Resolute Forest Products Inc (RFP) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products first quarter 2012 earnings call. I would now like to turn the meeting over to Mr. Remi Lalonde, Vice President for Investor Relations. Please go ahead, Mr. Lalonde.

Thank you, Ann, and good morning, everyone. Welcome to management's review of first quarter 2012 financial results. My name is Remi Lalonde, Vice President for Investor Relations. With me today are Richard Garneau, President and Chief Executive Officer, and Jo-Ann Longworth, Senior Vice President and Chief Financial Officer.

Let me first direct your attention to the note on forward-looking statements in this morning's press release and on our website. We will be discussing forward-looking matters on the call today. You should note that due to uncertainties inherent in these statements, actual results may differ. Our statements are not guarantees of future performance. You can find additional financial and statistical information, including a reconciliation of non-GAAP financial measures used on the call, in the press release, and on our website in the investor relations section.

Following our prepared remarks, we will take questions from analysts and the investor community. We ask that media and others please direct their questions to our communications department following today's call. Today's call is scheduled to last approximately one hour. I'm pleased to turn the meeting over to Richard.

Thank you, Remi. Good morning, everyone. Thank you for joining us today. First quarter was impacted easily by the significant down time in each of our segments. The first quarter is traditionally the softest, but in addition to the seasonal deep demand for our products, we also faced headwinds from continued uncertainty in the pulp market, price declines in the coated segment and above seasonal demand declines in the specialty segments. Our newsprint segment continues to produce attractive margins, the result of our (inaudible) approach and overall we generated $57 million of cash from operations, reducing our net debt to $210 million at the end of the quarter.

For the reasons I mentioned, we generated adjusted EBITDA of $71 million in the quarter compared with $99 million in the first quarter of 2011 and $122 million in the fourth quarter. Adjusted EBITDA compared to the fourth quarter of 2011 was down $5 million in newsprint, $10 million in specialty, $13 million in coated, $33 million in pulp, and flat in wood products. When compared to the first quarter of 2011, adjusted EBITDA in newsprint was at the same level. It's up $16 million in specialty and down only $3 million in coated and $1 million in wood products. The largest impact was in market pulp which was down $43 million on significantly lower pricing and shipments.

We said last quarter that in light of the continued softness in pulp and paper demand, we expected to manage our production and inventory levels very prudently to avoid any unnecessary buildup as we are committed to sending only profitable tonnes. We did so in the first quarter taking over 120,000 metrics tonnes of down time in the paper grades, 85,000 metric tonnes in newsprint, 35,000 tonnes in specialty grades, and over 77,000 metric tonnes in pulp. We also productively advanced one pulp mill annual major maintenance through the first quarter to the second in light of soft demand.

Total North American newsprint demand in the first quarter declined a modest 2%, the smallest decline since 2004 despite shipments from North America to overseas markets down 20.3%. With the steepest decrease in production following a number of announced closures, industry reporting rates in North America on the production to capacity basis averaged approximately 92% in the quarter. Pricing in North America is now approaching two full years of stability in the mid $600 and mill inventories remain at the manageable levels.

Similarly, newsprint demand declined only 1.4% through February, the last month for which data is available including a year-to-date 9.4% increase in demand from Latin America and 9.9% in China. With our network of lower cost assets and our proximity to deep sea ports, we grew our quarterly sales in Latin America which allowed us to walk away from some business in Asia and Europe where pricing continued to remain under pressure due to lower newspaper prices and strong US dollars and weaker euro.

Total North American demand for coated mechanical paper was down 8.3% in the first quarter with industry production also down 9.5%. The shipment to capacity ratio was 90% through the end of the first quarter, but appears to be declining as a result of weaker demand. We intend to run our world-class, low-cost capacity to full production. We see that catalogs mailed in the quarter decreased 4.2% compared to last year. North American demand for uncoated mechanical papers fell 18.9% in the first quarter of 2012, including a 27.4% drop in [high gloss] rates, 17% drop in lightweight and 9.9% drop in standard uncoated mechanical.

