Resolute Forest Products Inc (RFP) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products fourth quarter 2013 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.

All right. Thanks, Paul. Good morning, everyone, and welcome to Resolute's fourth quarter earnings call. Today's we'll hear from Richard Garneau, President and Chief Executive Officer, and Jo-Ann Longworth, Senior Vice President and Chief Financial Officer.

You can follow along with the slides for today's presentation by logging on to the webcast, using the link in the Presentations and Webcasts page under the IR 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 today involve forward-looking information. Our statements are based on our current assumptions, beliefs and expectations, all of which involve a number of business risks and uncertainties, and, accordingly, can change as conditions do.

Richard?

Good morning and thank you for joining us today.

We generated $110 million of adjusted EBITDA in the fourth quarter. That's 6% more than the third quarter and 13% higher than the same period last year.

For all of 2013, adjusted EBITDA was $377 million, down 4%. It was $93 million in Market Pulp, and $17 million in Wood Products, but it fell by $56 million in Newsprint, and $56 million in Specialty Papers.

We lowered our overall manufacturing costs by over $30 million in 2013, with asset optimization and mill restructuring initiatives, and increased external power sales from co-generation facilities, which are now fully operational. That was despite headwinds from higher-than-expected maintenance costs, higher overall fiber costs, and increased fuel costs, mostly natural gas pricing.

In the fourth quarter we generated adjusted EBITDA of $38 million in Newsprint -- so, it's up $7 million from the third quarter -- $31 million in Specialty, down $2 million; $29 million in pulp, down $5 million; and $18 million in Wood Products, up $9 million from the previous quarter.

The total North American demand for Newsprint was down by 9% in 2013, with a 10% reduction in demand from newspaper publishers and 6% from other users. Globally, demand was down by 5%. Western Europe was down by 6% and Latin America was down by 7%, but demand was up 7% in India.

The 11% increase in exports helped North American producers ship only 4% less, overall, than last year, with a 31% increase in shipments to Asia, and 2% to Latin America. Accordingly, the shipment-to-capacity ratio in North America remained at 92% for the year compared to the global average of 90%.

Pursuing opportunities for higher margin tonnes, we grew North American shipments in the fourth quarter, reducing to 41% the portion of total shipments to export markets where the market recovery has been sporadic. Nevertheless, our export sales were about 44% of total sales in 2013 compared to 41% in 2012.

After running the network at near capacity in the fourth quarter, we expect to maintain our Newsprint volume into the first quarter, despite seasonal loads, with our scale, financial strength, and lower cost operating platform, we are confident in our ability to be a long-term, reliable supplier to our customers.

North American demand for uncoated mechanical papers rose by 3% in 2013, with a 14% increase in demand for high gloss, as customers switched away from coated grades. Demand was down by 3% for standard grades.

The industry shipment-to-capacity ratio was 92% for the year 2013.

Coated mechanical demand was down 7% in the year. After being considerably higher through three quarters, imports fell significantly in the fourth quarter, finishing the year down 11% overall. The industry shipment-to-capacity ratio dropped 4 percentage points in -- during the year to 89%.

We expect to see lighter, but seasonally consistent, shipment volumes for our Specialty Papers, with supercalendered grades backing up their fourth quarter seasonal highs and coated papers under continued pressure from lower demand and also grade switching.

The chemical pulp market grew by over 1.5 million tonnes in 2013, up 3%. Regionally, North American demand was up 5%, China 9% up, while Western Europe was down 1%.

Softwood mills operated at a strong 94% ratio in 2013. Compared to the end of the third quarter, Resolute's finished good inventory fell by 21% or about five days of supply.

While our average transaction price in the fourth quarter didn't reflect recent industry price announcements, mostly on account of grade mix, we expect that the improving market conditions will be more apparent in the first quarter, particularly in softwood and recycled grades. But the timing of worldwide capacity increases, mostly in hardwood grades, makes the second half of 2014 uncertain.

2013 housing starts were 18% higher in the US, which positive affected our realized price, up $37 per thousand board feet, with shipments also improving by 3% to 1.5 billion board feet.

With US housing starts expected to continue to improve, we believe lumber pricing and shipments will certainly hold near fourth quarter levels, but costs will remain under pressure because of the comprehensive modification to the Province of Quebec's forest tenure system.

