Resolute Forest Products Inc (RFP) 2001 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the Abitibi Consolidated first quarter 2001 results conference call. I will now turn the meeting over to Mr. John Chimienti. Please go ahead, Mr. Chimienti.

Thank-you. Good afternoon everyone. Welcome to Abitibi's first quarter conference call for 2001. I am John Chimienti, manager of Investor Relations. Joining me today here are John Weaver, President and Chief Executive Officer; Dan Perkins, Senior Vice President and Chief Financial Officer; and Yvan Gingras, our Vice President and Controller. This call is being broadcast over the internet, and we will be referencing a short slide presentation which was made available for download earlier today at our homepage www.abicon.com. Posting or publication of this slide presentation is not permitted without the expressed written consent of the company. I'd like to remind members of the media who are on the call that while you can quote anything said by the Abitibi participants, you need permission from any individual analyst you wish to quote. We are also asking members of the media to hold questions until the final portion of the question and answer session, at which time management will be available to respond. This call will include certain forward-looking statements and/or estimates. Comments and observations are based on information provided to the company which management believes to be reasonable and is [correct] at the time of this call. Such comments will be effected by a number of risks and uncertainties, many of which are beyond the company's control and which may cause the actual results of the company to be materially different from those expressed or implied. The company disclaims any intention or obligation to update or revise any forward-looking statement. One final reminder, our acquisition of Donohue was completed on April 18, 2000, and unless otherwise noted, all comparative information prior to that date refers to Donohue's results only. I will now turn the call over to our Chief Financial Officer, Dan Perkins, to discuss earnings and other financial highlights.

Thanks John. In Q1, net earnings were $132 million or 30 cents a share or net sales of $1.7 billion. This compares to $51 million or 20 cents a share in the same period last year and $148 million or 33 cents a share in the previous quarter. Our results also compare favorably to Q1 2000 pro forma net earnings of $36 million or 8 cents a share, or net sales of $1.6 billion. When compared to last quarter, net sales were down somewhat, but our EBITDA remained flat reflecting higher prices for our paper products offset by lower sales volumes. During the quarter, we shipped 125,000 fewer tonnes of newsprint, 24,000 fewer tonnes of value-added grades. Remember also that first quarter included a net gain of $12 million due to non-recurring events. Operating income was $360 million in the first quarter, in line with what we earned last quarter. Modest improvements in our newsprint and lumber segments were offset by a similar decrease in our VAP and pulp segment. Continuing high-energy cost also impacted pulp and paper operations by a total of $10 a tonne or $72 million more than Q4 on an annualized basis. Fortunately, our overall fiber cost decreased by $8 million on an annualized basis. Despite recent improvements, lumber prices fell further 3% in the quarter and were still well below levels seen in the same quarter last year. Overall, the segment had a $16 million operating loss in Q1 due to market conditions and downtime of about 90 million board feet. We have scheduled approximately 30 million additional board feet of downtime for the current quarter. Compared to Q4, mill-net for newsprint in Q1 were up $31 a tonne, reflecting the March 1st price increase, as well as price increases in [Europe]. Mill-net for our value-added grades were up $9 a tonne, but our pulp mill-net decreased by $31 a tonne. As you can see in slide 3, costs in our newsprint segment decreased by $2 a tonne from Q4. When you back out higher energy costs at $13 a tonne in newsprint, the net result was that those costs within our control actually decreased by $15 a tonne quarter over quarter. During the quarter, we also continued to achieve some of the best EBITDA margins in the industry. We continued an improving trend ending the quarter at an EBITDA margin of 29.9%. Internationally, our share of the Pan Asia Paper joint venture earned $16 million for the first quarter or $3 million more than in Q4. John will discuss recent developments in Pan Asia in more detail a little later. While the average US exchange rate remained basically flat, quarter over quarter, in the end of the first quarter, the Canadian dollar closed at over 3 cents US lower than at the end of Q4. This negatively impacted the amount of US denominated debt on our balance sheet by $267 million. Now let me turn it over to John Weaver who will report on our synergies, markets, and our outlook for the remainder of the year.

