Resolute Forest Products Inc (RFP) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products third-quarter 2015 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' presentation, we will conduct a question-and-answer session. (Operator Instructions).

Please note that this call is being recorded today, Thursday, October 29, 2015 at 9.00 AM 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, Tiffany. Good morning, everyone. Welcome to Resolute's third 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 onto the webcast using the link in the Presentations and Webcasts page under the Investor Relations 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 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.

Good morning, and thank you for joining us today. We generated $82 million of adjusted EBITDA in the quarter, compared to $89 million in the second quarter. Growth businesses, market pulp and wood product, performed well considering the cyclical headwinds they face, but our paper grades, particularly newsprint, are meeting an increasingly challenging environment.

By segment, we generated adjusted EBITDA of $36 million in market pulp, down by $2 million from the second quarter; $18 million in wood products, up by $13 million; $6 million in newsprint, down by $13 million; and $27 million in specialty papers, down by $9 million from the previous quarter.

Overall, pricing was lower across each of our four segments, especially in newsprint and market pulp, and manufacturing costs rose slightly. But the impact was partially offset by the favorable effect of the weaker Canadian dollars, and lower selling price, general and administrative expenses. Shipments were higher in each segment except for newsprint.

Through September, world demand for chemical pulp grew by 4% compared to the same period of 2014, including an increase of 13% in China, 4% in Latin America, and 1% in North America. World capacity grew by about 2% in the same period, mostly reflecting the impact of the significant expansion of Latin American hardwood capacity.

Year-to-date, world demand for softwood was also up around 1%, which reflect an increase in shipments to North America and a 7% increase in shipment to China, offset by a 4% decrease of shipments to Western Europe. In the same period, the demand for hardwood was up by about 7%, with shipments higher by 22% to China and 4% to Western Europe, but down by 2% to North America.

Through August, world shipments of non-eucalyptus were up by 1 million metric tons, on par with the increase in eucalyptus. But eucalyptus is gaining shares in market like North America, where shipments of northern and southern hardwood grades were down collectively by 12%.

The average transaction price for market pulp was down by $19 per metric ton compared to the second quarter, mostly as a result of customer mix. Shipments improved to 360,000 metric tons, up by 9,000 metric tons from the second quarter's.

We also continue to reduce our finished goods inventory, which dropped by a further 11,000 metric tons, now down to 77,000 metric tons, our tightest level of supply in years.

The impact of the lower prices was partially offset by the effect of the weaker Canadian dollars and the favorable property tax adjustment, leading to an EBITDA margin of $100 per metric ton this quarter, down by $8 from the previous quarter.

We continue to believe in the underlying fundamentals and growth prospects for market pulp, but our near-term outlook for pricing remain cautious, considering the uncertainty around macroeconomic factors and global commodity prices.

US housing starts sustained their pace of gradual improvement in the quarter, with starts nearing 1.2 million on a seasonally-adjusted basis, which is 13% higher in the same period of 2014. But lower North American lumber export to China, down by 15% through August, continued to have downward pressure on prices.

Our average transaction price fell a further $6 per thousand board feet, on top of the $33 drop in the second quarter, reaching the lowest level since the first quarter of 2012. Prices bottom out in September then, started to recover in October. Likely, [that is] became clear that the fear of a drastic increase in supply to the US market failed to materialize with the mid-October expiration of the Canada-US Softwood Lumber Agreement.

Lumber shipments rose incrementally in the quarter, including some additional production from the Atikokan and Ignace sawmills. But we took some downtime in Quebec during the quarter due to fiber shortages.

Despite the lower selling prices for lumber, our EBITDA margin improved to $43 per thousand board feet, or 14%, compared to $12 in the previous quarter as a result, again, of the weaker Canadian dollars, lower fiber cost, and the recognition of additional tax credits in connection with infrastructure investments.

