Resolute Forest Products Inc (RFP) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products fourth quarter 2014 earnings call. (Operator instructions). Please note that this call is being recorded today, Thursday, February 5, 2015 at 9:00 a.m. Eastern Time.

I would now like to turn the meeting over to Mr. Remi Lalonde, Vice President and Treasurer. Please go ahead, Mr. Lalonde.

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

Richard?

Good morning and thank you for joining us today.

Today we announced another good quarter by generating $106 million of adjusted EBITDA to bring us to $366 million for the year, even as the abnormally cold winter of 2014 set us back by $55 million in the first quarter. The market pulp and wood products segment generated $221 million of EBITDA in 2014, which represent a 30% improvement over 2013.

For the fourth quarter we generated adjusted EBITDA of $27 million in market pulp, down by $7 million from the third quarter; $27 million in wood products, down by $5 million; $32 million in newsprint, up by $10 million; and $22 million in specialty papers, down by $4 million from the previous quarter.

For the year our adjusted EBITDA was $25 million higher in each of market pulp and wood products, but it was $47 million lower than specialty papers and $21 million in newsprint. The negative impact of the abnormally cold winter was about $27 million in newsprint and $20 million in specialty papers.

We grew lumber shipments by 105 million board feet in 2014 and we are on track to reach another 300 million of annualized capacity in 2015 with our two new Northern Ontario saw mills.

The fourth quarter restart of the refurbished Ignace sawmill is going well. We are also on schedule with the construction of our Atikokan sawmills. And the high-capacity planer mill will start to finish Ignace's lumber in the next few weeks and the sawmills begin ramping up in the second quarter. Even though both mills will need a few quarters to work up to their expected productivity, we expect them to start generating EBITDA as early as the third quarter of this year.

I will add that the Thunder Bay pellet plant, which has been operational since October, has generated EBITDA after only two months of operation. We will continue to work to improve productivity to reach its production target.

We're also making excellent progress with our continuous digester project in Calhoun where we expect to start the ramp-up process in the fourth quarter. When the digester reaches capacity we will have an additional 100,000 metric tons of market pulp available on an annualized basis. This world-class equipment will help to significantly lower the mill's overall costs and improve the quality of its product.

Let's review market conditions and segment performance.

Total chemical pulp market grew by almost 1 million tons in 2014 and up by 2%. Latin America was up by 5%, China by 3%, and the North American demand was flat, and down by 1% in Western Europe. Overall hardwood demand was up by 3% as the market absorbed major new [eucalyptus] capacity. Despite this increase, softwood demand was flat.

Our average transaction price improved by $39 per metric ton in 2014 or 6%, reflecting stronger market prices for softwood and fluff grades and, to a lesser extent, recycled grades. Shipments, however, were 200,000 tons lower or 13%. This is in part due to more internal consumption, including Calhoun hardwood redirected to make paper grades higher in the value chains, as well as a production slowback in recycled bleached kraft pulp and equipment failures. We continue to believe in the global pulp market fundamentals and the way we fit into it, particularly with our competitive assets, even as price started to come up to their recent high.

2014 housing starts were 9% higher in the US, exceeding the 1 million starts level for the first time since 2007. And despite wood shortages affecting certain area of Quebec, our lumber shipments rose by 105 million board feet in the year, or 7%, to 1.6 billion. This reflects the first stages of our initiatives to grow capacity in line with the gradual recovery in US housing starts, including the 2013 restart of the Maniwaki sawmills and the replacement of the Comtois sawmills -- sawline, as well as other capacity enhancement initiatives. Despite significant fluctuation in the last two years, the average transaction price for 2014 was essentially unchanged compared to 2013.

Market prices for dimensional lumber trailed off toward the end of the year, but we remain cautiously optimistic in our outlook for 2015. Although demand for building products is particularly sensitive to macroeconomic factors, we have seen sustained lumber demand despite the slow recovery in US housing starts. We continue to believe that the wood products business is a great area in which to grow.