We made significant progress this year, including strengthening our financial position, and enhancing the efficiency of our operations, and improving our performance on safety and sustainability.

We strengthened our financial position in three key ways. The first one, we reached an agreement in principle with Company stakeholders in Quebec and Ontario to replace correct measures mechanism under the existing funding relief regulations in favor of stable, predictable, and balanced pension funding for our Canadian plants, which represent the bulk of the obligation.

Secondly, our balance sheet net pension and OPEB liabilities were down by $672 million. I want to emphasize that we have not wavered from our commitment to pay 100% of retirement benefits.

And third, we refinanced under a very timely basis all of our outstanding secured debt with $600 million of unsecured notes at 5-7/8%, reducing our cash interest burden by $16 annually, and adding five more years to maturity.

Since 2012, we optimized our Newsprint capacity by idling two machines, and we're restarting the Gatineau mill for a net reduction of about 285,000 metric tons on an annualized basis. In Specialty, we idled three machines and restarted the Dolbeau mill, for a net reduction of about 220,000 metric tons on an annualized basis.

Secondly, we also restructured many, yes, two more sites this year, eliminating 170 positions without reducing operating capacity. This alone represents a saving of about $17 million per year.

Compared to 2012, our asset optimization and mill restructuring initiatives together, reduced our cost by $42 million. We've grown, also, our pulp capacity by over 70% with our 2012 acquisition of Fibrek, and by the time Atikokan and Ignace begin production in early 2015, along with our capacity initiatives we're working on, we expect our annualized sawmill capacity to be around 1.9 billion board feet, which represents a 30% increase.

All four of our new power generation assets are now online. The external sales of power will reduce our costs by about $45 million this year.

Finally, we've restructured and significantly improved the performance of the three pulp mills we acquired in 2012. After the difficult start because of the extensive catch-up maintenance and environmental work required at the Saint-Felicien mill, we've made the three mills more competitive than under the previous management.

It's worth noting that with the capital project, environmental upgrades, the dredging of many years of accumulated sludge in the lagoons and costly repairs to the electrostatic precipitator, we've invested about $25 million at the Saint-Felicien mill alone.

We also achieved an OSHA incident rate of 1.02 in 2013. We are striving to have zero injuries, but our 2013 safety performance is considered world class.

We are closing in, ahead of schedule, on the goal we set as a member of the WWF Climate Savers program to reduce our absolute green gas emissions by 65% by 2015, compared to the 2000 level.

We also fell short on our internal commitment to reduce environmental incidents by 10% in 2013 compared to 2012, but we have developed an action plan to address gaps and improve performance. For 2014, we set a goal of reducing the number of mill environmental incidents by 10% compared to 2013.

Finally, we have taken action to stop certain environmental activists from spreading malicious falsehoods about us, not only to protect our own reputation, and that of our employees, but also to protect the reputation of our valued customers and business partners.

This year, we generated 45% of our adjusted EBITDA from Market Pulp and Wood Products businesses with long-term growth potential. This is our strategy in action, to retreat proactively from certain paper grades and build on our growth businesses, but our paper segments continue to play an important role.

First, the diversified and complementary nature of our asset base offers the dual benefits of more stable earnings from multiple products and the fiber management advantage of integration, and secondly, especially with our initiatives to maximize asset utilization and improve margins, paper generates significant EBITDA, which we use to finance our growth.

We've made a great deal of progress in these last two years and improved our competitive advantage. Increasingly, we are seeing our Newsprint and Specialty Paper customers prioritize the reliability in their supply chains, an advantage we offer because of our scale, financial strength, and lower cost operating platform.

This means that we will likely be able to run our pulp and paper network at nearly full capacity in the first quarter, despite the seasonal low period, and we expect to continue improving our margins through disciplined operation and inventory levels, producing only what our customers order.

But the road ahead is not without its challenges. First, a number of our collective bargaining agreements are up for renewal this year. As a company, we believe in succeeding together where every member's contribution is important to reach our collective goals and ensure our long-term success. We are optimistic that we can work with our union partners to remain a competitive employer, but also one that maintains its competitive edge.

