Resolute Forest Products Inc (RFP) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products first quarter 2014 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. Good morning, everyone. Welcome to Resolute's first quarter earnings call. Today 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 Investor Relation 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, everyone, and thank you for joining us today.

We generated $40 million of adjusted EBITDA in the first quarter compared to $110 million in the previous quarter and $73 million in the same period last year. This is a disappointing outcome as this winter's extreme cold caused a material increase in energy costs, production disruptions, equipment failures, and also distribution constraints.

We generated adjusted EBITDA of $3 million in newsprint, down $35 million from the fourth quarter. We were negative in specialty papers, down $33 million; made $31 million in market pulp, down $8 million; and $20 million in wood products, up $2 million from the previous quarter.

Operating costs generally peak in winter but this winter was severe, greatly overcoming the favorable effect of the weaker Canadian dollar. The abnormally cold winter is responsible for the $55 million drag on earnings caused by, first, $17 million of higher steam costs due to higher pricing at most of our mills and an increase in usage, especially in the US Southeast; second, a $16 million increase in electricity costs at our Ontario mills as a result of volatility and sharp increases in market-based power rates; third, $9 million associated with pulp and paper production loss due to natural gas curtailments, electricity costs and other process limitations; and fourth, a $13 million hike in the cost of freight, fiber in the US, labor, chemicals and maintenance.

Distribution constraints for lack of courier availability also caused increases in inventory. What is more, this quarter we also encountered a greater than expected level of operational disruptions, including mechanical failures in Catawba, Saint-Felicien and Augusta. These operational disruptions which were unrelated to the cold weather accounted for about 25,000 metric tons of lost production in the quarter in addition to $7 million of additional costs.

Let's review market conditions. Total North American newsprint demand weakened by 7% through March reflecting a 9% reduction from newspaper publishers and a 4% increase from other users. Globally demand decreased by 5% through February, including a 5% decline in Asia and 11% in Latin America, most of which was Venezuela. Western Europe also was up only 1%.

Consistent with North American industry exports, we increased the international portion of our full shipments to 42%. Compared to the same period last year North American producers' export were down 5%. With the timing of industry production adjustments, lagging demand declines, the shipment-to-capacity ratio slipped to 89% this quarter compared to 91% in the year-ago period. Our average transaction price slipped by $13 in the quarter, mostly because of the weaker Canadian dollar, sales mix and price deterioration in certain export markets.

Contrary to earlier expectations, shipments also slipped this quarter but it was due to weather-related disruptions, a mechanical failure at Augusta and shipment timing. Accordingly, we expect to work down inventory in Q2. While recent industry conversion announcements such as high operating rates later this year, prices could continue to erode in certain areas.

North American demand for uncoated mechanical paper slipped by only 3% in the first quarter. Demand for super-brites and high-brites together rose by 4% and demand for supercalender grade was flat, but lightweight grade in which we have only a small presence were down by 20%. The industry shipment-to-capacity ratio was 87% compared to 89% in the first quarter of last year and 93% for the full-year 2013.

Coated mechanical demand fell by 7% in the quarter. Imports were 10% lower than the previous quarter and 24% lower than the same period last year, helping in part to alleviate the supply/demand balance. The industry shipment-to-capacity ratio was 88% compared to 92% in the same period last year and 87% last quarter. Reflecting shifting end-use markets, our average transaction price for coated mechanical grades was down by $37 per short ton in the quarter and down $16 per short ton in supercalender grades. Shipments were down, affected by seasonality, weather-related disruptions and the mechanical failures at Catawba. We expect the coated paper portion of the specialty segment remain under pressures as a result of the low operating rates.

Overall demand for market pulp slipped by 1% compared to the first quarter of last year. China rose by 2%, but North America was down by 2% and Western Europe, the world's largest market, was down by 4%. Global demand for softwood pulp was flat, but down 1% for hardwood.