We are currently in the one-year standstill period following the expiration of the SLA -- the Softwood Lumber Agreement. We believe in free trade, and that everyone benefits from open and fair, market-driven competition. If Canada is to renegotiate an agreement with the US, we believe that it must include a free trade exit ramp for provinces that have implemented market-based reforms. Such an exit mechanism was included in the now-expired 2006 Softwood Lumber Agreement, but unfortunately it was never activated or enforced by either the US or Canada.

North American demand for newsprint dropped by 12% through September. Production was also significantly lower, down by 13% in Canada and 18% in the US, contributing to operating rates of 91% in North America.

Global demand was down by 10% in the same period, with drops in all major regions, including Asia down 10%, Western Europe down 9%, and Latin America down 12%.

North American exports remain weak, down by 16% year-to-date, including a drop of 17% to Latin America and 19% to Asia. World operating rate outside of North America and Western Europe were around 80% through August.

Shipments were 31,000 metric tons lower in the quarter, mostly due to strategic Ontario mill downtime to avoid coincidental peaks under the province electricity rules, thereby saving millions on our [annual] Ontario electricity bill.

The average transaction price continued to slide this quarter, falling another $30 per metric ton to $498. Selling price are down more than $90 per metric ton since the same quarter of 2014.

The lower prices reduce our EBITDA margin to $12 per metric ton, compared to $35 per ton in the previous quarter. Consumption shows no sign of improving. The -- nevertheless, we plan to run all of our newsprint machines, as we believe that our asset base gives us a competitive edge to weather the accelerated pace of North American and global decline, and the effect of very low operating rates outside North America and Western Europe.

Year-to-date demand for uncoated mechanical papers was down by 12% in North America, with supercalendared grade down by 9% and standard grades, which include super-brite and hi-brites, down by 13%. Overall production is down by a corresponding 14%, leading to operating rate around 90%, unchanged from 2014.

Coated mechanical demand was down by 7% through September, but the shipment-to-capacity ratio was 93%, as a result of a 9% reduction in capacity. Domestic shipments by North American producers dropped by 11% as European imports rose by 90,000 metric tons.

The average transaction price in the segment was down by $8 per short ton compared to the second quarter, mostly as a result of increasing pressure from European imports.

Our shipments of specialty paper rose by 23,000 short tons in the quarter, reflecting a seasonal increase in demand, and in shipments of our Connect uncoated freesheet grades. With the Connect grade, we're moving up the value chains and generating more attractive margins. The lower prices as well as higher chemical and seasonal power costs reduced the margin by $27 per short ton to $66, or 9%. Finished good inventory fell by 12,000 short tons.

The US Department of Commerce recently announced that it would require cash deposits on estimated and projected duties against Resolute in connection with the investigation of imports of SC paper from Canada. The 17.87% subsidy rate is a significant increase from the preliminary rate of 2.04% Commerce calculated in July.

We believe that their position is based on the refusal to consider all the information we made available during the investigation, an incorrect interpretation of the statute, and the unreasonable application of a subsidy rate determined in an administrative review decided in 1997, concerning a 1988 investigation into imports of magnesium that has nothing to do with Resolute or with SC paper.

All but 0.77% of the 17.87% subsidy rate is based on two specific programs. Commerce said it discovered during its on-site verification of the extensive records we provided, these program relate to modest amounts received by Fibrek, which produce kraft pulp, only a very small portion of which is sold internally to add strength to SC paper manufactured in Dolbeau and Kenogami in Quebec.

We believe that it is unreasonable to conclude the two program in question represent a subsidies of any significance, if at all, for SC paper production. But, for these two programs, the subsidy rate applicable for Resolute would have been de minimis, and Resolute would be excluded from a possible countervailing duty order.

We will continue to strongly defend our position. We've consistently said that our production of SC paper in Canada has received negligible, if any, direct or indirect subsidies, and that we should not be subject to countervailing duties.