Total 2014 North American demand for newsprint was down by 9% for the second consecutive year. Though demand from commercial printers was 3% higher, demand from newspaper publishers was down by 12% from last year. Global demand for newsprint was down by 7%, with Latin America down by 9%, Asia down by 8% and Europe down by 6%.

The lower demand in China and the strength of the US dollar against the euro, and the rapidly devaluating Russian currency have made it difficult for North American newsprint to compete in Asia as European and the Russian producers have used their currency advantage to gain market share. Accordingly, North American exports to Asia were down by 17% in 2014. Furthermore, consumption in Latin America has also declined as a result of their weaker currencies and softer macroeconomic conditions, a trend that accelerated in the second half of 2014.

The net results has been lower exports volumes out of North America, causing a more competitive domestic environment. This led to 4% in the average transaction price for 2014 compared to 2013, down by $25 per metric ton. Despite these headwinds, our overall shipments were down by only 1% this year. Our international shipments were down by 9% for the reasons I mentioned, but at the same time we grew domestic shipments by 5%. This shows that the Resolute platform is well positioned to compete in this challenging market.

For the communities and the people affected, there is no good time to close a mill. Although our recent closure announcements have been difficult, 0.5 million tons of newsprint capacity and 200,000 tons of specialty papers capacity, they immediately improve our competitive position. By streamlining our production to adapt to changing market dynamics, we are able to optimize assets by maximizing the utilization of our most cost-effective mills and also reduce fixed costs and avoid costly and inefficient rotating downtime strategy.

North American demand for our coated mechanical papers was down by 5% in 2014. Demand for supercalender grades, which is about 27% of our specialty shipments, was down by 2%. Total standard grades were down by 4%, but shipments of super-brites and hi-brites, which are another 34% of our total specialty papers shipments, were unchanged.

The industry shipment-to-capacity ratio was 91% for the year, down by 1%.

Coated mechanical demand was down by 5% for the year, but shipments improved significantly in Q4. After the pressure on the industry this year as a result of lower operating rates, buyers began to restock inventories in anticipation of possible price increased with the higher operating rates. When adjusted for the late-year capacity closures, the shipment-to-capacity ratio was 94% for the year, up 1% from last year.

Our overall shipments of specialty papers were 59,000 short tons lower, or 3%, as a result of weather-related production disruption, mechanical failures in Catawba and lower production following the closure of our Fort Frances and Laurentide. The average transaction price was $29 per short ton lower, or 4%. Most of this was due to the significant erosion in coated mechanical paper prices in the first 9 months of the year due to the excess supply. We expect the recent positive price momentum for coated and supercalender grades to carry into the first quarter, which otherwise stands to be a seasonal low.

I'd like to highlight some of the other key achievements this year. First, I'm proud to announce that in 2014 we beat the ambitious safety target we set for ourselves, achieving an OSHA incident rate of 0.83, even better than last year's world-class rate of 1.02. This accomplishment reflects our employees' focus, dedication and vigilance for which they deserve our recognition. Safety is our first priority and we all strive for zero injury.

Second, we worked with our unionized employees and their union leaders toward the mutually beneficial renewal of our US and Canadian collective agreements earlier this year. By working together with the shared goals of Resolute's long-term success, we helped to reinforce our position as financially strong and reliable suppliers for our customers.

Third, we reduced mill environmental incidents by 19% this year. This is encouraging progress considering that we fell slightly short of our 10% improvement target last year. Building on this success, we've already set a new target to reduce incidents by a further 8% in 2015.

Fourth, we can confirm that we have surpassed our greenhouse gas emissions reduction target, having reduced emissions by 67.5% compared to the year 2000 baseline and there is more to it than just capacity adjustment. Over 50% of the improvement comes from reductions in energy consumption, fuel switching and fuel mix improvements. As a member of the WWF Climate Savers Program, we're happy to say that we have exceeded the 65% commitment we made to WWF two years ahead of schedule.

Finally, we remain on course with our sustainability initiatives. In addition to developing information resources such as BorealForestFacts.com and the Resolute blog, we launched the Southern Boreal and Boreal Forum social media platforms. These French and English sites provide a forum for fact-based discussion concerning sustainable forestry practices and they help to ensure that individual and community voices are heard, particularly when it comes to the importance of forestry to northern economies.

