Resolute Forest Products Inc (RFP) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded today, January 31, 2019, at 9 a.m. Eastern Time.

I would now like to turn the meeting over to Ms. Silvana Travaglini, Treasurer and Vice President of Investor Relations. Please go ahead.

Good morning. Welcome to Resolute's fourth quarter earnings call. Today, we'll hear from Yves Laflamme, President and Chief Executive Officer; and then Rémi Lalonde, 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 Presentation and Webcasts 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 expectations, all of which involve a number of business risks and uncertainties and can change as conditions do. Please review cautionary statements in our press release and on Slide 2 of today's presentation.

I would now turn the call over to Yves.

Good morning. Thank you for joining us today. We generated $105 million of EBITDA in the fourth quarter, down from $189 million in the third quarter. While prices continued to be strong for market pulp and paper grades, the effect was more than offset by the $110 per thousand board-feet drop in lumber prices as well as production restrictions, planned maintenance, seasonally higher energy expenses and higher wood costs due to extremely wet weather, mainly in the U.S. Southeast.

By segment, we reported quarterly adjusted EBITDA of $46 million in market pulp, down $18 million; tissue was unchanged at minus $5 million; wood products generated $1 million, down $52 million; newsprint $45 million, down $3 million; and $28 million in specialty paper, a decrease of $10 million against the previous quarter.

For the year, our adjusted EBITDA rose by $210 million to $574 million. With the positive pricing momentum for pulp and paper grades as well as for lumber during the first half of the year, we generated $435 million of cash from operations, a year-over-year increase of over $275 million.

In the fourth quarter, we completed the sale of our Catawba and Fairmont facilities for over $360 million, maximizing the value generation of these assets. Without Catawba, we estimate that EBITDA would have been about $35 million lower in 2018. But the transaction allowed us to achieve an attractive valuation for conversion-ready assets. With the Fairmont divestiture, we can optimize recycled pulp production at our Menominee mill and improve our overall profitability.

The asset sales and our solid operating results enabled us to return $136 million to shareholders through a special dividend and further reduce our leverage by $225 million shortly after year-end. With a strong balance sheet, we are well positioned to fuel growth in our businesses.

Let's review our different segments, starting with market pulp. World shipments of chemical pulp grew 1% in 2018 compared to the prior year. Shipments to China were up 2% for the year but were down 11% in the fourth quarter when compared to the third quarter. Western Europe shipments were also up 2% for the year, while shipments to North America fell by 5%.

Softwood pulp shipments were 3% lower during the same period, while world shipments of hardwood rose 4%. Softwood mills ran at 88% shipments-to-capacity ratio, and hardwood mills were at 89%, largely reflecting industry production disruptions as well as recent softening in Chinese buying activity. Both markets remained strong in the fourth quarter, leading to further publicly reported price increases in October and November across all our pulp grades.

Our realized price rose to $809 per metric ton in the quarter, up $123 year-over-year. Shipments were lower, however, largely due to scheduled maintenance downtime at Coosa Pines soft pulp and -- -- mill and our Thunder Bay kraft mill and a reduction in recycled pulp capacity following the sales of the Fairmont facility. Our production was also negatively impacted by wood shortages in Calhoun due to extremely wet weather as well as recovery boiler issue at the same mill. Weather-related fiber shortages continue to be a headwind going into the first quarter.

Total tissue consumption in the U.S. grew by 2.7% through November compared to the same period last year. Converted product shipments increased 2.1%, led by away-from-home sales, up 3.3%, while at-home improved 1.5%. Our sales growth has been on target this year, reflecting a refocus on our market entry and growing Resolute tissue brand awareness in the marketplace.

While the ramp-up with our Calhoun tissue project has not been as rapid as we had originally expected, we have made significant and encouraging progress in the fourth quarter to improve quality and productivity. We, therefore, expect Calhoun tissue to become profitable in the first half of 2019.

Housing starts in the U.S. were 5% higher on a seasonally adjusted basis through November compared to 2017, averaging 1,264,000 units, which reflects an 8% increase in multifamily starts and a 3% increase in single-family starts. But in the quarter, lumber prices dropped to multiyear lows. Our average transaction price fell to $347 per thousand board-feet, its lowest level in 2 years, essentially reducing our EBITDA to breakeven.

Given challenging market conditions, combined with extremely wet weather affecting transportation and log cost, we temporarily curtailed 10% of our production capacity during the quarter. Despite the lower production, sales volume improved slightly compared to the previous quarter.

North American newsprint demand fell by 11% in 2018 compared to last year, reflecting a 14% drop in demand from newspaper publishers and a 7% reduction from commercial printers. The North American shipment-to-capacity ratio remained strong at 94%, unchanged from 2017. Global demand for newsprint was down 8% through November compared to the same period last year, with Western Europe down 11%, North America 9% and Asia 8%. The world newsprint shipment-to-capacity ratio was 90%. Our sales continued to increase in the quarter with realized pricing reaching $634 per metric ton. Shipments were seasonally higher and also reflected higher international sales, largely timing-related.

North American demand for uncoated mechanical paper was down 6% in 2018 compared to the prior year. Lower demand for standard grades drove this decline, decreasing 9%, while the demand for supercalendered grades was down only 1%. Compared to 2017, the shipment-to-capacity ratio improved from 90% to 92%. Coated mechanical demand was down 8% in 2018 compared to the prior year. The industry shipment-to-capacity ratio was 95%, unchanged from 2017. With the sale of Catawba, we have exited coated mechanical grades.