Our production across the grades, however, was lower by a corresponding 21.6% over the same period and compared to the 18.9% drop in industry demand. There was industry-significant capacity closure late in 2011, including our number six at our [Kenogami] Quebec mill in December. The industry shipment to capacity ratio was 90% over the quarter and produced inventories continued to remain fairly low. Our average transaction price has remained stable in the quarter, but pressure is starting to build as a result of the significant change in demand, a good portion of which we believe is driven by grade shifting. This shift, mainly drown a grade spectrum, could benefit our newsprint segment as retailers become even more cautious with their print advertising budgets.

Overall demand for chemical market pulp in the quarter was up 2.6%. That number reflects a mixture of demand pressures. It's up 17.6% in China and 5% in Latin America, but it is down 5.6% in North America and also down 7.6% in Western Europe. In particular, demand from China slowed importantly in March. Despite this overall increase in demand and despite increased announcements by us and a number of our competitors, conditions in the pulp markets continue to remain challenging due to the economic uncertainty in Europe and also irregular buying patterns in China; the two largest markets in the world.

We, therefore, remain cautious in our outlook for the balance of the year and will focus, instead, on what we control. I mentioned that we took 77,000 metric tonnes of market and maintenance down time in the quarter. We completed annual outages at two of our mills, including an outage at advanced from the second quarter in light of tough market conditions. We expect to carry out annual outages on our remaining pulp mills in the second quarter, positioning ourselves for a better second half of the year.

Overall, market conditions continue to be challenging for wood products, but we are cautiously optimistic for gradual improvement based on some positive signals in the US housing market. Start in the US where at an annualized rate of over 650,000 units through the first quarter, an 18% increase year-over-year. We continue to believe that we are well positioned for the eventual improvement in the US housing starts.

Finally, we are currently working to optimize employment levels at four mills by reducing manning by about 130 positions. We continue to focus on aggressive cost reductions and mill rationalizations to compete as a leading lower cost North American producer. At [full session] we can simply fight to improve something in our efficient operations, surround economies of scale and access to competitive sources of energy and fiber. Guided by all values of safety, productivity and sustainability, the strategy [we told you] to build value for our shareholders includes, on the one end, a gradual, profitable retreat from certain paper rates. On the other, using our strong financial position to act on opportunities to acquire competitive assets that lead to product diversification and grow into key markets where the prospects are more favorable, such as pulp and wood products.

Now, I will make a few brief comments on Fibrex. We are excited that to date we own 48.8% of its outstanding stock. Our offer currently expires on Friday, May 4, and our goal remains to integrate the Company within the Resolute Group as quickly and efficiently as we can. As we said before, with our network of sawmills in the [Mille Lacs sagent] region and our presence in the Province of Quebec, we believe we are uniquely positioned to generate more value from fabric assets than it could as a stand-alone contingent. I will now turn the call over to Jo-Ann Longworth to review the results in greater detail.

Thank you, Richard, and good morning, everyone. Today, we reported net income of $23 million or $0.23 per share for the quarter ended March 31, 2012, on sales of $1.1 billion. Excluding special items of $16 million, net income was $7 million, or $0.07 per share. Special items of note net of tax during the quarter included a $15 million non-cash gain on translation of Canadian dollar net monetary assets resulting from a $0.02 strengthening of the Canadian dollar, a $12 million gain on the sale of assets, primarily timberlands, associated with our Mersey, Nova Scotia mill. $4 million in transaction costs related to our acquisition of Fibrex, a $4 million charge relating to closure costs, impairment, and other related expenses stemming mostly from a workforce reduction initiative at our Baie Comeau Quebec mill. Finally, a $3 million non-cash charge for tax adjustments related to our reorganization in 2010.

Total sales of $1.1 billion were down 8% compared to the prior quarter, reflecting the impact of seasonally lower shipments overall and demand decreases in market pulp and specialty paper. As Richard mentioned, we took approximately 85,000 metric tonnes of down time in newsprint, 35,000 metric tonnes in specialty, and over 77,000 metric tonnes in pulp. Compared to the fourth quarter, average transaction prices were up 9% in wood products and 1% in specialty grade. Newsprint was stable. However, coated and pulp prices fell 4% and 6% respectively.