We are not intimidated by attacks from misinformed and misleading activists. When their argument have failed on their merits, some have resorted to customer intimidation with a threat of economic harm and that is as unfortunate as it is unproductive. We always said that sustainability rests on three pillars: economic, social and environmental. And we are very pleased that others have recognized the significance of Resolute's sustainability leadership and our achievements, including a ranking in the Best 50 Corporate Citizens in Canada by Corporate Knights; being also named to the 2015 Clean50 for leaders who have made the greatest contribution to sustainable development or Clean Capitalism in Canada, and receiving The New Economy magazine's global award for the best forest and paper solution.

We make sustainability an integral part of the way we do business, building on the third-party certification for 100% of our management to at least one of three internationally recognized sustainable forest management standards. The forestry regulations in Quebec and Ontario are among the most, if not the most, rigorous in the world.

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

Thank you, Richard, and good morning, everyone.

Today we reported 2014 net income of $46 million or $0.49 per share, excluding special items, compared to $107 million or $1.13 per share in 2013. Sales were $4.3 billion, down 5% from last year, and net income in the fourth quarter was $36 million or $0.38 per share, excluding special items, up 13% from the fourth quarter of 2013.

GAAP net loss was $277 million in 2014, or $2.93 per share, including $278 million of pretax closure, impairment and other related charges, most of which was accelerated depreciation taken for our Laurentide and Iroquois Falls mills in Canada and a paper machine in Catawba.

The other 2014 special items, pretax, included a $61 million writedown related to our Ponderay newsprint company joint venture, a $32 million non-cash loss on the translation of Canadian dollar net monetary assets, and a $17 million stores inventory writedown related to mill closures. Of the total $323 million of special items on an after-tax basis, only $49 million are cash related.

GAAP net loss was $109 million in the fourth quarter or $1.15 per share. Special items pretax included a $131 million charge related to closure costs, mostly accelerated depreciation at Laurentide and Iroquois Falls, an $18 million non-cash loss of a translation of Canadian dollar net monetary assets, and an $11 million writedown related to our Ponderay joint venture. Only $27 million of the total special items of $145 million after tax are cash related.

Total sales for the fourth quarter were $1.1 billion, down by $41 million from the third quarter. Newsprint shipments were up by 2%, but we shipped 3% fewer tons of market pulp, mostly because of a shipment delay at year end, and 4% fewer tons of specially papers due to seasonally lower white paper sales. Wood products shipments were also down by 8% from the record high achieved in the third quarter, reflecting seasonal construction activity. Overall, pricing was unfavorable by $8 million, mostly because of the $12 per metric ton reduction in newsprint pricing.

Our manufacturing costs were better, even after adjusting for the positive effect of the weaker Canadian dollar and the lower shipment volumes. This reflected the favorable effect of seasonally lower power costs in the US Southeast, lower fixed costs with the closure of the Laurentide mill, and additional tax credits in connection with infrastructure investments, offset by higher fiber and operating costs in our wood products segment and the recognition in Q3 of an energy savings incentive.

The weaker Canadian dollar had an overall $14 million favorable effect on our results this quarter compared to the third quarter. For the year, the lower Canadian dollar improved our results by $98 million.

The cogeneration assets that sell power to third parties helped improve the EBITDA by $8 million in the fourth quarter, unchanged from the previous quarter due to the timing of annual maintenance. For the year, co-gen contributions improved EBITDA by $43 million, $3 million less than in 2013, which reflected the negative impact of the weaker Canadian dollar. Although the full year of operation from the Thunder Bay co-generation facility contributed an additional $10 million in 2014, it was offset by higher wood waste costs in Dolbeau, operational difficulties and equipment failures in Saint-Felicien, and in Thunder Bay a longer-than-expected annual outage, as well as turbine damage and lost production caused by multiple power transmission disruptions to the mill.

