Resolute Forest Products Inc (RFP) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded today, November 1, 2018, at 9:00 a.m. Eastern Time. I would now like to turn the meeting over to Ms. Silvana Travaglini, Treasurer, Vice President, Investor Relations. Please go ahead.

Good morning. Welcome to Resolute's third quarter earnings call. Today, we'll hear from Yves Laflamme, 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 webcast page under the Investor Relations section of our website, or you can also download the slides. Today's presentation will include certain non-U. S. GAAP financial information. A reconciliation of those non-GAAP numbers to U.S. GAAP financial measures is included in our press release and in the appendix to the slides. We will also make forward-looking statements. Forward-looking information is based on our current assumptions, beliefs and expectation, all of which involve a number of business risks and uncertainties, and can change as conditions do. Please review the cautionary statements in our press release and on Slide 2 of today's presentation.

Good morning. Thank you for joining us today. Supported by ongoing positive price momentum for our pulp and paper products, we announced record third quarter earnings, despite weaker lumber markets. Our adjusted EBITDA of $189 million exceeded last quarter's best performance and is 60% higher than the year ago period.

Our third quarter results also benefited from improved productivity, lower freight cost and the favorable impact of the weaker Canadian dollar. But these favorable elements were offset by the rise in market-related fiber costs. During the quarter, we generated $131 million of operating cash flow, and year-to-date, our cash from operation was $351 million, a year-over-year increase of over $250 million. We continue to invest in our businesses this year, including the recently completed strategic project at our Saint-Felicien pulp mill, which I will discuss later.

Also, Resolute's Board of Directors approved a special dividend of a $1.50 per share. This quarter, we reported EBITDA of $64 million in market pulp, up $15 million from the second quarter; tissue was unchanged at negative $5 million; wood products generated $53 million, down $33 million; newsprint $48 million, up $13 million; and $38 million in specialty papers, an improvement of $22 million against the previous quarter.

In line with our strategy to maximize the value generation from our assets, we recently entered into an agreement to serve our Catawba facility, which is expected to close around year-end for $300 million, and today, we will complete the sale of the Fairmont mill of total proceeds of $62 million.

With the sales of Catawba, we are realizing the most value for an asset whose [latest] earnings potentially lies with a conversion project. Without the Catawba operation, we estimate that our EBITDA, mainly from a our pulp business, would have been reduced by approximately $35 million for the last 12 months ended September 30, 2018.

With both of our recycled pulp mills running at 65% of their capacity, the Fairmont disposition enables us to optimize production at our minimally recycled pulp mill and improve our overall profitability.

Excluding Fairmont, our EBITDA would have been about $5 million higher for the last 12-month ended September 30, before taking into account the expected increase in production at our Menominee mill.

Let's review our individual segments starting with market pulp. World shipments of chemical pulp grew 3% in the first 9 months of 2018 compared to the year ago period. Shipments to China and Western Europe were up 7% and 5% respectively, while shipments to North America fell by 5%. Softwood shipments were 2% lower during the same period, while wood shipments of hardwood rose 7%. Softwood mill ran at 89% shipments-to-capacity ratio and hardwood mills were at 99% -- at 90%.

The shipment-to-capacity ratio do not fully reflect the wave of recurring industry production challenges, and general supply disruptions, which has affected global pulp markets. Supply constraints coupled with a steady growth in demand led to the highest EBITDA the company had or has ever achieved in our pulp segment. Price realizations continue to increase, up another $37 per metric ton this quarter and up a $134 per tonne compared to the year ago period. Shipments were also higher due to improved productivity.

A significant portion of the strategic project at the Saint-Felicien mill aimed at increasing pulp production and reducing costs and greenhouse gases was completed on schedule. The mill restarted production in mid-October and is now operating at full capacity. Additional phases of the project will be completed by the end of 2019. Total project cost is about $45 million. Once completed, this investment will increase annual production by 27,000 metric tons.

We have also announced an investment plan totaling $30 million for our Thunder Bay mill to improve energy efficiency, productivity and cost as well as reduce greenhouse gas emissions.

For the first month of the year – excuse me, for the first 9 months of the year, total tissue consumption in the United States grew by 2.5% compared to the same period last year. Converted product shipment increased 2% led by away from home sales by 3.1%, while at home improved 1.5%.

During the quarter, our tissue sales rose by 5% as we secured new business and improved our product mix by shifting more volume towards converted products. As a result, our average transaction price also increased by $30 for short term. We continue to focus on ramping up the operations, working to increase the output of both the tissue machine and our converting lines at Calhoun.