We're confident that the facts support our case and that legal process will treat the matter fairly. But, until it's resolved, we will be required to make cash deposit at the punitive rate set by Commerce on all SC paper imported to the US.

Unfortunately, the situation could significantly impact the competitive position of our Dolbeau and Kenogami mills; and this just one year after the closure of our Laurentide SC mills, whose competitiveness was mainly affected by the heavily subsidized restart of the Port Hawkesbury mill at the end of 2012.

We have a clear strategy for the future -- maximize our competitive edge to generate as much value as we can with our paper assets; continue to grow the lumber and pulp segment; integrate our pulp asset to product high-quality tissue and towel products.

Building on the integration of our Ignace and Atikokan sawmills this year, we are focused on completing the Calhoun continuous pulp digester project. This project is on track for the late December startup. Once fully operational, we expect that it will grow our market pulp capacity by 100,000 metric tons, and that it will reduce our [mill-wide] costs.

The key advantage is that it will also provide enough slush pulp capacity to meet all of the fiber needs for the tissue machine that we plan to start up in the first quarter of 2017. We will compete in the tissue market as one of only a few integrated producers, with the benefit of the latest technology.

Jo-Ann will now review our financial performance.

Thank you, Richard, and good morning, everyone. Today we reported third-quarter net income of $14 million, excluding special items, or $0.15 per share. GAAP net loss was $6 million, or $0.07 per share.

Net special items of $20 million in the quarter included mainly $13 million of non-operating pension and other post-retirement benefit costs, and a $5 million non-cash loss on the translation of Canadian dollar net monetary assets.

Total sales in the third quarter were $905 million, $21 million lower than the second quarter. Shipments were 31, 000 metric tons lower in newsprint, but they rose in each of the other segments by 9,000 metric tons in market pulp, 3 million board feet in wood products, and 23,000 short tons in specialty papers.

Overall, the higher shipments had a $2 million favorable impact on our results, but pricing was lower across each of the grades -- $19 per metric ton in market pulp; $6 per thousand board feet in wood products; $30 per metric ton in newsprint; and $8 per short ton in specialty papers.

The lower pricing unfavorably affected results by $25 million compared to the second quarter. This was only partly offset by the $12-million favorable impact of the weaker Canadian dollar, mostly because of the fact of the effect on our costs.

Costs rose marginally this quarter, up by $4 million after adjusting for the higher volume and the effect of currency. The change in manufacturing costs is due to higher scheduled maintenance, increased costs for chemicals, and seasonally higher power costs, partially offset by lower fiber costs, a property tax adjustment, and the recognition of additional tax credits in connection with infrastructure investment.

The cogeneration assets that sell power to third parties added $10 million of EBITDA in the third quarter, a $3 million reduction from the previous quarter due to the impacts of scheduled outages and the weaker Canadian dollar.

Compared to the second quarter, market pulp's all-in delivered cost was $9 per metric ton lower, or 2%, to $576, which reflects a property tax adjustment, partly offset by higher maintenance costs and lower cogeneration contribution.

The delivered cost in wood products fell by $33 per thousand board feet, or 10%, to $294, mostly because of the favorable effect of the weaker Canadian dollar, lower fiber costs, and the recognition of additional tax credits in connection with infrastructure investments. Newsprint delivered cost was essentially unchanged, (technical difficulty) by $4 per metric ton.

Higher chemical and seasonal power costs contributed to a $13-per-short-ton, or 2%, increase in the delivered cost of specialty papers.

Our selling, general and administrative expenses were $6 million lower in the quarter, mostly as a result of expense timing and lower project costs.

Cash and cash equivalents were $235 million at quarter-end, down by $68 million from the second quarter. The change reflects the repurchase of 2.3 million shares, or 2.5% of outstanding, for $22 million; an increase in capital expenditures to $44 million; and a $21-million increase for pension funding to $55 million which, as we described last quarter, is due to the timing of contributions in both the US and Canada.