Compared to the third quarter, market pulp delivered cost rose by 2% to $655 per metric ton, mostly because of lower contribution from the Saint-Felicien co-generation facility in connection with the mill's annual needed maintenance outage. In wood products, the delivered cost per unit was $5 per 1,000 board feet lower, or 1% at $332. Newsprint delivered costs fell by $27 per metric ton or 5% to $555 per metric ton due to the favorable effects of the weaker Canadian dollar, seasonally lower power costs in the US Southeast and a higher contribution from the Thunder Bay co-generation facility. In the third quarter Thunder Bay co-generation was affected by a longer-than-expected annual outage and other power disruptions as I described earlier. The delivered cost in specialty papers was $706 per short ton, essentially unchanged.

Operating costs per unit were favorably affected by the weaker Canadian dollar and the elimination of fixed costs associated with the Laurentide Mill, which was closed in mid-October. But the benefit was offset by the absorption of fixed costs over the seasonally lower shipment volumes. I will add that while it's still early, so far this winter we've not seen a repeat of the same harsh conditions we experienced at this time last year which caused a material increase in energy costs, production disruption, equipment failures and distribution constraints. We also implemented a number of measures to reduce our exposure to these types of events.

We incurred $131 million of accelerated depreciation and other closure-related costs of a quarter related to the permanent newsprint capacity closures announced for Iroquois Falls, Baie-Comeau and Clermont. Closure costs also included the remaining portion of accelerated depreciation associated with the closure of the Laurentide in mid-October.

This quarter we wrote down our investment in Ponderay by a further $11 million to zero in addition to the $50 million writedown we took in Q3.

Cash and cash equivalents increased by $72 million in the quarter to $337 million, bringing our net debt down to $260 million at year end. Net cash provided by operating activities was $106 million in the quarter, rounding out the year at $186 million despite the $41 million of cash used in the first quarter, largely because of the abnormally cold winter.

Balance sheet working capital increased by $25 million -- sorry, decreased by $25 million in the quarter to $679 million, which reflected a two-day improvement in days sales outstanding, a $38 million reduction in finished goods inventory, and a $22 million received in connection with the sale of US timber assets securitized in 2001. This was partially offset by the update to our deferred income tax balance sheet classification between current and non-current; a $32 million reduction in accounts payable and accrued liabilities; and a $17 million seasonal increase in raw materials, mostly logs, and mill stores.

Capital expenditures were $51 million in the fourth quarter, $9 million less than in the previous quarter. CapEx for the year was $193 million, below our -- it was $193 million which was below our earlier guidance because of the timing of projects. For 2015 we expect to spend approximately $200 million of CapEx, including $130 million on value-creating projects.

Pension contributions were $29 million in the quarter with a $7 million expense. For the year, pension contributions were $164 million with an associated expense of $29 million, in line with our previous guidance.

After rising interest rates helped to reduce the net pension and other post-retirement benefits for OPEB liability on our balance sheet by nearly $700 million in 2013, interest rates shifted downward in 2014 finishing the year even below 2012 levels. But thanks to strong assets returns, the favorable currency impact and amendments to our OPEB plans, our balance sheet net pension and OPEB liabilities increased by $330 million in 2014 to $1.6 billion when compared to the $2 billion in 2012. The increase also included the significant impact of longer life expectancy assumptions in both Canada and the US. Despite this increase in the liabilities, we expect our funding levels to come down by about $20 million in 2015 compared to 2014 to approximately $145 million due to the impact of the weaker Canadian dollar.

We are required to amortize this increase in the liability, which will result in an increase of our pension and OPEB expense by approximately $55 million in 2015, which given the volatility of interest rates could reverse in subsequent years. Although the higher expense does not have a cash impact, it creates headwinds for our EBITDA expectations in 2015.

I want to emphasize that our capital structure is flexible and conservative. Our financial strength gives us the ability to look at a range of appropriate opportunities and the patience to make sure the related valuations are right.

Availability under our ABL credit facility at year end was $521 million for a total liquidity of $858 million. For the last three years we've maintained a net debt to EBITDA ratio of around 0.7 times. We also hold substantial tax attributes, including US operating loss carryforwards of about $1.8 billion or $700 million after tax; Canadian operating loss carryforwards of about $175 million for a net of around $50 million; over $3 billion of undepreciated capital costs, mainly in Canada, for a net benefit of almost $1 billion; and other attributes, including R&D expense pool and tax credit carryforwards for over $300 million after tax.