We have also undertaken initiatives to improve our cost structure. In October, we closed 2 less efficient converting lines at our Florida facilities and upgraded others to take up the volumes. Construction of an outside warehouse adjacent to our Calhoun mill is near completion and is expected to significantly reduce warehousing and logistic costs.

Housing starts in the U.S. on a seasonally adjusted basis was 6% higher in the first 9 months of the year compared to 2017. For the quarter, U.S. housing starts averaged 1,218,000 units, down 3% from the previous quarter. This decrease reflected a 4% decline in multi-family starts and a 3% decrease in single family starts.

While prices declined 11% from the historical highs in the second quarter, our average transaction price of $457 per thousand board feet was nevertheless $44 higher when compared to the year ago period.

The unwinding of inventory build earlier in the year due to freight constraints, mainly in Western Canada, combined with a slowdown in the U.S. housing starts resulted in weaker market conditions.

Shipment were lower this quarter, leading to a 34 million board feet increase in finished goods inventory. Despite the recent softening in North American lumber market, we generated a healthy EBITDA of $53 million. We continue to focus on improving productivity and efficiency at our sawmill. We had recently announced investment in an Ontario sawmill that will increase annual lumber capacity by 50 million board feet.

Capital expenses are also being made at several of our Quebec sawmills to optimize our manufacturing processes, which once completed, will increase capacity by 30 million board feet.

North American demand for newsprint declined 12% in the first 9 months of 2018 compared to the same period last year, driven by a 14% drop in demand from newspaper publishers and a 7% reduction from commercial printers.

North American shipments-to-capacity ratio rose to 95%, up from 93% in the year ago period. Total demand for newsprint was down 9% through August compared to the same period last year, with North America down 11%, Asia 9% and Western Europe 8%.

The world newsprint shipments-to capacity-ratio was 89%.

During the quarter, the supply-demand balance remained favorable. With continued implementation of previously announced price increases, our average transaction price rose to $629 per metric ton, $118 higher than a year ago. Shipment, however, decreased largely due to the timing of export sales. This led to an increase in finished goods inventory at quarter end.

North American demand for uncoated mechanical papers was down 7% in the first 9 months of 2018 compared to the year ago period. Lower demand for standard grades drove this decline decreasing 10% while the demand for supercalendered grades was down only 1%. Compared to the year ago period, the shipment to capacity improved from 90% to 91%. Total mechanical demand was down 7% in the first 9 months of 2018 compared to the year ago period.

The industry shipments to capacity ratio decreased to 94% from 95% in 2017.

During the quarter, we realized further price increases across all grades and the average transaction price rose by $36 per ton – per short ton compared to the previous quarter. Shipments were also higher, largely reflecting increased production flowing plan of outages at Catawba and Calhoun in the second quarter as well as better operational performance.

In addition, the initiatives taken to improve cost and productivity at Alma and Calhoun have contributed to the increased profitability of our special papers business. In anticipation of higher seasonal demand for supercalender papers in the fourth quarter, our finished goods inventory rose by 11%. In July, the United States Department of Commerce revoked the converging duty order on supercalender paper from Canada, and in August, the U.S. International Trade Commission wrote that U.S. uncoated groundwood products were not materially harmed by imports from Canada. As a result, all paper deposits are being reformed.

For our softwood lumber exports from Canada to United States, average continue to apply.

I would now have Jo-Ann discuss our financial performance before I conclude with our outlook.

Thank you, Yves, and good morning everyone. Today, we reported net income of $117 million for the third quarter or $1.25 per diluted share.

Excluding special items, net income was $96 million or $1.03 per diluted share. This compared to net income excluding special items of $66 million or $0.71 per share in the previous quarter and $31 million or $0.34 per share in the same period last year. Total sales in the third quarter were unchanged compared to the previous quarter, as higher pricing and production in our pulp and paper operations offset lower newsprint volume, mostly timing related, and lower sales for lumber.

After removing the effect of volume and foreign exchange, our manufacturing costs increased by $8 million from the second quarter, reflecting a 13% rise in recovered paper prices and an increase in market-related log costs.

Compared to the second quarter, market pulp's all in cash costs decreased to $609 per metric ton, as higher volumes outweighed the rise in recovered paper prices and the impact of the previously announced extended downtime at Saint-Felicien. Combined with better pricing and volume gains, EBITDA rose to $64 million or $175 per metric ton.

Cash costs of our tissues segment remained elevated as we continue ramping up the tissue machine and the converting lines at our Calhoun facility. The growth in sales this quarter was offset by these higher costs, and as a result, EBITDA was unchanged at negative $5 million.