Softwood mills ran at 93% shipment-to-capacity ratio in Q1, unchanged from the same period last year. Hardwood mills, however, were at only 87%. We recorded average transaction price increases across each of softwood, hardwood, [RBK] and [slub] grades for a $22 per metric ton increase overall. And unfortunately, shipments were down this quarter, in part because of shipment timings and internal consumption, but also because of unforeseen events such as shipment constraints and production disruption associated with the severe weather as well as the mechanical failure. As a result, we did not benefit in full from favorable market conditions. Nevertheless, we expect to work down inventory in Q2, but it remains difficult to predict the impact of worldwide capacity increases, mostly in hardwood grades, expected over the course of the year.

We have also planned to do the annual outage at two mills in the second quarter, Coosa and Calhoun, which will affect production by about 20,000 metric tons.

US housing starts have been sluggish this quarter, likely due to weather. Seasonally-adjusted housing starts averaged about 925,000 in the first quarter compared to an average of about 960,000 in the first quarter of last year. Our average market price rose by $6 per thousand board feet.

Though higher than the first quarter of last year, shipments slipped by 27 million board feet as a result of the winter impact on demand and also on carrier availability.

I'd like to take a moment to highlight some important developments. First, we announced in February that unionized employees at four of our US pulp and paper mills voted overwhelmingly in favor of a five-year renewal of their master collective agreement. Our total US pulp and paper operations represent almost half of our total pulp and paper production capacity. We are pleased to have quickly reached an agreement with union leadership and members to ensure we remain a competitive employer, but also one that maintains its competitive edge.

Second, we announced in March a significant upgrade to our Calhoun, Tennessee pulp and paper mill, including the installation of a modern continuous digester and other chip processing equipment. When completed by mid-2016 this will help significantly lower the mill costs, increase its pulp capacity and improve its grade flexibility. With the ability to produce a range of products from specialty papers such as Align uncoated freesheet substitutes to value added grades, the mill will better be able to adjust with the market.

We also continue to make progress to grow our sawmill capacity as our Atikokan and Ignace sawmill projects are moving on schedule to begin production in early 2015. As part of ongoing efforts to optimize the asset base, we recently -- we started the idle paper machine (inaudible) at Calhoun to produce mechanical grades. While we were pursuing opportunities to continue to operate the biomass borers and electricity-producing steam turbine, it appears that we will not be able to successfully (inaudible) from the rest of the Fort Frances mill, including the specialty machine presently under an extended market outage. We spent about $9 million in the first quarter to keep the mill in not idle mode.

Finally, on March 21st, on the UN 2014 International Day of Forest, we launched www.borealforestfacts.com to provide a new digital resource to highlight our ongoing efforts to promote sustainable forest management in one of the world's most vibrant ecosystems. The site includes information about the boreal, the forest product industries and the future of this renewable forest upon which so many of us depend.

I would like to remind everyone that less than a quarter of 1%, a quarter of 1% of the boreal is harvested each year with five times -- yes, five times the amount affected by natural disturbance such fire, disease and insects. Of course in the Ontario and Quebec boreal forest about 75% of the forest naturally regenerates and the other 25% is promptly reseeded or replanted.

It is also worthwhile to point out that over 40% of the boreal is completely out of bounds for the forest product industries in both Quebec and Ontario. Of the remaining area that constitutes the managed forest, a significant portion has already been set aside for conservation, biodiversity and other purpose.

I'll close by saying that we are presently at the bargaining table discussing the renewal of labor agreements covering 11 of our Canadian pulp and paper operations. Eight of those mills, representing about 35% of our total pulp and paper production, now have the ability to take work action. As a company we believe in succeeding together where every member's contribution is important to reach our collective goals and to ensure our long-term success. Both sides of the table have been engaged for almost two weeks now and we are making progress. Out of respect for the process I will not comment on the discussion yet except to highlight that it is absolutely in everyone's best interest to reach an agreement that works for both sides.

I'll now invite Jo-Ann to review our financial performance.

Thank you, Richard, and good morning, everyone.

Today we reported a net loss of $26 million in the first quarter, or $0.27 per share, excluding special items on sales of $1 billion. GAAP net loss was $50 million. The special items included a $16 million non-cash loss on the translation of Canadian dollar net monetary assets, as well as an $8 million charge for idling and cleaning costs at Fort Frances and accelerated depreciation for a machine closure at Iroquois Falls.