The US NOLs don't begin to expire in any meaningful way until 2022, despite the accounting valuation allowance we recorded in 2013 which, as we said at the time, was based on a strict application of US GAAP. We're comfortable at this point in our ability to maximize the use of these US tax attributes.

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

Certainly. (Operator instructions). Bill Hoffmann, RBC Capital Markets.

Thank you. Good morning. Richard, I wonder if you could just talk a little bit about the newsprint market, specialty markets and coated markets, your outlook here for 2015 and how you expect maybe the trade flows to change, especially with the change in the C dollar.

Well, I think that when you look at the North American demand, certainly -- well, down 9% in 2014 and we expect likely the same decline in 2015. We was encouraged, through, to see the commercial printer up, it's up by 3%, but obviously the newspaper publishers, well, it's hard with a significant decline of 12%.

Certainly when you look at the global demand for newsprint, with the global reduction of 7% -- even Latin America is down, but we know about the economic difficulties in Latin America. Europe is also down, as well as Asia. And it is the reason why we basically made the decision to close capacity, to be able to eliminate the fixed costs and to basically optimize (inaudible) on the segment of our business that is declining.

So I think that obviously we know that it's related to advertising and circulation. But we still have some hope that overseas, Latin America, that eventually is going to stabilize at some point. Because I was in Brazil a couple of weeks ago and the circulation is basically remaining the same, but they have less pages, they have less advertising. And the way that they explained it to me was that it's really related to the economy. And I don't know what is the situation in China, but the news that we see is that also there are some pressure on their economy, but certainly I see a relation between the economy and lower demand.

I think that certainly we are taking measures to streamline our operation, make sure that we produce (inaudible) in the most efficient (inaudible) proceeded to service the market and we're continuing to be able to manage this difficult situation.

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

To stop?

The prices from sliding.

Well, it's a question that I would like to be able to answer. I think that the currency, Bill, as you know, when you look at Russia we saw a devaluation or a weakening of their currency of 40%, 45%. We know that they are now as -- it's starting not only in Russia, but also in Europe. They are using part of their currency devaluation to gain market shares and we are seeing that and also in Latin America. So I don't think that -- as long as we have this very high volatility that we have seen lately and that we have in countries that -- producing countries that benefit from very weak currency, I think that it's going to be very difficult to have a stable pricing environment.

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

We see certainly some pressure by some imports that are coming to the domestic market, but I think that certainly when you look at the operating rates, with the closure announcements, so it's large. And don't forget that the advantage of the North American producer of the supply chain. So with a better (inaudible) to take advantage of (inaudible) we are flexible to respond to demand. So I think that even though there is certainly pressure from imports, I think that the outlook is certainly a lot more positive now than it was a few months ago. So we're up domestic and you've seen the pricing announcement for the first quarter. And there was -- seasonally it's a (inaudible) in the first quarter so it indicates that the market is tight and that the operating rate really reflects what the situation is.

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

Well, it's a very good question and I think that everyone realizes that we have a very strong financial position. But I think that it provides certainly a lot of flexibility to look at the range of appropriate opportunities. And so far we haven't seen anything that basically meets our valuation targets. So I think that eventually --- and we want to make sure that we're not going to overpay for any assets. And it is opportunities that we're going to continue to look at them, but we're just going to make sure that the valuations are right. And it is really the strategy that we have and 2015 could provide that kind of opportunities at the right multiple.

Great. Thank you.

(Operator instructions). Stephen Atkinson, Dundee Capital Markets.

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

Well, I think that we're going to basically to have a new audit. We have six months to do it. And I think that that is as far that I would like to go on this one. So just it's going to be reviewed and we're going to hopefully be able to maintain our (inaudible) certification for these two territory there, these two certificates.