Secondly, wood costs in Quebec will remain under pressure because of lower overall wood allocation and the comprehensive modification of Quebec's forest tenure system. Of the $26 per thousand board feet increase in wood product this year, about two-thirds is attributable to higher wood cost in the province. This includes the effect of the changes to the tenure system, and we're concerned that we haven't seen its full impact, which could push our costs even higher in 2014.

We have to keep our focus on costs. Our pulp and paper unit operating costs are down because of asset optimization and mill restructuring initiatives and the effects of external power sales from our new co-generation facilities. This shows in our Newsprint margins, which are back above 10%, close to where they were before the significant price drop in 2013.

Now, Jo-Ann will review our financial performance.

Thank you, Richard, and good morning, everyone. Today we reported 2013 net income of $107 million or $1.13 per share, excluding special items. Earnings were up 24% from 2012 on sales of $4.5 billion that were unchanged.

Net income in the fourth quarter was $32 million or $0.34 per share, excluding special items, up 13% from the fourth quarter of 2012.

GAAP net loss was $639 million in 2013, reflecting a $604 million non-recurring, non-cash income tax charge taken largely in the third quarter to reduce the value of deferred income taxes on our balance sheet. This reduction in no way affects our underlying tax attributes, including $1.8 billion of US net operating loss carryforwards, and it does not hinder our ability to use these NOLs to shield future earnings. We continue to expect that we will not have to pay cash income taxes over the medium term, neither in the US nor in Canada.

Other 2013 special items, net of tax, included a $59 million charge related to asset impairment and closure costs, a $38 million net charge related to the refinancing of our now-retired senior secured notes in the second quarter, a $26 million non-cash loss on the translation of Canadian dollar net monetary assets, and $23 million of mill startup costs.

GAAP net loss was $3 million in the fourth quarter. Special items included a $24 million charge related to asset impairment and closure costs, mostly from the extended market outage at our Fort Frances mill and the write-down of our US recycling assets; a $17 million non-cash loss on the translation of Canadian dollar net monetary assets; and a $25 million credit to the non-cash income tax charge taken in the third quarter.

In the fourth quarter, we combined the results from our coated paper assets with the Specialty Papers segment. This better reflects Management's internal analysis, given the increasingly high degree of substitution with super calender grades and the diminishing percentage coated papers represent in our product portfolio.

Total sales in the fourth quarter were $1.2 billion, up 2% from the third quarter. We shipped 5% more Market Pulp and 3% more Specialty Papers, mainly super calender grades. Wood Products shipments were down 9% from the unusually high level in the third quarter.

Overall pricing had a $14 million positive impact on sales in the fourth quarter, thanks mainly to a 7% increase in average transaction price for Wood Products, or $26 per thousand board feet, which recovered from its third quarter low.

Fourth quarter cost of sales was up $17 million or 2% due to the higher volume, higher fuel energy costs, mostly on seasonal usage, maintenance costs, including lost co-generation production, a write-down of fair-price inventory of $6 million with the extended market downtime at Fort Frances, and higher wood costs, including the effect of wet weather in the US Southeast. These higher costs were partially offset by a favorable power adjustment and the weaker Canadian dollar.

Newsprint delivered cost was $579 per metric ton in the fourth quarter, down $10 or 2% from the previous quarter. We benefited from seasonally lower electricity costs in the US Southeast, higher production from power co-generation assets, as well as a favorable power adjustment, despite an increase in fuel energy consumption due to the cold weather at Canadian mills.

The delivered cost in Specialty Papers rose 1% to $718 per short ton because of seasonally higher fuel energy usage in Quebec, the higher wood costs in the US Southeast, and maintenance-related costs, despite a drop in electricity, coating, and clay products.

Market Pulp delivered cost rose by 3% to $639 per metric ton, mostly because of higher maintenance-related costs, including lost co-generation production, fuel energy consumption at Canadian mills, and wood costs at US mills due to the wet weather.

In Wood Products, delivered cost per unit remained relatively stable at $353 per thousand board feet.

I will add here that, generally speaking, seasonality has a strong influence on costs, and this winter looks like it will be a particularly difficult one. We expect to see seasonal cost pressure in the first quarter, not just in terms of energy, but also because of weather-related constraints in our distribution network in both Canada and the US, in addition to product production disruption at mills facing unusually harsh weather conditions such as in the US Southeast.