Total sales were $1 million, down 12% from the fourth quarter. Shipments fell in each of the segments; 6% in newsprint, 11% in specialty, 20% in market pulp and 7% in wood products, which reflects the impact of the severe winter, the operational disruptions, seasonality and shipment timing. Overall, pricing had a $2 million unfavorable impact on sales with increases of 3% in the average transaction price of market pulp and 2% in wood products, which more than offset declines of 2% in newsprint and 3% in specialty papers.

First quarter cost of sales was down $53 million or 6%. Excluding the effect of volume, cost of sales rose by $7 million. We did not experience the full benefit of the weaker Canadian dollar, or $23 million, nor the $6 million of lower pension and other post-retirement benefit, or OPEB expenses, because of an increase in overall manufacturing costs. Such manufacturing costs suffered because of the greater than expected operational difficulties of $7 million and the $40 million of additional costs associated with the abnormally cold winter.

The $50 million impact to operating income that we've been talking about includes not only the $40 million of additional manufacturing costs, but also extra freight costs and lost margin.

Newsprint delivered cost was $623 per metric ton, up $44 or 8% from the previous quarter, mostly because of the severe winter-driven higher cost of electricity in the Province of Ontario and the absorption of fixed costs over lower shipments offset in part by the weaker Canadian dollar.

The delivered cost in specialty papers rose 8% to $774 per short ton because of higher steam and freight costs due to the severe winter, additional costs following the mechanical failures at Catawba and fixed cost absorption once again. These unfavorable items were only partly offset by the favorable effect of the weaker Canadian dollar and increased co-gen production.

Market pulp delivered cost rose by 5% to $674 per metric ton due to the costs associated with the severe winter, the operational disruptions at Saint-Felicien and fixed cost absorption despite the favorable effects of lower ongoing maintenance costs and the weaker Canadian dollar.

Finally, delivered cost in our wood products segment fell by 2% to $347 per thousand board feet as a result of the weaker Canadian dollar and the reversal of certain export duties, despite an increase in log costs.

Looking forward we expect to feel some of winter's after effects in Q2, though the impact should not be anywhere near as harsh as Q1. In particular, the price of natural gas and of power in Ontario have for the most part normalized in April. Distribution constraints continue, however, and will be felt through the second quarter as carriers gradually ease the accumulated backlog, which will be all the more difficult given the spring weight restrictions. These element will weigh on shipment volumes as well as freight and warehousing costs in the second quarter.

The cogeneration assets we use to sell power to the market improved our costs by $13 million, a full $3 million better than in the previous quarter. With Thunder Bay and Gatineau now fully operational this is also $4 million better than the first quarter of last year.

Closure costs and related charges were $10 million down from $33 million in the previous quarter. Q1 included mostly idling and cleaning costs at the Fort Frances mill and accelerated depreciation for a machine closed at Iroquois Falls in mid-April.

Turning to the balance sheet and cash flow items, cash and cash equivalents decreased by $82 million to $240 million. Balance sheet working capital increased to $705 million. Net cash used in operating activities was $41 million compared to net cash provided of $96 million in the fourth quarter.

Working capital increased by $32 million due in part to a $64 million increase in inventories, including $22 million of raw materials, almost all of which is a seasonal build-up in round wood, and $38 million of finished goods, partially offset by a $29 million reduction in accounts receivable, largely on lower sales. This compares to a working capital decrease of $57 million in the fourth quarter.

Capital expenditures were $36 million, in line with the previous quarter. For 2014 we continue to expect spending on maintenance of business of between $135 million and $160 million and we expect spending on value-creating projects, including many carried over from 2013, to be between $75 million and $125 million. Spending will pick up with the pace of construction at our Atikokan and Ignace sawmill projects in the second quarter.

Availability under our ABL credit facility at the end of the first quarter was $548 million for a total liquidity of $788 million.

Pension contributions were $39 million against an $8 million expense. Our combined pension and OPEB expense, which is allocated to the segments, was $6 million lower and will be going forward because of the lower unfunded pension liability and amendments to our US OPEB plans. These amendments, together with contributions and a favorable currency impact, caused a further $110 million drop in the balance sheet net pension and OPEB liability to $1.2 billion. For 2014 we expect total pension contributions to be approximately $160 million, of which an expense estimated at $25 million will be included in our operating income.