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

Well, I'd like to maybe try to answer your question from this one on the BLC. I'd like to again to repeat what I said, that (inaudible) control you have the laws and regulation enforcement that are among the more rigorous in the world and I think that that's been confirmed by Yale University and (inaudible). And you're right; there is a dispute in Northern Quebec between the government and the First Nation. Resolute is not involved in this dispute. And I think that there is also a situation with the Caribou Habitat Conservation Plan. That is one of the reasons that we had that certificate that were revoke and one that was suspended.

So I think that it's -- what I'd like to say is that it's the government that determines, that decide on laws and regulations and the government is sovereign, so government decides. There is two very strong act in Ontario and Quebec. In Ontario the (inaudible) forest is underneath the act and then in Quebec there's also a level of (inaudible). I think it's really difficult to understand because the FSC president, the FSC president mentioned during the holidays that the FSC standards ask more than the laws and regulations of the province. So I think that a company like Resolute, by law we have to make sure that we follow, that we apply in our practices the laws and regulations of province. And if we don't respect it we're going to be subject to penalty.

The other point that I think is so interesting to mention. So when you look at the stats on FSC, Canada has 310 million acres of timberland and there is only 18% that is FSC certified, but there is 40% that is [PES] certified, so it means (inaudible) another certification like the CRC. And when I look at the US, the United States of America they have 305 million acres. Only 5% is FSC certified. And there is more than double that amount that is SFI certified and other certification. When I look at Germany, it's another interesting one. So they have a million acres and only 8% is certified FSC. I look at Finland with 22 million acres, only 2% that is certified FSC. Norway is 4% certified FSC with 10 million acres. And in Canada, in Quebec and Ontario, it's 82%. But when we look at BC, BC is the largest solid wood and also the important producers of pulp and paper and they only have 4% certified FSC.

So I think that we have to put everything into context and we have to ask the question why we are the target here, especially when there is a dispute between the government and the First Nation -- we have nothing to do with -- and the Caribou habitat conservation plan.

And I'd like to also, on the Caribou, just make a comment. So there is two significant caribou herd in Quebec, one at George River and you can Google it. It's easy to Google it. And you'll see that this herd, 20 years ago there were 800,000 caribous. Well, they made an inventory this year and it's down to 14,200. And it's (inaudible) and it's in the north and there is no disturbance at all. No disturbance at all and they are not surviving. So the question, we don't know why. And there is another one also in Northern Quebec (inaudible). I'm just going to -- just to help our English friends, the Leaf River, you can Google it. It's a very large also herd. And just had the report over the holidays where the population, the females are -- now the specialists are saying that they are not in good health. So I think that there is questions that certainly could be asked here and we're raising some of these questions.

But you have to put everything into the context and it's difficult to understand. And when (inaudible) caribou, it's not for us, then. And they're not surviving. Is it because of climate change? Is it because of nutrition? Is it because of something else? I think that certainly I'm not a specialist. I'm not able to answer the question, but I could just raise that and I think that's certainly of interest for a lot of people.

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

You mean the spruce--?

The spruce budworm.

The spruce budworm on the north shore. So you know that this infestation started some seven or eight years ago. Now there is -- and it's about 30% of the wood supply in the north shore that is balsam. And we know that balsam -- is the primary by this insect and the next one is the white spruce. We're obviously seeing now significant impact on our costs because there are some blocks where we have up to 50% of the wood that it's mainly balsam that is affected and we're still paying the full stumpage on very low-quality wood.

And when you have dry wood and when you have wood that is affected, it's a lot less productive for the harvester, for the contractors. It increases their cost. You need to build more roads, more kilometers or more miles of roads to get the same volume of wood. Transportation is also -- the truckers are not getting the same -- because they have paid on weight. So when the wood is dry, they receive less. There is more breakage into the sawmills and it costs more also at the pulp mill because you have to bleach the stain. You need more energy and you have -- you need also more wood, so the yield is not the same.

So we're having discussion with the government to try to have recognized the significant impact and to try to find out a way to recover this wood. And the stumpage rate is finally -- the stumpage rate finally consider the value of the wood. Now at this time it's not reflecting the value of the wood. And it is a reason why we decide that -- partly one of the reason why we decided to close the machine, and they can ruin the machine, at Clermont.