Thank-you Dan. At the end of the first quarter, almost a year after the acquisition, we are still delivering synergies ahead of targets. In slide 5, you can see that we continue to make progress, achieving an annualized synergy run rate of $194 million. We expect this run rate to accelerate over the next 2 quarters, bringing us to our $250 million goal before year-end. We made progress in every area and especially in the areas of SG&A and logistics, as we are currently on [pace] to exceed goals that we originally set. On the manufacturing side, synergies were $83 million during the quarter. Annualized energy and fiber cost rose to $267 million, during the first quarter compared with 203 last quarter. We expect energy cost to return to more normalized levels as the year continues, and this should impact the bottom line. Turning to the markets, beginning with newsprint, we implemented the [US] $50 price increase effective March 1. Given current economic conditions, effective May 1, we are adjusting March increase down by $25 a tonne on an ongoing basis. There is no doubt that the economic slowdown has effected our industry and customers, and we are still looking forward to a [market] recovery in the second half of the year. Internationally, European prices were raised at the beginning of the year, as demand continues to be strong, and inventories remain at some all-time low levels. Latin American markets are generally stable, and pricing is likely to continue to track US levels. Despite a drop in overall economic activity in Asia, pricing in most markets still exceed the US. In addition, our Pan Asia joint venture announced approximately 35,000 tonnes of downtime for upcoming months to correct inventory imbalance, something rarely seen before in the Asian markets. Our value added papers business continues to be a stable performer with March being an unexpectedly strong month. Overall, our order book remains firm into the second quarter, our directory business is performing well, and our offset paper strategy is paying dividends. We expect our SC grades, however, to be coming under increasing pressure given the new capacity coming on-line and projected weak conditions for the lightweight coated market. Looking at our inventories, while they grew during the quarter, they still remain in line with last year's levels. The effective permanent capacity closures and market related downtime, including our 50,000 tonnes of downtime announced for April should keep inventories at comfortable levels. On our capacity rationalization, during Q1, we closed the high cost value-added machines at our Lufkin and Wayagamack mills totaling 160,000 tonnes. This will displace about 70,000 tonnes of newsprint production at our Kenora mill. Looking ahead, we expect to announce our last group of permanent closures and possible market downtime in the next few weeks. The start-up of the Kenogami TMP operation was completed at the beginning of the year and was successful. During the quarter, we also continued with the major conversion of the Lufkin SCB machine. As we alluded to in our last quarter's call, this project should continue to negatively impact earnings throughout the start [_______________]. Looking at some other recent developments effecting our business, Hansol Paper of South Korea, one of our Pan Asia partners has decided to divest its share of our joint venture. We expect that given favorable negotiations, we will take up our proportionate share thereby making Pan Asia a 50-50 joint venture with Norske Skog of Norway. We believe that a stronger position in one of the world's fastest growing markets will be accretive to our bottom line. The US-Canada softwood lumber agreement expired April 1st, and we are committed to working with our industry partners to maximize the benefits of a new trade relationship, one based on unrestricted trade across the US border. As we expected, the US Department of Commerce said this week that they [will] investigate allegations made by US lumber companies into their anti-dumping and countervailing duty petition. In the midst of all this, we do not forecast any significant recovery in the lumber business over the short run. As we announced in February, we will divest [of our] Port Alfred newsprint mill as part of our settlement agreement with Canadian Competition Bureau. Port Alfred has long been profitable, and we expect to realize full and fair value for the mill. The sales process has begun, and we expect to conclude the sale in the second half of the year. We are also in the final stages of receiving approvals for the sale of the Wayagamack mill to Kruger and expect closing to occur this quarter. In closing, we remain focused on achieving our three main priorities in 2001. First, we will continue to improve our earnings and generate free cash flows to take down debts and improve our balance sheet. Second, we will complete the 400,000 tonnes of high cost capacity rationalization, and third, we will achieve 250 million dollars in synergies before year-end. John?

Before we take some of your questions, just a reminder. There will be a replay of this call starting an hour after this call ends lasting until May 3rd. The replay number is (416)695-5800, and the password is 644355. The slide presentation that John and Dan referred to today, as well as a recording of this call will also be archived under the investor section of our website. Today we will start with questions from the investment community and conclude by taking questions from the business media. We would ask the media to limit their questions to today's topics. For any other inquiries or questions, you may directly contact Denis Leclerc, Manager of Public Affairs, after the call at (514)394-3601. We will now take some questions from the investment community.