There was no net cash provided by operating activities in the quarter, compared to $61 million in the previous quarter and $90 million year-to-date. Most of the change was due to an increase in working capital related to non-trade receivables, the seasonal decrease of wood inventory in the second quarter, as well as the timing of pension contributions.

Capital expenditures were $44 million, a 13% increase from the previous quarter. As we said before, our rate of CapEx spending will increase going forward as we ramp up construction for the tissue project. We've spent $22 million so far this year, and we plan to spend another $28 million on the project in the fourth quarter. This is short of the $90 million we previously announced for 2015, and is due only to timing of spending. For 2016 we will spend about $190 million on the tissue project, which remains on-time and on-budget.

We expect to have total CapEx, including the tissue project, the continuous digester, and other value-creating projects, of approximately $240 million in 2015.

Pension funding was $55 million in the quarter compared to $34 million in the second quarter and $27 million in the first quarter. As we noted in July, the increase reflects $15 million for the third and fourth quarter contributions to US plans, and an additional contribution of 14 million for machine closures under the special funding relief measures in Quebec and Ontario. We expect contributions to drop back to $29 million in Q4.

In total, for 2015 we continue to expect $145 million of pension contributions and $15 million of OPEB payments versus $81 million of related expense.

The net pension and OPEB liability at the end of the third quarter declined by $119 million when compared to the second quarter, as a result of the weaker Canadian dollar and our regular contributions.

Finally, availability under our ABL credit facility at quarter-was $448 million, maintaining very strong liquidity of $683 million, with net debt low at only $362 million.

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

(Operator Instructions). Sean Steuart, TD Securities.

A couple of questions. I wonder if you can quantify the Q3 property tax adjustment and the impact of the incremental tax credits. And on the tax credit side, I assume that's all in the wood products segment. And if so, what's the sustainability of that number, going forward?

For -- hi, Sean, it's Jo-Ann. For the property taxes it was $6 million, and for the tax credits it was $7 million.

And was the property tax adjustment in wood products as well?

No. It was partially in newsprint, partially in pulp.

Okay. And sustainability of those numbers?

Well, those are credit for prior years, so there is some continuity on the property tax, because we lowered our tax base there, and we've lowered in actually many areas in Ontario. So, there will be an impact going forward, but much less.

Okay. And Richard, a question on North American newsprint markets. Just your sense of -- is a floor setting in with the supply response initiatives you've seen from some of your competitors? Do you have a sense that the market's balancing out here?

Well, when you look at the shipment-to-capacity, it's 91%. So, I think that, at this level, I consider that -- well, it's certainly not a disaster. So, when it's higher than 90%, we should not see, I guess and I hope, more pressure on pricing.

When you look at our shipments of Q2 versus Q3 -- so, our shipments and -- domestic shipments were down by only 19,000 tons, and on the export also we were only down by [12].

So, I think that certainly the -- some of the capacity closures that we announce, and that's going to take -- to be in effect, basically, before the end of the year, are certainly helping to bring this shipment-to-capacity ratio to over -- maybe over 91%.

So -- but should maybe be a level where the prices could stabilize and sort of coming down. Because, if you look at the quarter on newsprint, now we're below $500, at that $498, as I mentioned. So, who would have expected a decline that significant? So, I think that we'll probably have -- we'll hit the bottom, and we should see hopefully some improvement on this side.

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

Bill Hoffmann, RBC Capital Markets.

A couple of things. Richard, you talked about the fiber shortages up in Quebec in the quarter. Could you just talk a little bit about, sort of, what your outlook is for fiber availability up there, and how it's going to affect your lumber business, if and as you continue to be able to increase shipments into the US for next year?

Well, I think that this fiber shortage is going to continue in Quebec. So, I think that [whilst] we're likely to have also outages in our sawmills, or downtime, because of that fiber shortage in the fourth quarters, and I think that it's also likely that this situation is not going to be better in 2016.