Not including improved operating efficiencies such as labor, our co-generation assets reduced our costs by $10 million in the fourth quarter, $2 million less than in the previous quarter. The drop is due to lost production because of maintenance outages, including one co-generation and one pulp mill in the fourth quarter, versus only one pulp mill in the third quarter.

Closure costs and related charges were $29 million higher in the fourth quarter, to $33 million, mostly from the extended market outage at our Fort Frances mill and the write-down of our US recycling assets.

Turning to the balance sheet and cashflow items, cash and cash equivalents increased by $51 million in the quarter to $322 million. Net cash provided by operating activities was $96 million, $34 million higher than the last quarter, and $206 million for the year.

Balance sheet working capital decreased by $122 million in the quarter to $675 million due in part to a $41 million reduction in trade accounts receivable with a 2-day improvement in collections, but also in line with seasonally lower December sales, the collection of $33 million of road-building credits for prior years, and a $44 million reduction in the current portion of deferred income tax assets.

Capital expenditures were $37 million in the fourth quarter, in line with the previous quarter. At $161 million for the year, we came in slightly above the range of our earlier guidance because of the timing of certain projects.

For 2014, we expect spending on compliance and maintenance of business to be between 55% and 65% of depreciation and amortization, and we also expect spending on value-creating projects, including many carried forward -- carried over from 2013, to be between $75 million and $125 million.

Availability under our ABL credit facility at year end was $561 million for total liquidity of $883 million.

Pension contributions were $57 million in the quarter against an $11 million expense. For the year, pension contributions were $155 million compared to an expense of $44 million, in line with our previous guidance. For 2014, we expect total pension contributions to be approximately $165 million, while expense is estimated at around $30 million.

With rising interest rates, favorable asset returns, 2013 contributions, the favorable currency impact, and amendments to other post-retirement benefit or OPEB plans, we eliminated $672 million of net pension and OPEB liabilities from our balance sheet, down by one-third compared to 2012, without wavering from our commitment to pay 100% of retirement benefits.

We anticipate that in the coming months Quebec and Ontario will adopt regulations consistent with the agreement in principle we reached with Company stakeholders in those provinces in 2013. These regulations will replace the corrective measure mechanism with modest incremental contributions beyond basic funding, providing us with stable, predictable, and balanced pension-funding requirements. Accordingly, we accelerated $30 million of contributions to our Canadian plans in the fourth quarter, representing the incremental funding under the regulations, had they been adopted in 2013.

By the time we file our actuarial report, we expect that the solvency rate for our material Canadian pension plans will have increased by over 10%.

Thank you, Jo-Ann. Thank you, Richard. Paul, let's open the call for questions, please.

Thank you. (Operator Instructions). The first question is from Bill Hoffmann from RBC Capital Markets. Please go ahead.

Yes, good morning. Richard, I wonder if you could talk a little bit about your thoughts on acquisitions going forward, and trying to grow out further the Pulp and the Wood Products business?

Well, obviously, I think that I have mentioned previously that we like these two segments, Pulp and lumber, and we're going to continue to look for opportunities at the right price. So, I think that is where our mind is, and, obviously, I think that it's very important that you don't over-pay for any assets, and so we're going to continue to be on the lookout.

Do you expect in 2014 to be able to find some assets that are worth acquiring at this point?

Well, I don't want to speculate. I would like to, certainly, if we have -- we can identify opportunities, we're going to look at them, but that's -- sometimes things happen unexpected and I -- so unexpected opportunities are going to present themselves in 2014.

Okay, thank you. And just looking at the Newsprint and also the coated business, just from a pricing environment, the Newsprint business, obviously, continues to be challenged from a demand standpoint, but the market's reasonably balanced. Do you expect to be able to get prices back up to the prior levels, or is that an initiative that makes sense in the Newsprint business this year?

Well, again, it's -- I don't want to speculate on it. When we look at 2013, the demand went down in North America by 9% and world down by 5%. It's always a question of supply and demand. Presently, the market seems to be balanced, but operating rates at 91%, 92% normally means that the price -- pricing is going to remain stable.