Thank-you. We will now be taking questions from the investment community using our quick-queue polling feature. If you have a question, please press 1 on your touch-tone telephone. You may need to lift the handset first and then press 1. Once again, if you do have a question, please press 1 on your touch-tone telephone. And our first question comes from Mark Connelly of Credit Suisse First Boston. Please go ahead.

Thank-you. John, just a couple of things. Publishers are suggesting that because of the way this price hike has been transformed, that the negotiation now starts from zero again, based on February. They are also suggesting that it's going to be extremely difficult for you to collect any of the money that you booked for the last couple of months. I am curious whether you agree that this negotiation is likely to start from zero given that this isn't normally the way we roll back a price hike.

I think that this is really when you think back, Mark, [_______________] really the first time we have announced that the price is going down effective some day, and I think what we are trying, from our position, we are trying to create an atmosphere of more stable pricing and where the price is known and understood by everyone, and so by announcing that the price is down $25, we assume that we are pricing our product effective from May 1st, and those papers that we shift from March 1st to May 1st are at the old price. That was the agreement we made with our customers at the time of shipment, and we expect to be paid accordingly, and going forward, we will stand by the price down by $25, and that's the way we are marketing our product.

Okay, just a couple of other issues. There seems to be a lot of discussion about how much impact web-width reductions are having on these current consumption figures. What is your sense, John, of just how significant web-width reductions have been in these relatively awful consumption figures we see?

I think that the industry has shown that overall, people would expect that the web-width reduction programs were going to take place over 3 or 4 years in account to not more than 1% decrease in consumption because even though the size of the page goes down, there is some actual increase in number of page counts because you can only squeeze the words onto so many pages, and I don't know. I think certainly there 00:3e accelerated their reduction to smaller web-width, but I don't believe you could have more than a 1% impact in this quarter, perhaps a little bit more than 1%, but in general, I don't believe that many people converted in the quarter.

Okay, and one last question. On energy consumption, is there significant seasonality that we should be expecting over this next quarter or over the next year to your energy needs?

Certainly, our energy consumption goes up in the winter months, maybe Yvan Gingras, our Controller, can comment on the increased consumption of energy in the winter months.

We got normally in winter months, an impact on our [_______________] $4 or $5 per tonne [_______________] newsprints [and] paper mills. Okay? And these appear in the second and third quarters.

Okay, thanks very much.

Thank-you, and at this time our following question will come from Luisa Lau of Salomon Smith Barney. Please go ahead.

Good afternoon. Yes, two questions. First question is on the Lufkin SCB project. Is that still slated [for its] completion in June? And then if you can give us an idea as to what sort of ramp-up curve we could expect to see from that machine this year in light of what your assumption to market conditions are, as well as what we can expect next year? And then the second question is related to your debt objective, debt to capital objective. Given the unfavorable exchange rate scenario, as well as what could be softening market conditions, could we still expect to see you meeting your debt objective by year-end?

First of all on the Lufkin project, the start-up of Lufkin is delayed, and where the project itself is under pressure on the budget side. We expect to start up the machine in August now and make good paper in September, and that delay as we talked about last time, I believe, we talked about start-up around the 1st of July or end of June, and now we have delayed that.

Right.

And we have taken action at that in those operations. We have brought some additional manpower from [our side] and replaced as much of the construction management force at the site and working in partnership with them to get the project on focus. I think our start-up plan is still very much in place. We have a well-trained crew, and we expect to be start-up and making paper that's designed to get up to design capacity. There's always been an 18- to 24-month start-up curve, and so we are still expecting to stay on that in order to achieve design capacity of 260,000 tonnes. So the start-up curve is still there. Dan will talk about debt.

On debt repayment, our objective is to use our cash flow to pay down debt, and certainly the reduction of $25 a tonne and softening in pulp prices has made that a greater challenge, but we going to try to find ways to offset that, but certainly that will be some difficulty for us. The foreign exchange rate, I think, I'll draw your attention to the change in debt that you see in the quarter, the $267 million increase in the translated Canadian dollar debt is due to the exchange rate going from $50 to $57.50. Today that's down to $54, so you can see there is quite a lot of volatility. You should take note that we have $3 billion of US dollar cash flows a year, which are benefiting from the weakening Canadian dollar. So all in all, Canadian dollar is good for the company. It's the timing of the weakness that gives the appearance of difficulty.