Newsprint exports represented 43% of total newsprint shipments, a 2% increase from the previous quarter. Most of that increase represented higher shipments to Latin America where demand increased overall, as Richard mentioned. Notwithstanding the slight change in the geographic mix of sales, the international newsprint market remains challenging, particularly in Europe and Asia as a result of the continued strength in the US dollar, lower prices for old newspaper, and a weaker euro.

Cost of sales were down 3% compared to the previous quarter reflecting lower volumes across most segments and favorable input costs in newsprint, primarily from lower old newspaper prices and power prices. These were partially offset by the stronger Canadian dollar and $17 million for annual maintenance outages at our Coosa Pines and Catawba mills. Distribution costs decreased by 8% in Q1, also reflecting lower shipment levels versus Q4 of last year. Selling, general, and administrative expenses were down $4 million or 11% against the previous quarter due mainly to a $9 million refund of certain group benefit premiums we paid in prior years. SG&A also included $4 million of transaction costs related to our acquisition of Fibrex, as I mentioned earlier. Interest expense at $16 million in the quarter was $2 million lower than the previous quarter as a result of the redemption in November of $85 million of our senior secured notes.

We recorded an income tax benefit of $10 million for the quarter, primarily the result of favorable adjustments related to R&D tax incentives as well as foreign exchange related items. These were partially offset by the previously mentioned unfavorable reorganization related adjustments. We expect our effective accounting tax rate to be approximately 30% on a normalized basis, excluding currency translation impacts and other adjustments. We do not anticipate paying meaningful cash taxes in the near term.

Management continued to focus on working capital improvements during the quarter reducing it a further $14 million. There was a $60 million drop in accounts receivables, $28 million of which came from reduced trades accounts receivable on lower sales revenue as well as a $32 million drop in other receivables largely as a result of our ongoing efforts to accelerate the collection of Canadian indirect taxes as well as road construction credit. On the other hand, inventories rose $26 million due to the seasonal increase in logs at our sawmills. Cash rose by $41 million in Q1 to $410 million resulting in a net debt position of $210 million. When added to our availability on the ABL credit facility, our liquidity at the end of the quarter was a healthy $900 million.

With the reduction in working capital, we generated cash flow from operating activity of $57 million in the quarter. We also received $26 million of the sale of non-core assets including $24 million for the sale of a portion of our Mersey timberlands. We spent $39 million on a variety of quality improvements and efficiency enhancement projects at a number of our sites, including a condensing turbine at our Thunder Bay pulp mill which will improve its competitiveness.

Consistent with the previous quarter, we made $25 million of pension contributions. As reflected in our cash flow statement, this funding exceeded pension expense by $18 million. We expect funding to be essentially unchanged second quarter. I will remind you in that third quarter last year we prepaid $25 million of pension contributions we would otherwise have had to make in the first two quarters of this year.

Thank you, Joanne, and with that, Ann, we'd like to open the call for questions.

Thank you. We will now take questions from the telephone lines.

(Operator Instructions)

We have the first question from Tarek Hamid of JPMorgan. Please go ahead.

Good morning. Thank you. Can you talk a little bit more about the coated paper segment, particularly the $30-a-tonne price decline in that segment relative to flattish prices in specialty papers? Sort of any color you could add would be helpful.

Well, I think that when you look at the stats for the first quarter, demand is down 8.3%, so I think that with -- and demand seems to be weaker and I think that you can relate that to consumer confidence and also retailers and cataloguers that seems to be very cautious with their budgets, with their print advertising budget. As you are aware, they are at $40 for price increase that has been announced for July, but I think that we need to see how the demand is going to evolve in the second quarter. Obviously, we expect to see demand improvement on that side in the second quarter and for the balance of the year, but I think that we certainly remain cautious. As you certainly know, we had also maintenance of (inaudible) mills and we believe that we have the lowest cost in North America so we intend to, someone needs to run the mills on the pricing side. I think we need to wait and see how demand is going to evolve.

