

Okay. That's all I had. Thank you very much.

[Operator:]

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

[Paul C. Quinn:]

Yes, thanks very much. Good morning. And welcome your comments on certification. Lots of misinformation there. I just had a follow-up question on the pulp side. We see another couple hardwood mills startups in 2015 here. Do you expect this to have a major impact on the marketplace or do you consider the 2% growth that we saw in 2014 balancing off that capacity additions?

[Richard C. Garneau:]

Well, it’s certainly concern that we have to – its significant capacity I think that one you look at and it’s a reason why we also decided to make this investment in Calhoun the new continuous digester is going to replace the best digester is going to bring our cost down quite significantly. The only positives that I saw and this one is the currency in Latin America is taking really a hit and we know well because we have got some [indiscernible] in America, so when you have to service that in U.S. dollars and that you when you consider the weakness of their currency so it could certainly, I don’t how its going to mitigate the impact of this new capacity, but I think that – I hope that we're going to see some stability and the big question that we also have Paul is the situation in China. So if the Chinese economy does well, I think that certainly to the assumptions of Paul that has shown very significant increase in the past few years. So I think that this year we had significant - also capacity addition on the [indiscernible] it was all short, so looking forward this year 2015, the Chinese economy and I know it’s a big question mark at this one, but could certainly help to absorb this additional capacity.

[Paul C. Quinn:]

Okay. And then just flipping over to Latin America, just wondering -- we've seen a material drop in the Canadian dollar since the start of the year. The Euro's also going down. Just wondering how your competitive position is with respect to European imports down in that area.

[Richard C. Garneau:]

Well its certainly making it more difficult because it’s a U.S. currency, we said in U.S. dollars and certainly when the customer look at the Canadian dollars they are raising questions, we export that to Latin America from [indiscernible] so its our cost in U.S. benefit certainly from the lower value Canadian dollars but we are seeing impact of European producers even the Russian producers are showing up in Latin America, but I think that certainly we have [indiscernible]on supply chain, so that it takes shipping from North America and the advantage that we have also from [indiscernible]five or six weeks and at 25,000 tons. So we had a significant supply chain advantage that I don’t think many can claim. So I think that because of that pricing we are still considering that obviously [indiscernible] it’s becoming more and more difficult for the Brazilian and other Latin American countries to deal with that with the U.S. dollars purchase.

[Paul C. Quinn:]

Great. That's all I had. Best of luck.

[Jo-Ann Longworth:]

Thank you. End of Q&A

[Operator:]

And we have no further questions at this time. I’ll turn the call back over to Mr. Lalonde for any closing remarks.

[Rémi G. Lalonde:]

Right, well just wanted to thank everybody for joining us today. Thank you.

[Operator:]

And this concludes today's conference call. You may now disconnect.