Then looking at all those elements, would you say it's still realistic to target maybe a 50% debt to capital objective by year-end, or is that something that could get stretched.

I believe that we're looking at about 54% or so, and that's quite a comedown from where we are at the moment.

Okay, thank-you.

Thank-you, and at this time our following question will come from Mark Wilde of Deutsche Bank. Please go ahead.

Hi, John. I wondered if you could talk a little bit this afternoon to update us, give us a little more color on both Wayagamack and what's going on over at Chandler in terms of those mills moving into other hands, and what you understand about what products they're going to be producing? And that if you have any thoughts about this newsprint machine which was announced over in Europe this morning.

First of all, it was hard to hear you. So you asked a question about Chandler and Wayagamack operations and what grades were expected to be manufactured at those facilities?

Exactly.

Okay. Well, the Chandler mill was sold under the understanding that they would make no grades other than those manufactured by Abitibi, and I understand that the project is still focused on making the #4 coated. And as for Wayagamack, Kruger plans to, well, I don't know exactly their plans, but just that they will make some very ultra-lightweight uncoated grades which we only manufactured at Wayagamack, and then they will not compete with us, however, in newsprint or other uncoated groundwood grades, and we will market the [directory] for them for the remainder of the year. I'm afraid that I've been busy with the annual meeting, so I don't know anything about a new machine announced in Europe this morning.

Okay, I will [hold that] announcement on the newsprint machine. John, finally, if I could, can you talk a little bit about what you're seeing in export pricing because I've been hearing about slippage in export prices, and I wonder if you can kind of confirm or deny that.

Well, as you know, South American prices generally track US prices, and so if there has been some extension of terms and some erosion in Brazilian prices, but overall the rest of South American prices have stayed stable along with the US. As far as European prices, European prices remain very stable, and the increase on the first of the year, and we see no change there. Asia generally remains above US markets for the most part. They declined in the first part of the year by US $20, but they're still above US markets and other than Pan Asia, Abitibi Consolidated, really does very little business in Asia except what we do through Pan Asia.

Okay, as far as any downtime, you're going to have something to say in a couple of weeks, you have nothing to say today, John?

Well as you know, we've already announced the 50,000 tonnes that we are going to take in April, and then in the next few weeks, we'll be announcing the remainder of our permanent closures, and we're committed to balancing our inventory, and if we need to take downtime to do so, we will announce that in a few weeks.

Okay, thank-you.

Thank-you and our following question will come from Greg Ransom of JP Morgan. Please go ahead.

Hi, Dan. I got a couple of questions for you. First, on Pan Asia. Within the context of your debt reduction target, how does this fit in in terms of how you might have to readjust, what total debt will come down to, or can we expect to see an offsetting asset sale on that? Secondly, use of cash in working capital, looks like it used up about 215-216 million in the quarter. Might we expect to see that unwind in Q2? And finally, just in terms of trying to get a handle on how much the exchange rate impacted total debt, you mentioned the number of 267 million due to the currency exchange, and I see a total change in debt of 221, so do we come up with about $46 million total debt reduction in the quarter?

Okay. So let me take those at a time.

Sure.

Pan Asia, as you probably know, we're in the process of selling Port Alfred.

Yeah.

And we're negotiating with Hansol at the same time, and hopefully those will [_______________].

Got it. Okay.

On the cash and working capital side, yes. I expect those will reverse. If you look at the change in working capital in the fourth quarter is about $200 million positive.

Right

$200 million negative, that [we could] inventories quite a lot this quarter. So that was in effect of about $86 million. Receivables were up to $32 million. Also it's the period where we make a lot of interest payment on bonds which has worked to about $36 million as well.

Okay

So there are a lot of reasons for it, but it does come back. Next question was the debt. That's right, we had, if you look at, yes, the debt did change by $40 million, plus the $267 [_______________].

Okay, thank-you.

Thank-you. And our following question will come from Don Roberts of CIBC World Markets. Please go ahead.