In wood products, despite higher log costs and lower sales volume, the cash costs improved by $3 per thousand board feet to $337. This is mainly due to the favorable effect of the weaker Canadian dollar and lower freight costs as shipments to the U.S. decreased. With lower pricing and volume EBITDA decreased by $33 million to $53 million this quarter.

Newsprint cash costs increased by $3 per metric ton to $499 in the third quarter, mainly due to higher power costs with the abnormally warm weather and maintenance outages. Higher price realizations of $45 per metric ton more than compensated as EBITDA rose from $35 million to $48 million, equivalent to a $130 per metric ton.

The cash cost in specialty papers fell by $40 per short ton to $604, given improved efficiency, lower maintenance as well as a decrease in freight costs. With prices increasing by $36 dollars per short ton and higher volume, EBITDA rose to $38 million or $131 per short ton compared to $16 million in the previous quarter.

Despite the increase in inventory, we generated $131 million of cash from operations in the quarter. This allowed us to fully repay the $30 million that was remaining under our revolving credit facility and increased our cash to $72 million at quarter end, up $66 million from the prior quarter. As a result, liquidity improved by $137 million to $654 million, and our debt-to-trailing to 12 months EBITDA dropped to 1x. Capital expenditures in the quarter were $41 million, up $13 million from the second quarter. As previously disclosed, we expect to invest $150 million in capital spending for the full year.

For the quarter, softwood lumber duty deposits of $21 million were paid with cumulative deposits of $88 million reported on the balance sheet as of September 30, 2018. For uncoated groundwood, no duty deposits were paid in the quarter and the $6 million of cash deposits will be refunded with interest. For SC paper, $25 million of the $61 million of cash deposits were returned with interest in the third quarter and as of today only $6 million remains to be refunded.

As of September 30, the Catawba and Fairmont assets subject to sale and the liabilities to be assumed by the potential buyers were reclassified as assets and liabilities held for sale on the balance sheet. This quarter, our net pension and OPEB liabilities decreased by $65 million, reflecting pension contributions and OPEB payments of $39 million as well as the reclassification to liabilities held for sale of the obligation to be assumed in our agreement to sell Catawba.

The corresponding pension and OPEB expense included in adjusted EBITDA was the same as in the previous quarter at $10 million. Our pension and OPEB guidance is unchanged for 2018 at a $125 million of pension contributions and $15 million of OPEB payments with an associated expense reducing adjusted EBITDA by $40 million. In the context of our current financial position and announced asset disposal, I want to talk about the specifics of our approach to capital allocation.

Our low debt which has favorable pricing and flexibility combined with strong liquidity levels provide us with the ability to execute our strategy. Our capital expenditure, our capital spending is undertaken in a disciplined, strategic and focused manner concentrating on our most competitive sites.

We take an opportunistic approach to strength strategic initiatives pursuing only those that reduce our cost position, improve our product diversification, provide synergies or position us to expand into markets that benefit from long-term growth. From time-to-time, based on market conditions, we may seek to retire, repay or refinance our outstanding indebtedness with a view to reducing costs and further enhancing our financial flexibility. We explore value creating opportunities for the divestiture of idle non-core or sub-optimized operations and we return excess capital over time to our shareholders through dividends and share repurchases.

As a result today we announced a special cash dividend of $1.50 per share. It is payable on December 20, 2018 to shareholders of record on December 6, 2018.

I will now turn it back to Yves for concluding remarks.

Thank you, Jo-Ann. We remain opportunistic of all business through the fourth quarter as the industry continued to experience unplanned supply disruptions and demand remains strong. Favorable outlook is supported by further price increases publicly reported for October and November. In the fourth quarter, pulp maintenance outages are scheduled at our Thunder Bay and Coosa Pines mills including the planned lock-down in October of our Saint-Felicien mills to complete a capital project, our pulp production is expected to decrease by approximately 30,000 tons in the fourth quarter compared to the 20,000 tons of lost production in the third quarter.

Despite the outages, we expect pulp price to remain solid. For tissue we are focused on the ongoing productivity improvements at Calhoun. We inform our customers that segment price increase would be implemented for away from home products starting in December. The recent weakness in lower prices is expected to negatively impact our results in the fourth quarter. In the medium to long-term, we believe the ongoing recovery in U.S. housing starts and the growth in the repair and renovation segment should improve demand. While paper markets continue to be impacted by structure of declining demand, the implementations of previous increases will favorably impact our results in the fourth quarter.

This concludes our formal presentation. Operator, we will now open the call for questions.

(Operator Instructions) Your first question comes from the line of Paul Quinn from RBC Capital Markets.