Okay. And then just sort of update us on sort of other major maintenance outages to expect through the course of the year?

Well, there are two mills that we are going to do our maintenance in the second quarter and after that it's all going to be done, so I think we do not expect any significant outside of our budget maintenance for the second quarter, so I think it's going to be as usual and after that it's going to be done for the balance of the year.

Great. Thank you very much.

Thank you. Our next question is from Bill Hoffman of RBC Capital Markets. Please go ahead.

Good morning. Richard, I wonder if you could talk through your capacity management strategy for newsprint, specialty grades and pulp, second quarter and maybe through the balance of the year, but with this kind of high amounts of economic downtime, thoughts about further machine rationalizations?

Well, I think that the strategy that we have is really to make sure that we produce only what our customer orders and certainly in the first quarter with newsprint demand down, and especially in Europe and Asia, it's not really down in the export market, it's rather the low O&P and the strong US dollars that basically made our mills in North America less competitive. So, when you look at the relative value in converted euro, the European producer of gain on the weakening euro, as you are probably aware, the furnish of European is mostly recycled so with the significant decline in O&P has provided what I call temporary advantage to the European and recycled producer. So, I don't think that it's going to last for long, but as long as we have this condition, I think that we're certainly going to continue to manage our capacity.

It's probably worth mentioning that even with the significant decline in overseas shipment, it was over 20% in the first quarter, we basically increased our total shipment overseas, including Latin America by 2 percentage points. We spent 42% of our total shipments, export shipments, in the first quarter compared to 41% in the fourth quarter so we took advantage of our strong position to increase our shipments into Latin America in the first quarter. So, what's going to happen in the second quarter, I think that we need to wait and see the impact on O&P, and O&P started to creep up, so I expect some improvement on this side and the other factor is we need strong US dollars, and I would not make any forecast because I just don't know.

Don't forget also that Q1 is seasonally lower than any of the other quarters. And if you look at specialty, I think that obviously I think that when you look at the coated mechanical sold, that demand was down by 18.9%, so it's a very significant churn, way higher than we have had and when you look at high gloss [at C and FCB] it's down 27%, and lightweight 17%. Lightweight, it's directory, not much of a surprise there but, again, the environment and the retailers and print advertising, which we (inaudible), very cautious and we expect that the improvement is going to be shown for the balance of the year.

Do you have any sense of how much of this drop in the first quarter might be permanent?

Well, it's a question that I just don't know the answer on it. So, I think that when you look at the stats, there's probably, as I mentioned, some switching to lower cost rate, and when you look at the domestic demand in North America in newsprint, it's down only 2.6%, so there is probably a portion of it that has moved to a lower cost rate, but I think that certainly high gloss with the closure of the [Fort Ogsbury] machine, so there is less, there is 400,000 tonnes that has disappeared so you have to expect that the demand is going to decline. But on the other grade at CB and soft-nip (inaudible), I think there's certainly some substitution that we believe is happening, but we're going to have a better idea if that kind of decline is going to continue. We doubt it. We believe that we're going to see an improvement for the balance of the year, but I think that, again, we're cautious on expectations here.

I'm sorry, just last question. Do you think as you look at the specialty grades, can you just talk about your strategy, thinking potentially about sort of acquiring a lot of the other specialty grade producers out there and so you can have a much better balance on that market?

Well, I think it will, but a very much focus on our cost and on our mills. I think that we have a pretty good net worth and if you look at even the initiative that we had on optimizing manning at four of our mills, we're focused on trying to get the best cost possible and I think that -- I don't think that -- it's not an objective of -- one of our objectives to look at producers and try to consider it more. So, I think we're more focused at this point and look at optimizing and when you have lowest cost, you have a better chance to be the company that continues to operate and continues to generate margin.

Thanks for that thought.

Thank you. Our next question is from Joseph Von Meister of Bennett Management. Please go ahead.