So, I think that it's probably worth mentioning that this -- the restriction that we have on the wood -- it's the new -- well, the 2013 new tenure system -- [now it's] 25% of the wood that is put to auction. And planning is done by the government. But it happens, quite frequently that it's difficult to have access to the cut blocks; that sometimes you have the wrong blocks. So, you have winter blocks in summer, or that you can -- basically, that you cannot have access to.

So, I think that, before it's completely under control, it will take time. But I expect that the shortage is going to be something that we're going to have to deal with in 2016 too.

And just general thoughts, with this sort of timeframe after the expiration of the SLA -- your thoughts on the market balance as you head into next year. I'm assuming demand will be up in North America. But it doesn't look like there would be any change over to Asian shipments. So, any thoughts on market conditions for next year?

Well, the -- certainly, when you look at the housing starts -- so, it's coming up. So, in September it was slightly over 1.2 million. So, I think that (inaudible) that next year we should see -- we -- well, between 1.2 million and 1.3 million.

And considering that there is some fiber shortage in Quebec, I don't think that -- and, well, likely, eventually [in BC] the (inaudible) fiber availability is probably going to be restrained too. So, I think that -- I heard quite often, this wall of wood. I don't think that we're going to see it.

So, my view, and our view, on the market is that supply and demand -- that the Chinese markets start to improve and the export comes back to last year level, I think that we -- I'm optimistic to -- well, [call it] cautiously optimistic, that we should see better pricing next year.

Thank you. And then just -- the last question is more for Jo-Ann. Just from a pure cash standpoint, as you look into 2016 and the tissue project, and continued pension funding within the context of what you're dealing with here, which is lower average pricing pretty much across the board in all the commodities, how do you think about your cash flows over the next year? Is 2016 going to be a cash-neutral year or cash-negative year?

Well, I'm not quite sure what the bottom-line cash position will be at the end of 2016. Obviously, we're only in October of this year. But certainly, what we've said in the past -- CapEx will increase or stay at the same level. We've got $190 million alone for the tissue project next year.

Pension contributions -- we talked about this last quarter. We are awaiting for new regulations from Quebec as to its method for calculating funding. Okay. And so, until we have a final regulation on that, we do know that that could impact contributions. If not next year, certainly in the medium term. And it will be favorable, but we don't know how -- by how much.

And of course, we have nearly $500 million of availability under the ABL and another -- still, today, $235 million of cash. So, I'm not terribly concerned.

(Operator Instructions) Paul Quinn, RBC Capital Markets.

Just -- start on specialty papers. Just wondering what your recourse is on the Department of Commerce ruling. And mention the legal process, and what the timing of that is.

Well, it's -- the -- basically, being respondents, we have only one option. It's an administrative review. It's likely to take a year to 18 months, and maybe more than that. So, it's pretty long process, to have a decision.

And hopefully -- we still believe that when we look at how this rate was established -- I think that we're still questioning and trying to see if there is a faster process, basically, to have the recognition that the -- this deposit rate that has been set by Commerce has no relation with the subject (inaudible), and that that rate is based on program in Ontario, and also on these two program attached to Fibrek that use pulp. So, it's a -- and the pulp, the Fibrek pulp -- there's only a tiny, tiny amount that is used by Dolbeau and Kenogami.

So, we just don't see the rationale of this rate here. So -- and the rate was based on the magnesium case, as we mentioned in our press release. So, that case that came from 1990 and -- the 1990s. And it's not related at all to SC.

So -- and certainly I feel very confident that when the administrative review -- that we will eventually confirm that our -- the SC produced in Quebec is in no way subsidized. And I think that we already closed Laurentide, as you know, because of the restart of Port Hawkesbury. It?s the [metal] that has been subsidized; certainly not our two mills.