We're pleased to recognize that both Quebec and Ontario have now adopted the regulations needed to update the previous funding relief measures following the agreement in principle we reached with company stakeholders in those provinces in 2013. Compared to the previous structure we will make CAD 30 million of incremental annual contributions going forward, but the onerous, corrective measures mechanisms has been eliminated. Our actual 2013 contributions reflect the application of the regulations given the additional CAD 30 million we paid in the fourth quarter in anticipation of the regulations.

Thank you, Jo-Ann. Thank you, Richard.

Jessica, let's open the call for questions, please.

Operator, can we open the call for questions, please?

(Operator instructions). Sean Steuart, TD Securities.

Thanks. Good morning, everyone. A couple of questions to start. Richard, it showed up in your Q1 results you've seen some -- I guess marginal price weakness in your newsprint price realizations. Can you maybe just comment on regionally where you're seeing it and has this erosion continued into Q2? And I guess how much of it would you chalk up to weaker Canadian dollar and that feeding into the US dollar pricing environment for the commodity?

I think that overall, yes, we had a reduction of $13 per ton and it was across -- when I look at Canada, Latin America and Asia and also US. US was small, but in Canada the price went down more than the average, as well as Latin America and also in Asia. So there was pressure in all the markets. And I think it's reflected certainly by the operating rates when you look at shipment capacity at 89%. So, I think it's certainly one of the challenges that we have in the industry.

So it is -- certainly when you look at also the Canadian dollars has some impact. Obviously the Euro is still strong and it helps somewhat for the volume that we export, but I think that the issue is really the -- there was also some capacity conversions that have been announced. I think that it's certainly -- well, until it happens it's going to keep probably pressure on pricing. But there is a machine that is going to be converted in the south, as you're aware, and it's going to remove a material volume. And I think that certainly until then we're going to see the pressure, but I'm more optimistic that it's going to stabilize somewhat in the third and in the fourth quarter.

Okay, thanks for that. And then the second question and I'll get back in the queue. The Calhoun capital project, the $105 million, can you talk about I guess over what period you're spending that capital? And then if you can go through the expected returns on that project as well.

Well, it's going to be done in the next two years and so we will (inaudible) going up this new digester with the other modification that we're going to make sometime in 2016. And on the benefit itself, I'm not going to give you the return, obviously, but I can tell you that we're going to improve the yield because now we have nine batch digesters. We're going to have only one. We're going to make also a saving on the chemicals and that's also material. We're going to save also on energy. And obviously, that will go into benefit on the mix. Certainly with the improve quality that we're going to have, we're going to have more volume, more capacity because the pump dryer was not used at its full potential because of the lack of slush pump. So, I think that the -- all that together is going to bring the costs down.

And one of the advantages of Calhoun -- so we have the growth rate of the hardwood is significantly -- it's very high. And wood cost is very, very competitive. And some mill that is well located. And obviously, with only one continuous digester compared to the eight or nine that just that we have it's going to reduce the pressure on maintenance, going to cost less. And I think that there's other savings that are difficult to estimate at this point, but I think that all that added together is going to make this mill more competitive.

And then obviously there is some also assistance that we get from the state (inaudible) and also [TDE] that is going to certainly shorten the payback on this project.

Okay. Thanks for that detail. I'll get back in the queue.

Paul Quinn, RBC Capital Markets.

Yes, thanks very much. Good morning. It looks like in specialty papers you've got a similar problem to newsprint in lower operating rates, but what's required here to get that market back in balance?

On the uncoated mechanical?

Yes.

Well, to get the market on that is, well, it's two weeks to get a market advantage, a better demand and a closure of machines. So, it's that simple. And I think that when you look at what we have done with -- on this side, closed a machine at Kenogami, we closed a machine at Laurentide, we closed a machine at Fort Frances. So, I think that in terms of capacity we remove -- we're removing capacity to -- so basically to take into account that the decline in demand. And I think that it's difficult to -- when there's only one machine running at the mill it's difficult to close more than that. So, I think that certainly we're looking at developing new products. And it's the case in Calhoun now where in the fine grades like the bag business and have been successful in producing these new grades. And I think that we're also looking at Calhoun, at increasing our (inaudible) recorded freesheet of (inaudible).