Hi, Richard. Could you talk about the coated paper operation? I know that plant is very efficient. I think last year you had operating problems related to the maintenance turnaround, but then it took longer to get the mill back up. I forgot the exact nature of the problem. This year you managed to do worse than you did last year on relatively flat volumes, and I'm talking about on an operating cost basis. So, I'm wondering what happened down there, if there's anything unusual or whether we should expect that coated paper operation to produce single-digit EBITDA in the first quarter of every year?

Well, the first quarter is always the time of the year where -- when we do our major maintenance on the pulp mill. This year we also replaced the dryer on our large machine -- [the machine in the tree] -- that is an event that is not going to be repeated, as have some, because when you restart -- install a new piece of equipment, you always have some difficulties that you have to address. But I think if you look at the history of this mill, and I think that the first quarter was always the one where we do our major maintenance, you have to expect that the first quarter is always going to be lower than the other one, and I think that going forward maintenance is done. Now, we have the dryer on the machine that has been installed and the bugs have been basically addressed and I think that we're certainly hopeful that everything is in control and we're going to continue to address strongly the items that we control, and this mill has certainly a potential to even be lower cost. The other one also that I would like to mention is that the chemical costs were up this quarter because of inflation and fuel costs, chemicals that are oil based.

So, that all amounted to a $20-a-tonne increase over last year's first quarter where you had, I think, and you would know better than I do, but wasn't it a one-week delay on getting the machine back up because of problems?

We always had some operating issues when you install a new piece of equipment, but we don't have real specific items that we have. If you look at the quarter, costs increased by $10 per tonne. If you look at Q1 of 2011 to Q2 of 2012, adding the impact of this piece of equipment that we installed and, as I mentioned, the increase on chemicals that basically we do not control, I think that you can expect that the other quarters are going to show an improvement on cost.

There's no doubt in my mind that you're seasonally weak in the first quarter when you do your maintenance outage. I was under the impression that last year was an extremely difficult quarter and so this would be an easy comp, and so I was just a bit surprised to see the EBITDA from the coated side of the business lower than what was supposed to be an extremely easy comp on relatively flat transaction prices and flat shipments, relatively flat shipments. So, you put in a new dryer and the chemical costs explain the deterioration in EBITDA versus last year?

But the price also went down. If you look at pricing, pricing went down. If you look at our disclosure, price went down by $4 a tonne, so you had another item here where pricing had also an impact.

Right.

And with the announcement of $40 in July, assuming that this price is going to be implemented in its totality, we should see an improvement on pricing and on EBITDA.

And on the subject, can you talk about your expectations for O&P for the balance of this year?

Well, it's difficult to forecast O&P, and I think that the reason that O&P price came down was a slow down in China purchase and I think that lately they have restored their buying pattern and price went up, so I think that it's probably China. If you look at demand, newsprint demand in China in the first quarter, if I'm not mistaken, it's up 9.9%, close to 10%, so you have to expect that they're going to buy more and it's likely to put pressure on O&P and I would not be surprised to see O&P pricing creeping up significantly for the balance of the year.

Thanks so much, Richard.

Thank you. Our next question is from Paul Quinn of RBC Capital Markets. Please go ahead.

Thanks very much. Good morning. Just a question on maintenance. Just if I heard you right it was a $17 million cost for Coosa Pines and Catawba in the quarter. I just wanted to know what that quarter-over-quarter change would be for the Q2 maintenance?

Well, I don't know exactly. It should be less than that, but I don't know by how much because the most expansive one, Catawba and Coosa Pines, we had extensive maintenance and with the down time that we took at Coosa Pines we were able to use more of our maintenance crew and avoid the outside [complankers]. We mitigate somewhat the expense on maintenance, but I would expect that the maintenance at the other pulp mills should be lower than the $17 million that we had in the first quarter.

Okay. And then -- so, for the balance of the year after it's done in Q2 you will have nothing in the back half, right?

No, nothing.

Okay. And then just CapEx for 2012, what's your expectation here?