So, obviously, if we were to see operating rates above that level, while it would probably mean an opportunity to look at it, but I think that as we speak and as we monitor the market, I know that there is some conversion that is taking place, but I think that it's certainly just balancing the supply and demand. And, again, when you look at -- we which monitor very closely the operating rates and that sell in -- at a level where just allows the environment to remain stable, the pricing environment to remain stable.

Okay, thank you. And then, just last question, with regards to your Specialty system, any thoughts on additional capacity closures to keep those markets tight, as well?

Well, I think that we have done a lot in the last three years. So, if you look at the machines we have closed -- that we closed and that we removed capacity, so I think we are at a point where the mills with two machines are running one, and we have optimized the mill manning and adjusted our consumption, and basically we're able to take advantage of fiber that's now travels the shorter distance.

So -- but I don't -- I think that our network is well balanced. We have mills that are cost competitive, and I don't see any closure in 2014.

Okay. Thank you. I'll get back in queue.

Thank you. The next question is from Tarek Hamid from JPMorgan. Please go ahead.

Good morning. Could you talk a little bit about some of the substitution that you've been seeing between some of the coated grades and some of the uncoated grades in your Specialty Papers? Have you seen that accelerate in the last quarter, or is it sort of just a continuation of the sort of ongoing trend?

Well, it's really difficult to -- I think that the switching that we saw was the -- restored, then, and volume availability on SCE. I think that my view, and it's only my view, I think the -- most of the switching from coated to SCE has taken place. So, I think 2014 should be -- we should not see the wide swing that we saw last year.

But, again, it's a question of demand, and how much demand is going to come down. But I think that we should see more stability, and I insist on the "should."

Okay. And then, just on the M&A front, acknowledging that kind of Wood Products and Pulp are certainly what seem to be, longer term, more attractive, there is I'd say a larger acquisition or merger going on in coated paper as we speak, and there are potential divestitures from that. Would you guys look at potential divestitures of a coated paper mill in the US or would you sort of tend to shy away from that?

Well, I think that it's difficult to comment on that. So, it would be speculation on my part. I believe that, obviously, we're just going to monitor that situation and I guess that it's probably fair to say that we'll advise, depending of how the situation will evolve in 2014. I mean, overall.

Okay. Then just finally, for me, you made some comments about the winter weather, and, obviously, it's been pretty horrendous this year. As you think about the cost impact of that in the first quarter, is there any way you can help us kind of frame it? Is it sort of double the normal impact across the business, seasonally, or something less than that, or something more than that?

Well, I think that what we had -- what they call this vortex, arctic vortex, has, while never been seen, at least, the -- our management in our US mills, US South mills that they didn't see weather as cold as that. So, we had to, basically, to take production down. We had piping that was frozen, control equipment that broke down, and, obviously, it's going to have a significant impact. We also had mills that we had -- we were curtailed on gas and also power of where -- at very high levels.

So, I cannot give you at this point the impact, but it is going to be material. It's -- and I think we're not the only one in this situation, and our mills, especially the ones in the US Southeast, well, unlike the Canadian mills they are not well winter -- protected the same way for winter.

But even in Canada, we also had some very significant challenges in Ontario and Thunder Bay we had unusual, unusual cold, and the same thing, also, in Quebec. So -- where we had to take a machine down because we didn't have the trucks or the rail car availability.

So, obviously, it's the first time that I see it in 40 years. So, I think that I (inaudible) that it's that we're -- we're over (inaudible), because it's quite difficult to manage, but I think that we're going, certainly, to have the opportunity at the end of the first quarter to talk about it. But it is not insignificant.

Understood. Thank you very much.

You're welcome.

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

Yes, thanks. Just a couple questions. One, just looking at the pension funding, like the guidance of the $165 million in '14, under your agreements, is that kept at that level for a number of years going forward?

Yes. Hi, it's Jo-Ann. Hi, Paul.

Yes, it'll be kept at that level going forward. It's basically, like we said, we had the $50 million of basic contribution originally and now we're adding that $30 million, which we paid already for 2013. So, we'll have the same payment in 2014 and in years going forward.

In later years, there are potential adjustments, again, if you're not on target, but so far, so good.