Maybe a couple of questions just starting with capital allocation, how you guys look at the special dividend versus share buybacks versus the implementation of a regular dividend and whether you have any restrictions around any of those?

As far -- may be Jo-Ann can join me on that answer, but I think as far as restriction there was no matter of restriction on any of the option that you suggested. So we decided to go with a special dividend, not having a dividend for -- I mean since the emergence of the company in 2011, and we have shareholders been with us for a long time and supporting us, and that is -- you know, the cyclical business that we are in, and we set the right time to have a special dividend, this is why we went that way, and see what's going to come in front of us as far as the markets.

And Paul I think in my conversation and that's why we talked specifically about capital allocation this call. I mean, the company is focused on its previously described strategy to spend capital on our most competitive sites taking opportunistic approach to growing in the segments of pulp and wood which we talked about. We talk about our leverage and keeping that at a level and financial liquidity to exercise the strategy and then obviously over time with excess capital, we have in the past returned capital to shareholders in terms of share buybacks and this time around it's a special dividend.

Okay. And then, just on the CapEx spending you know I look at that Saint-Felicien as a pretty expensive addition for my capacity basis, what are the other benefits of that and then maybe you could outline the Ontario and Quebec sawmill capacity additions there, what's the CapEx that you are spending there and what's the timing?

The timing and when we said Saint-Felicien full project is $45 million U.S. about I would say 75% has been done in that phase and of course there is a lot of things being done like you know it's the largest, I would say shutdown that we have had at this mill since the beginning since in 1978, so and so a lot of bottleneck that been fixed and improving efficiency, same thing with the recovery boards and pricing has been changed and a lot of stuff that's going to increase first of all, a lot of their reliability. Same thing in Thunder Bay actually. And so that's going to increase as we said by about 20,000, 25,000, 26,000 ton in Saint-Felicien and it's about the same thing in new storage space, storage tank in Thunder Bay, improving washing efficiency, bleaching cost, new function and a new pulp machine drive and steam box that's mostly the investment that we are doing in Thunder Bay. So Thunder Bay is going to be done pretty much, back of it I would say has been done, probably finished by sometime, in the first quarter of 2019 when Saint-Felicien, we are going to do full production as far as getting the spread of the volumes sometime middle third quarter of 2019.

Okay, then the amount of money you are spending on the Ontario and Quebec sawmills and what's the timing when you expect that production to come online?

The sawmill I will say that's about the same, there's many sawmills, it's mostly about efficiency and mill capacity in Quebec. It's going to be, I would say probably much done by the second, first-half of 2019. We have some new sign what's more efficiency and do better with the yield and in terms of there while we are talking mostly in the Thunder Bay sawmill, why we can have a new printer there was a bottleneck to address the rough number we see from the sawmill. And the equipment (inaudible) we already had the third shift to run more adding that capacity that we can address now to the new (inaudible).

Okay, that's great. And then, just lastly just the tissue away from home price increase you announced, how much is that in or maybe another way to ask is, is that going to be enough to get into the block?

Efficiently, price increase away from home, which is about 50% of our business right now was up to 10%. Obviously, not all of it, it was up to 10%. We certainly expected to be overall below 5%.

Your next question comes from the line of Hamir Patel from CIBC Capital Markets.

You guys have done a great job monetizing assets this year, when you look at sort of the remaining fleet of paper machines you have. Are there additional mills that you could see the company monetizing over the next year?

I mean, I don't see when I think that it's fun of us right now, but as you know there is a lot of things going on in the industry right now with us and other companies and of course that and the opportunities that we see that can make sense for us, we are going to take evaluation of those options and see what we are going to do with it. But pretty much, what I can say right now with like a lot of things are going on right now in the industry.

Fair enough and just wanted to ask you about actual markets for on the graphic papers we've seen uncoated free sheet prices continue to move higher. I know you guys produce some competing grades. How much room do you have to increase production off those grades?

Well, just a couple. We do some equivalent grades but we also produce UFS in Calhoun on the remaining paper machines we have there.

So Jo-Ann what would those volume speed sort of on an annual basis and what's the potential to grow there?

It's about 140,000 tons and obviously we continue to work on the productivity. And we'll see what the market total pricing as we said was up this quarter certainly.

Okay. That's helpful and maybe just turning to lumber markets, given the weakness are you guys planning on taking any downtime -- in market-related downtime in Q4 and have you seen a larger discount emerge in the Canadian markets given the duties?