There is a lot of wood through the area. So I think that the government should accelerate the process to recover of more wood that has started to be affected because this infestation is (inaudible). So it's going north. And eventually the other one, the one that affected the province in 1968, it's going to affect a lot of wood. And again, working with the government and hopefully it's going to be reflected in the stumpage at market. We have 25% of the wood that's being sold on the two options and should be reflected, the value of the wood, the quality of the wood should be reflected into the option when this wood is sold through auction.

Thanks so much. Thanks, Richard.

(Operator instructions). Sean Steuart, TD Securities.

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

Well, we're still looking at it now. We have identified certainly -- working on three locations. Because I mentioned at the last call that the sawmill was close to the pulp mill that we have over at Catawba or Calhoun or at Coosa Pines and even in Mississippi are making a lot of sense. There's wood that is available. And we continue to really to look at it, to look at the permitting that we need on the environment and to look at (inaudible) south. So I think that within the -- certain in 2015 we're going to make a decision on this. So the (inaudible) continue and we are starting to know pretty well what we're going to do and how we're going to do it. And as I mentioned, with the strength, our financial strength it's certainly something that we could afford. And the benefit also of this integration with our old mill is not insignificant.

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

Well, certainly on softwood the demand has been flat last year. There was more demand for hardwood. I think that in 2015 we are cautiously optimistic on the pulp side, so I think that there is no new significant capacity on softwood. And so I think that I don't see it, I know there are some weaknesses on, well, price adjustment lately. I think that the -- well, I don't see a big slide on this side.

On the recycled, I think it's important to mention that we have been taking downtime on recycled, and also a slowback the two pulp mills, the two recycle pulp mills. I think that the situation, the way that we see it, we don't see an improvement. I think that 2015 is certainly going to be not a difficult one on this side. That could change, but it's not -- we're not -- we're less optimistic on the recycled.

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

Paul Quinn, RBC Capital Markets.

Yes, thanks very much. Good morning. And welcome your comments on certification. Lots of misinformation there.

I just had a follow-up question on the pulp side. We see another couple hardwood mills startups in 2015 here. Do you expect this to have a major impact on the marketplace or do you consider the 2% growth that we saw in 2014 balancing off that capacity additions?

Well, it's certainly a concern that we have, too. It's significant capacity. I think that when you look at the -- and it's a reason why we also decided to make this investment in Calhoun. The new continuous digester that is going to replace the batch digester is going to bring our costs down quite significantly.

The only -- well, the only positive that I see on this one is that the currency in Latin America is taking really a hit. And we know full well because we have customers in Latin America, it's -- when you have to service your debt in US dollars and yet you have -- when you consider the weakness of their currency, so could certainly -- I don't know how it's going to (inaudible) the impact of this new capacity, but I think that -- well, I hope that we're going to see some stability.

And the big question that we also have, Paul, is the situation in China. So if the Chinese economy does well, I think that certainly consumption of pulp has shown very significant increase in the past few years. So I think that this year, even though we had significant also capacity addition on the (inaudible) it was all absorbed. So looking forward at this year, 2015, the Chinese economy -- and I know it's a big watch on the market at this point, but could certainly help to absorb this additional capacity.

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

Well, it's certainly making it more difficult because it's a US currency with $71. And certainly when the customer look at the Canadian dollars, they're all raising questions. We export to Latin America from (inaudible). So it's -- our cost in US competitive certainly from the lower-value Canadian dollars, but we are seeing impact of our European producers. Even Russian producers are showing up in Latin America. But I think that certainly we (inaudible). It takes less time shipping from North America.

And the advantage that we have also from (inaudible) I think that we can -- and we had about five or six weeks and it's 25,000 tons. So we had a significant supply chain advantage that I don't think many can claim. So I think that because of that I think that we have -- we're still (inaudible). But obviously, with the (inaudible) it's becoming more and more difficult for the Brazilian and other Latin American countries to deal with a US dollars purchase.

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

Thank you.

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

Great. Well, just wanted to thank everybody for joining us today. Thank you.

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