Okay. And then, just over on the -- I guess on the Pulp side, you mentioned flat pricing, despite higher list prices and favorable currency. I'm just trying to reconcile that. You mentioned mix, but I'm not really seeing the mix. Maybe could you just give us a little bit more detail on that and why it's so flat?

Well, Jo-Ann is going to add a look at the mix impact that I mentioned.

Some of it was just in terms of hardwood versus softwood, Paul, and, as well, we had some more spot pricing in some of our US mills. So, that's why you didn't see necessarily the price increase you thought that you would see.

Okay. And just if you could give us an idea of 2014 maintenance schedule on the Pulp side?

Well, I think that it's going to be the Catawba. We have Catawba. We're going to have, also, Saint-Felicien and Thunder Bay. All the mills are going to have their -- but I don't have in front of me the schedule. But, as you know, we changed the way that we account for it, so, it's going -- basically, when we do the -- our maintenance outage, so it spreads on the -- that ends up the remaining period until the next one. So, it's not going to have the same really swing that we used to have in the past with the change that was implemented, I think, two quarters ago.

Okay. So, it'll be pretty consistent for the year, on a seasonal basis?

Yes.

Okay. And then just on the Newsprint side, it seems to me you've done a great job on the cost side, but we've still got demand falling a good 9%. You're guiding for maintaining volume in Q1. And we've got this weaker Canadian dollar, which sort of helps, I guess, your Canadian competitors.

Where do you see the future direction of demand and pricing in this environment?

Well, as I said, I think that when we look at supply and demand, and the operating rate, for the time being it's going to -- it's flat. I don't see any change of direction. Obviously, the exchange rate is for the Canadian mills. It's certainly a benefit, so we all know it, but what the -- decline in demand, so I think that what's going to happen on that side, I don't know.

There's also, Paul, as you know, some machines that are now being converted to lightweight paperboard. So, one in the Southeast and one in the Pacific Northwest. So, obviously, it helps on the supply and demand side, and there is also, from what we hear from the analysts other financial conversions that could also be added.

So, I think it's a reason why we see that Newsprint for 2014, we're certainly optimistic that we are going to find a balance here, and, obviously, with stable price, assuming that the supply and demand balance does not change, it is very important that we continue to focus on our costs, what we have done in the last three years. But, as you probably imagine, at the end, it's becoming more difficult to find opportunities to bring costs down. So, especially with our capacity in Quebec and the major significant modification made to the tenure system could -- and I think that our wood cost is certainly going to be under pressure. So, it may affect, as well as the other producers in the province, the wood costs going forward.

So -- but, again, it's in balance (inaudible), and we're going to monitor the situation. We still believe that the export market is still a very good opportunity. So, a market of 25 -- about 25 million tonnes. So, I think that -- and it's profitable. It's certainly a segment that is going to help us to grow on the sawmill side, the investment in Ignace and Atikokan, and also the project that we had to increase the capacity at Thunder Bay and the project that we had is not completed to increase the capacity at our Comtois mills in northwestern Quebec.

Okay. Last question. Just on the potential conversion, and it's something that your Company tried in the past to go the containerboard route. Since that time, we've seen containerboard prices move up over $100 a tonne. Is that something that you guys are still considering at some of your operations?

No.

That's definitive. Thanks very much. Best of luck.

You're welcome.

Thank you. The next question is from Sean Steuart from TD Securities. Please go ahead.

Thanks. Good morning, everyone. A few questions.

With respect to your Specialty Papers segment, I'm wondering if you can maybe just break down some of the price trends across the grade spectrum there on the uncoated groundwood side and, I guess specifically, what I'm wondering is, have you guys proposed follow-on price hikes for some of the -- I guess the high-bright grades that would compete against the uncoated free sheet market for March?

Well, the -- certainly one grade that is going to benefit from the uncoated free sheet price increase is our high-bright, maybe at Alma and also Calhoun. So, I don't know -- I think that there is certainly an opportunity or potential here to see improvement on this side. We haven't decided what to do at this point. So, I think that we want to have a better idea on how demand is going to shake up with the very cold weather that we had.