There is. I've been seeing that they are still going significantly up but there's been a discount since the beginning of the duties. Of course, the U.S. market is being slower I would say that, it's more about the inventory right now. As far as downtime, we don't have any downtime announced, the things that we see right now about us and other companies is in eastern Canada select board or with whatever. We have some problems and getting a lot and so that some places we just based on market what we -- will not running for capacity right anyways.

Maybe just a final question for me, given the improvement in the balance sheet, how do you think about growing the business in lumber and pulp, you've announced a couple sort of smaller projects, but how much room is there to debottleneck across the system for both and do you have any interest in at some point having lumber assets in the U.S.?

Yes, I think that's just the beginning of the -- since 2011, it’s been part of our strategy to grow in lumber and all. So in lumber we build as you know the two, we started one sawmill, meaning is and restart and build greenfield with (inaudible). We bought the Senneterre sawmill. So we are looking at as we've been spinning in many up low-quality days but didn't work, so we are suddenly open to look at some things to grow that business, so possibly the same thing of course we are talking about the different size of transaction if something that looks interesting and we also have the opportunity of growing pulp and certainly we are talking about Saint-Felicien where we have other possibilities, we have capacity that we can do in our own company same thing with Thunder Bay and Calhoun as well, we have today a good option with Calhoun as well to increase pulp capacity.

Which we did with Calhoun with the new digester in 2017.

Right. And then, you've just given your pulp and paper platform in the south. Does maybe a Greenfield lumber mill in the U.S. or would that be something that you look at?

I think that's something that we've been looking at in the past and that's something we still have in our book somewhere. But, it's the same thing with of course, the new. I mean the new reality of the lumber pricing right now could change the situation. But if you want to build a great mill today, before you get the equipment and you are ready to go, it's going to take few years, so it's something we have to take into consideration as well.

(Operator Instructions) Your next question comes from the line of Sean Steuart from T.D. Securities.

On the tissue business, just trying to get visibility on I guess the ramp up for Calhoun. Can you give us a bit more detail on where the operating rates are now and the expected timeline to ramp up to full speed there?

On tissue?

Yes.

Yes, on tissue at Calhoun, I would say that –we’re not giving you really a percentage. I think that we have significant improvement in the tissue machine again to the same size we've made a lot of improvement I think that we have a pretty good idea for studying the products. We have more, I would say, so they look more complicated, they're ending up on the conversion side right now. So even though we're making improvement we tried to push very hard on that side, so it just about the equipment, it's about the retention and labor as well. So we're training people and we have a lot of new employees. So at the end of the day right now I believe that we're heading to the right direction but we're still selling too much peripherals I would say.

And Yves you mentioned the post the sale of Fairmont, you would expect to improve the operating rates at Menominee. Could you give us a timeline on how fast do you expect to bring that mill up to full operating rates or close to that?

Yes, the timeline is like today.

Okay, quick ramp up and then more broadly speaking on capital allocation, are you in a position where you can give us guidance on 2019 CapEx, factoring in the sawmill expansion capital and some of the other initiatives you've talked about, do you have a given number in mind for 2019 yet?

I think, I wouldn't give you a number but would give you a report over the years without big projects that we did like Calhoun which I don't think I would talk about something we have today, price is $450 million per year, so with all those big projects that I said that was a specific project that we did lately, so that would be my ballpark for now.

Your next question comes from the line of Paul Quinn from RBC Capital Markets.

Yes. Just confused on duty refund, so maybe you can just walk me through what I would have thought that once a order gets reversed that a cheque is cut for the full amount. Why does it come in periodically and it sounds like you've got $6 million left to come in and do you expect that in Q4?

Yes, as you know Paul we don't record our duties on any of the paper or wood through our EBITDA, we record them as deposits to be refundable over time. So for example on FP we actually received $25 million of those refund in the third quarter. So they went against the balance sheet accounts receivable. Since then we have received another $30 million since the end of September to today, another $30 million again which will go against the balance sheet. And there is only $6 million remaining to collect which we expect to have by the end of the year. And then coated groundwood we only paid $6 million before that was canceled and we expect to receive that through Q4 the beginning of Q1 in 2019.

So specifically what's the holdup on the timing of them releasing the deposits? I mean you guys should know what you've paid. And then the order gets -- it gets reversed. Why isn't a [cheque] cut right that day for the full amount.

Well, that's the interesting thing Paul we actually get separate checks for every single entries that we pay duty on in the States over overall those here. So the processing time is a little long on their part.

So how many how many entries would that be in Q3?

Thousands and thousands and thousands.

There are no further questions at this time. I turn the call back over to the presenters for closing remarks.

That concludes today's conference call. I want to thank everybody for joining us today. Thank you.

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