I think that we -- the guidance that we gave on CapEx is 65% of depreciation and I think that we are going to be on the surrogate. I think that we have identified the CapEx we have. It's really focused on the mills that have the best performance and the mills that we have identified as the long-term survivor. I think that it's project underway basically address quality issues and also are going to help on the cost side somewhat.

Okay. Just lastly, on the specialty side you outlined the almost 20% drop in demand in the quarter yet we've got that -- a big mill back east that looks like it's going to start up again. How do you manage that business in light of what looks like additional capacity coming to the market with demand falling off the edge of the cliff here?

Well, the -- on the [NCE] we only have one machine competing with this large, large machine that is rumored to restart. I think that we're going to see what's going to happen with this restart and I cannot give you in advance what kind of behavior we're going to have but certainly with the focus that we have on cost, we're certainly trying to compete on it and -- but it is certainly on [NCE] if you look at the decline was 21%. So, to bring 4,000 tonnes in the market that has declined by 21%, well, you can draw your own conclusion.

Okay. Thanks very much. Best of luck and congratulations on February.

Thank you.

Thank you. Our next question is from Ethan Schwartz of Contrarian Capital. Please go ahead.

Hi. A couple of newsprint questions. First, do you have any sense of whether the [Zatacona] mills is going to open up on the newsprint side? Is that clear yet what the situation is there?

It's only rumor, so I think that we have more access to the French newspaper in this province or there is certainly rumors that they are looking at restoring it, but we just don't know what's going to happen.

Okay. And then in Asia, I know that Australian circulation has been declining and I heard you say that most of what you're suffering in Asia is a result of O&P prices and euro depreciation. Are you seeing anything as far as exports out of Asia or exports out of other developing countries into Asia that are in any way tamping down prices, anything other than the euro issue or the L&P issue?

Well, we don't see it as anything else and when you look at the stats and world demand was down 1.4% but when you look at Asia it is up 2.6%. I mentioned China, even South Korea is up 9.5%. If you look at Latin America and its number that we have at the end of February, Latin America is up 9.4%. So, there is certainly countries in the world that demand is growing. So, I think that what is certainly worth watching is what is going to happen in Europe because obviously when you look at the stat in Europe, overseas shipments or export shipment went up by 21% but, as I mentioned, the weak euro has provided them what I call a temporary competitive advantage.

Okay. All right, thanks very much.

Thank you.

(Operator Instructions)

Our next question is from [Ed Chuck] of Archview Investment Group. Please go ahead.

I'd just like to clarify if the $9 million gain from previous pension costs is backed out of your $71 million of adjusted EBITDA?

Hi. It's Jo-Ann. No. The $9 million is actually on other group benefits and, no, it is not backed out of the adjusted EBITDA.

Would you clarify -- would you classify that as a one-time item?

It's certainly not a quarterly item, but we do have true-ups normally on all of our benefit plans once a year.

And is that cash or non-cash in nature in terms of the true-up?

The group benefit is a cash item.

Okay, great.

Or will be a cash item, yes.

Okay. Do you have any update on potential future pension funding as it relates to the solvency ratio?

No. As you know, the solvency report is due in June, so once that's done and we've had a chance to meet with the parties concerned, we'll progress through the balance of the year.

Would you expect an update in the second quarter call or is that still too early?

Probably even at that point too early.

Okay. Then just lastly, have you ever disclosed the mix of pulp -- in market pulp that you sell in terms of soft wood versus hard wood? Just trying to understand how I should be looking at pricing going forward based off of the movements in softwood versus hardwood.

I think that when you look at the mills we have, basically 75% of our 1 million tonnes that we sell on the market is softwood and 25% hardwood, and I think that the -- there's more softwood that we sell on the market in percentage and when you look at the pulp shipment by grade I think that fluff is 46%, Southern bleach softwood is 22%, Northern bleach is 29%, hardwood is at 13% plus 23% so it's basically the grade mix that we have on pulp.

Great. Thanks.

Thank you.

Looks like we've exhausted the list of questions, so I would like to thank everybody for joining us today and thank you, Richard, thank you, Jo-Ann. I will turn the call back over to the operator.

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.