So, I think that it's not only us that had difficulties with our mills, but I think that there is also a -- it's slower on the business side, but we expect that it's going to improve when the weather improves, and normally in February it's the indication that we have up here, it's better. So, I think that demand should also go in the same direction.

Okay. When you -- Richard, when you think about growth initiatives, whether it's Pulp, lumber, or both, can you just speak again, and maybe, Jo-Ann, you can add some context. How comfortable are you taking your leverage up? What sort of, I guess, base liquidity position are you guys comfortable with? And I guess what I'm getting at is where do you see your capital structure gravitating to over time as you grow through acquisition?

Well, I think that it has to remain manageable. I -- certainly, I don't like too much debt. We've seen the damage of excessive leverage. So, I think that we have to keep that in mind. I think you can have profitable growth, but you have to consider the long-term implications. Now, it's -- if I were to know that the interest rate environment is going to be that low for 25 years, I think it would probably a decent investment to make, but who knows?

And I think that you have to be prudent. You have to manage growth with that view, you can basically digest it, and show that you're -- longer term, that you are going to increase shareholders' value. And that's really what we have in mind when we look at potential growth. And I think that what we have done, the organic growth and the acquisition of Fibrek, I think that just showed that, and the intention is going to continue to look at it the same way, but it's always depends on the opportunities that we're going to have, and I cannot speak on that, because we just don't know.

But no target leverage ratios or liquidity level that you guys are focused on?

No. No.

Okay. And last question, I'm wondering if you can give some context on what's happening in pricing for the recycle pulp grades you guys acquired through Fibrek. Is it moving in lockstep with hardwood? Any differentiation there?

Well, it's -- obviously, the price has been relatively stable, and demand has been also steady on this grade. Obviously, these two mills produce an excellent quality, and as we mentioned in previous calls that we have brought the production down to about 450, 425 (inaudible) tonnes per day.

So, and I that we're basically -- we're focused on profitability, on margin. We may have the opportunity, certainly, with the -- it's a question of supply and demand. I don't have in front of me the pricing, but still, we haven't see, really, the large variability that we saw in the past. So, I think that the strategy that we have applied, we're pretty pleased with the results.

So -- and I think that we're confident that 2014 the environment is going to remain the same. There is, obviously, on tissue, we have many customers on tissues, and the away-from-products are made, mostly, from recycled pulp. That brings a -- brings a stability into the market.

And when I look at price, now I have -- I was looking for notes, and I think that price has been quite stable, went down a bit in the last couple of months, but not a major difference. It's $5 or $6 per tonne. So, it still would be in the second quarter we had -- second and third quarter we had the $7 decline and third and fourth another $5. So, pretty stable in terms of the pricing environment.

Okay. That's helpful. That's all I had. Thanks, guys.

Thank you.

Thank you. (Operator Instructions). The next question is from Bill Hoffmann from RBC Capital Markets. Please go ahead.

Thanks. Richard, just one more question. On the forest tenure and the cost increases, I wonder if you could just talk a little bit more about that, whether there's any flexibility in that and whether you can also have any thoughts on how much the costs will go up? And also, if you can comment on that within the context of your -- the additional capacity you'll have coming on in 2015?

Well, most of the additional capacity is in Ontario. So, it's not in Quebec.

Okay.

So -- and we have a small capacity increase at Comtois, as I mentioned. It's -- I think that, really, the tenure system is being implemented. What we are seeing is certainly a significant increase on the operating costs, road maintenance, because now you cannot plan in advance on where you're going to get your wood, so -- and the timing of when the wood is offered for auction, now you have to plan for road construction, and we had lots that came available in October. October, it's not really the right time to build roads when it rains. And so, stumpage is also going up.

So, all of those factors that are -- that's very difficult, basically, to predict, to forecast, but I think that we could see another increase of 5% or even more. So -- and, I think that this year, 2014, we're going to have a very good idea of what the future is going to be, what this new (inaudible) tenure system. But it has not been easy to deal with, and we don't have the full knowledge yet of all the implications that it's going to have.

So, we'll certainly -- it's an area of concern, but there is -- when there is difficulties, there are also opportunities, and we're going to look at these opportunities.

Okay, thank you.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back to Mr. Lalonde.

Okay, great. Well, let's leave it at that. And thank you, everybody, for joining us today.

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