And obviously, with the improvement on the pulp side at -- on the pulp mill it's going to provide certainly opportunities to continue to work on value-added grades or take advantage of the location of the mill as well as better quality. And the uncoated freesheet substitute, I think that's certainly an area that we're looking at that would provide certainly an opportunity for us to -- for the Company to address this issue of low operating rates, of shipment to capacity that is lower than what it should be.

Okay. Thanks for the detail. And on the inventory build that you had in Q1, do you expect to be able to ship all that in Q2 or is that going to drag into Q3?

Well, I think that certainly we're going to have the impact in Q2. And there's still congestion into the real system, as you're probably aware. And I think that now we are in the spring weight restriction, this time the year is going to last for, well, certainly a part of May. But I think that we're considering that by the end of June that the inventory, while maybe not going to the level that we would like to see our inventory, but it's certainly not going to be a situation that -- is going to be an improvement compared to the end of this quarter.

Okay. And then just lastly, just on the sawmill projects, Ignace and Atikokan, if you could remind us what the total capacity there is and the total CapEx that you're going to spend and what you've spent to date.

Yes, it's about 250 million or close to 300 million of capacity. And the CapEx is about $75 million for both sawmills. And we've spent about $20 million, $25 million on commitment, now around $25 million. But we've started to pour concrete, the foundation. Now we're waiting to start the erection of buildings. So, that's going to certainly to increase the cash requirement and so we're certainly well-positioned now to be able to get the benefit of additional capacity by early 2015.

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

Thank you.

(Operator Instructions). Stephen Atkinson, Dundee.

Thank you. Good morning. In terms of the previous provincial government that shall we say had some unique approach to timber supply and costs, have you got any insight with the change in government as to how they will approach the -- shall we say the timber supply?

Well, good morning, Stephen. Well, to answer your question on this one, we expect to have an industry meeting with the new Minister of Forests in the short term. I think that the decision from the Premier to appoint a Minister of Forestry, a Forest Minister, is certainly a positive development for all the industry. I think that there's a lot of companies in the industry that are also raising cautions on the additional costs of this new (inaudible) system. We have been as a company quite vocal on the impact on cost. We know -- and I'm going to repeat again what I said many times. So compared to 2011 it's -- and when I look at our forecast for 2014 it's an increase in our wood cost that is about 25%.

And I think that what these -- one of the most significant impact on costs is planning. And I think that now it's the government that is in charge of planning and at some point we're going to certainly to try to do with the new minister. So when planning is not done by the Company, so it's really difficult to basically build the road. And just to give an example, if you can start to build road in September or in October, that's not going to provide enough time for the road to dry and you have additional costs and -- so it's one example, but I think that we know that there is many other small examples that could provide certainly opportunities to reduce the costs. I'm not trying here to say that we should change the system. There's things into this new tenuous system that have to be improved. It would not cost anything to government but could bring the cost down and it would not be insignificant.

Okay. So that -- can you compare it to the Ontario system right now?

Well, in terms of cost it's higher than Quebec there's no doubt and it's not insignificant.

Okay, okay. So, there is a precedent for them to go back to what they did before. (Inaudible) the number, but would there be an increase in maintenance this quarter?

Well, in the second quarter we're going to have two mills. The Coosa Pines and Calhoun that we're going to do the annual outage for the pulp mill on maintenance. And we're going also at Saint-Felicien. It's not the annual maintenance, but the (inaudible) borers. We have to wash the -- do some work on this, so it's 20,000 tons that I mentioned. But we change also the way that we account for that, so I think that when we spend it's spread over the period until the next outage. So the impact is less significant because it's just even up the cost instead of having everything into the quarter so you have a charge that is spread over the other quarters until the next outage.

Okay. Yes, that's great. Thanks very much.

Thank you.

(Operator instructions).

Okay. Well, it sounds like there's no other questions, operator, so why don't we leave it at that. Thank you, everybody, for joining us today.

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