John, could you [_______________] what the status of [_______________] initially going to be doing, I think, a bit of a review of your strategies, both on wastepaper collection, as well as lumber. I [was wondering] if there has been sort of any conclusion struck there, or what the status of those sort of reviews were.

On the waste paper strategy, of course you know, since the acquisition of Donahue, we've centralized our waste paper buying, and we currently collect or rather purchase approximately 25% of all the wastepaper used in North America, and we do that primarily for mills across the US south, but also for our Thorold mill and a couple of mills in Canada. So our strategy there is pretty much the same except we're trying to coordinate buying and maximize our own internal collection. As far as the lumber business, I don't think there's been a significant change in our strategy. It still continues to be that we're involved in the lumber business where it helps to secure fiber supply for our paper operations. So we're interested in lumber facilities that surround our paper mills, but [that's sort of the extent] to which we are involved in the lumber business. Nevertheless, we are the fifth largest lumber producer in North America.

Thank-you.

Thank-you and our following question will come from Richard Kelertas of UBS Warburg. Please go ahead.

Yes, good afternoon. Could you give us an idea of what energy and fiber cost did quarter-over-quarter. I know, John, you gave a number in terms of total year-over-year, I think it was 200 and some odd million. Could you give us a quarter-over-quarter, and then also I've got a followup after that.

The quarter-over-quarter [_______________] the energy going up by 72 million.

That was energy, sorry?

Energy yes, and on an annualized basis, the fiber went down by 8 million on an annualized basis.

Down 8 million, so you are saying that the synergy run rate was 195 not including fiber and energy?

That's correct.

Can you give us an idea of, number one, what the net realization [_______________] was in the first quarter versus the fourth quarter on your newsprint sales? And then, can you talk about overall what the impact of the dollar of that was in that number?

The net realizations, you mean the change in the mill nets?

Yes, that's correct.

It was $31?

Canadian, yes?

Canadian, yes.

On newsprint?

On newsprint.

Okay, and in terms of the quarter-over-quarter impact on the dollar on your net sales number?

The impact was minimal because the average [_______________] quarter-over-quarter is almost the same. It is 152 or something or a quarter of a point.

Okay, so there was no hedging impact.

No hedging impact. No.

Okay, finally on the EBITDA margin that you talked about, close to 30%. That was on your newsprint operations, is that correct?

No that was on the company.

Overall company. Yes.

Okay, good. Thank-you.

Thank-you and our following question will come from [_______________] of Morgan Stanley. Please go ahead.

Question on the debt target. I think a few months ago [_______________] I heard that you were targeting an $800 million reduction in debt. If I am looking at year-end debt numbers of 5.6 billion, it looks like you'll be targeting 4.8 billion. Now is that the hard target, the 4.8 billion or is it more the amount of debt you paid down through cash flow excluding the currency impact which would leave another 754 to go by year-end.

I think we're focused on using our cash flow to pay down debt, and we've used an 800 number which was reflective of our expectations of the market up until yesterday the day before.

Are you setting a new target?

And so achieving the 800, given the $25 and given the sensitivities of our cash flows, it would be a very difficult target. We'll try to mitigate the effect as much as we can, but 800, I don't think we'll be able to do that unless pricing comes back stronger in the fourth quarter.

Okay, just in terms of the inventory bill, I wanted to understand what was in the inventory bill that [got better] is up by about 88 million. What were the major components of that?

Half of it was [we built] inventories of finished goods and newsprint, and the other half was [_______________] chips.

Okay, so half was the newsprint inventory bill. Have you seen a reduction in the amount of production actually going towards the customer inventory bills. It seemed very high in recent months, and I am just wondering if the customers do stop building their inventories and actually start consuming out of inventories, are you going to be able to reduce your operating rates quickly enough in order to match the supply and demand?

No, we stand by trying to maintain our inventories within a normal range, and therefore, we will keep our inventories under control and in that range, and I am not concerned about our ability to reduce capacity if necessary. We did have a decline in capacity in actual shipments of almost over 100,000 tonnes in the first quarter and similarly with the closures we've announced this quarter, we'll have a similar reduction in capacity and shipments of more like 150,000 tonnes in the second quarter. So just through permanent closures, we are going to see our total capacity come down quarter-over-quarter.

Okay, thank-you.

I think we have time for another two more questions.