Okay. That's a pretty fulsome answer. Maybe just moving on to newsprint, because I'm kind of confused at your answer to Sean's question on shipment cap operating rates at 91% signaling a bottom. I mean, we've got North American demand going down 12%; world demand going down 10%. That just suggests that that operating rate's going to continue to slide unless we get some capacity out.

And you guys have always described yourself as a low-cost producer; and yet, EBITDA of $12 a metric ton -- what is it suggesting that the average industry participant is at? Are they negative right now? Where are they most negative? Is that in the US?

Yes. Certainly, the newsprint mills (inaudible) Canada have an advantage with the exchange rate. And you're right that the US mills are certainly challenged at this point. But I think that you've seen the capacity closures in Canada and also in the US. I think that it's likely to continue at this level.

So, I mentioned our pricing -- our selling price that is below $500. So, I think that at this level, I don't own any mills that are going to be able to continue to run. And certainly, US mills are more challenged than the Canadian.

Okay. And just lastly on the wood products side, just if you could describe how the ramp-up of Atikokan and the Ignace is going; and what do you expect, additional production in 2016 from those mills?

Well, we're still working on, basically, the ramp-up -- production ramp-up. So, the challenge that we have presently, that we didn?t really -- that we didn't expect, is to have enough people to run the Atikokan sawmills, and even the Ignace sawmill.

So, we?re -- well, several weeks ago we started a second shift at Atikokan, but just realized that we don't have enough people to run the second shift. So, that's -- we're in the process to try to hire people, and we go to job fairs and -- in other provinces. So, it's -- the difficulties that we presently have at both sites, to get the skill and to get the people to run them.

So, I think that overall, when we look at the equipment, the sawmills at Atikokan is really ramping up well. It's the planer mill that we have some difficulties with the equipment, that we believe should be resolved in the fourth quarter. And the Ignace sawmills run now on one shift, and some at two shifts when we have the people.

So, I think that we should have a full complement on the labor side in 2016, working on apprenticeship program and also trying to attract people that went to the western provinces for -- in oil patch that will -- that are going to come back in the northern communities.

Okay. And just switch back -- just lastly, just switching back to specialty again, that -- given the Department of Commerce cash deposit rate at almost 18%, and sort of your historical shipments from Canada to the US, what does that compute to, in terms of an annual cash deposit?

Well, it's between $20 million and $25 million a year. So, it is quite significant.

Okay. Great. Thanks very much. Best of luck.

Benoit Laprade, Scotiabank.

Just wanted to clarify, on the CapEx side you mentioned 2016 $190 million for the tissue alone. Would you have a number for overall CapEx for 2016?

Hi. No. It's Jo-Ann. No, we haven't completed our budgeting process, so I don't have that number yet.

Thank you.

Bill Hoffmann, RBC Capital Markets.

Just one followup. As you look into 2016 with the tissue project, I mean, given sort of cash positions and some of the challenges and fundamentals here, can you slow that project down if from a cash standpoint things get tight or you start to burn into too much of your liquidity?

Well, no, it's the -- I think that we are going to proceed, and the lines -- the converting lines should be basically ready for the fourth quarter of next year. And the tissue machine is going to be ready for the first quarter of 2017.

But I think that it's really a diversification. We have the pulp available. We're going to complete our continuous digester project by the end of the year. So, I think that it's really an important project, when we look at the diversification, and looking at a product that has a -- well, a steady increase in demand.

So -- and obviously, with the latest technology and the slush pulp available, and as Jo-Ann and I mentioned, that the costs with the continuous digester is going to be lower. So, we want to have it online as quickly as possible, and have this segment basically starting to generate EBITDA.

And Bill, like I said, we've got nearly $700 million in liquidity today. So, I'm really, as I said, not overly concerned about our liquidity for next year.

Okay. Thank you.

I now turn the conference back over to our presenters.

Great. Thank you, Tiffany. Thank you, everybody, for joining us today. We'll leave it at that. Thank you.

This concludes today's conference call. You may now disconnect.