Certainly, and the following question will come from Frank Dunau of Harvard Management. Please go ahead.

Yeah, I got a couple of questions. Now that Lufkins pushed back from a couple of months or two, is that going to cost you anymore to do that, or is it just the timing delay?

I think there are pressures on the project. First of all the project is being built in US dollars, and we're reporting Canadian dollar.

Right.

And, we are taking action to reduce our capex in other areas, some of the lower return projects in order to maintain our capital spending target.

And, [_______________] a question for Dan. Is there is any strategy that tells you when you are retiring debt, whether you retire US denominated or Canadian denominated debt or just whichever makes more sense of [_______________].

Most of our debt practice is US dollar denominated.

Okay, so you take the US cash flows and retire them.

I think the question, for us it is bank debt and then there is a callable bond or two that [_______________].

Right. And just one observation, I just like to thank you for at least hitting the earnings estimates without a mid quarter revision downward.

That [nobody] knows.

Thanks.

We have got time for one more question from the investor community.

Certainly, and the following question will be from John Duncanson of Duncanson Investment. Please go ahead.

Good afternoon, just a question, sort of following up on Rick Kelertas. Can you just give us a net realization for your value-added grades, the increase or decrease from Q1 versus Q4, similar to the $31 [_______________].

Yes. I have to put my glasses on. Just one second. Pulp is down $31 a ton, and value-added was up 9.

Up 9, okay. You said though that there was some weakness of prices slipped since the end of March.

Prices of pulp?

Prices of supercalendered.

No, the prices have not declined. I said that as we look out into 2001, we expect to see pressure on the supercalendered grade because of the increased capacity and the continued softness in the lightweight coated market, but so far our prices of supercalendered grade has held, but we expect to see some pressure on those in the coming months.

Okay. And Dan, just the capex numbers. What should we be using for 2001, and what should we be using for 2002, just to give us a...

I have no guidance for 2002, but now our target was to being at 50% depreciation and amortization at 300 at the [base company. We are slightly] below that than the rest of the Lufkin.

Okay, and just one other...

I think for 2002, if you take 50% of depreciation, you'll been pretty close.

Okay. What would your base maintenance, if things didn't improve and prices? I hear that Kruger announced that they're going to go retroactive to March 1st already on the rollback and the newsprint price. What happens if we go right back to where we were? What are you committed to sort of as a minimum for 2001 in capex? Is it 200, is it 250?

I think we can, we're going to balance Lufkin and our total expenditures to stay near our 400 million dollar target, and I think that we haven't really looked at future cuts in that regard. Day in and day out, our total asset maintenance budget runs about $150 million, but we have commitments in Lufkin that we are going to have to follow through [on] and similarly other commitments we've made now that we're halfway through the year, and so the most significant cuts if we would have do that, and I frankly, we still look forward to recovery in the markets in the second half of the year, and I am sure major customers will continue to put pressure on the price, but I think that we still remain committed to the prices we stated.

Okay, just one other followup for Dan. Dan, with regard to your shipments of newsprint for the quarter, is there a number you can give us for what your rough production numbers were for the quarter? Just for newsprint.

I can't lay my hand on that.

Inventory went up by 50, so the shipment [is of] 50.

So the inventories went up by 15?

50,000 [_______________].

As you could see on, I think it's slide 5, 6 or one of those slides.

Okay, and just one other final, final question here and...

Final, final, final?

Yeah, this [is the] final question. I have been getting a number of calls in the last couple of days about labor problems at Iroquois Falls and Grand Falls. Do you have any comments on that? I've been getting that from the unions.

I think we've targeted the smaller machines at those two mills with possible closures if we cannot work with the unions to figure out ways to lower the cost of operations [that] those facilities by using labor in a more efficient manner, and so those negotiations are going on right now, and we expect those to be completed early in May one way or the other.

That will be your closures for the next weeks category. Okay. Thank-you very much.

We'll now take any questions from the business media.

Certainly. At this time we will take question from the business media. If you have a question, please press 1 on your touch-tone telephone. You may need to lift the handset first and then press one. Please press 1 at this time if you do have a question. Once again, if you do have a question, please press 1 on your touch-tone telephone. I think we'll just finish the call here then. Thank-you all.