Our average transaction price rose by $19 per short ton compared to the previous quarter, supported by the continued implementation of previously announced price increases across all grades and a further price increase announced for supercalendered papers in the quarter. Shipment remains relatively unchanged as higher seasonal demand for supercalendered paper was offset by production downtime, largely at our Catawba mill.

As we look at the whole year, I'm proud to report that in 2018, not only did we deliver strong financial performance, but our employees also improved on our excellent 2017 safety performance by achieving a world-class OSHA incident rate of 0.46. We also managed to reduce environmental incidence by a further 10% in addition to the significant reduction in 2017. In 2018, our overall business and sustainability leadership has received significant recognition with over 35 awards and distinction on the regional North American and global business.

I will now have Rémi discuss our financial performance before I conclude with our priorities and outlook for 2019.

Thank you, Yves, and good morning, everyone. Today, we reported net income of $4 million in the fourth quarter or $0.04 per share, excluding special items. This compares to net income of $14 million or $0.15 per share in the fourth quarter of 2017 and $96 million or $1.03 per share in the third quarter.

Special items in the fourth quarter include: nonoperating pension and OPEB credits of $12 million, gains on the sale of Catawba and Fairmont facilities for $141 million and noncash impairment charge of $120 million against the goodwill and long-lived assets originally recorded with the 2015 acquisition of Atlas Paper Holdings. Despite helping to pave our entry into the tissue business and making significant safety and operational improvements, this acquisition has not lived up to our expectations.

Our total sales in the fourth quarter were $932 million, down by $42 million from the third quarter. While we realized higher prices in the pulp and paper segment, the real story was the $110 per thousand board-feet or $49 million drop in lumber prices. Overall volume was also lower as a result of a 25,000 metric ton drop in pulp shipments.

After removing the effects of volume and foreign exchange, manufacturing cost increased by $45 million from the third quarter, including: higher costs associated with scheduled outages and production disruption, including a turbine failure in Thunder Bay and the recovery boiler outage in Calhoun; seasonal increase in energy pricing and consumption, aggravated by a natural gas distribution interruption in Calhoun; and higher wood cost in the U.S. Southeast due to weather-related fiber shortages.

Compared to the third quarter, market pulp's all-in cash cost increased by $64 to $673 per metric ton, largely due to scheduled outages, production disruptions as well as higher weather-related wood costs and an increase in energy costs. Pricing in the segment rose by $25 per metric ton, but the impact was not enough to make up for the higher costs, drawing EBITDA down by $18 million to $46 million or $136 per metric ton.

Cash cost in our tissue segment were unchanged and elevated as we continue with the ramp-up of Calhoun. EBITDA was unchanged at minus $5 million in the quarter.

In wood products, the cash cost increased by $9 per thousand board-feet to $346, reflecting higher maintenance and log costs. Combined with a 24% drop in pricing, EBITDA dropped by $52 million to $1 million this quarter.

Newsprint's cash cost increased by $19 per metric ton to $518 in the quarter, largely due to the lower contribution from Thunder Bay cogeneration assets following a turbine failure. Despite the 6% rise in sales, EBITDA declined slightly from $48 million to $45 million or $116 per metric ton.

The cash cost in specialty papers rose by $57 per short ton to $661. Higher cost due to operational disruption, the annual maintenance of the Dolbeau cogeneration assets as well as higher wood and energy costs more than outweighed the $19 per short ton price increase in the quarter. EBITDA decreased to $28 million or $95 per short ton compared to $38 million in the previous quarter.

With our asset-based optimization over the years, we were able to deliver a strong performance in 2018, including generating $435 million of cash from operations in the year and $84 million in the quarter. This helped to pave the way to return $136 million to shareholders with a special dividend in December. Together with the $334 million of proceeds from asset sales in the quarter, our year-end cash position rose to $304 million. With liquidity improving to $821 million at year-end, we elected to repurchase $225 million of our senior notes, which we were able to execute at par. Accordingly, our net debt-to-EBITDA improved to 0.6x.

We spent $61 million in capital expenditures in the quarter, $20 million more than in the previous quarter. At $155 million for the year, we came in slightly above the 2018 target of $150 million. For 2019, we expect to invest $160 million in capital expenditures, including the next phase in our organic capacity growth project at Saint-Félicien and a number of investments to improve productivity and yields at our sawmills.

For the quarter, we paid $15, 1-5, million in softwood lumber duty deposits. We now have $103 million recorded on the balance sheet. For SC paper, we've received substantially all of the $61 million cash deposits, including $35 million in the fourth quarter. For the uncoated ground wood case, we expect the $6 million of cash deposits to be refunded with interest.

We contributed $27 million to pension plans in the quarter with an expense of $10 million included in adjusted EBITDA. For the year, consistent with our guidance, we made $121 million of pension contributions and $13 million of OPEB payments with an associated expense of $40 million in adjusted EBITDA.

In December, we elected to exit the special funding relief regulations in Ontario. As such, beginning on January 1, 2019, our Ontario pension plans are subject to the Ontario Pension Benefits Act, which provides for funding pension deficits on a going-concern basis rather than on a solvency basis. This essentially puts us in the same position as with our Quebec plan, where we exited from funding relief in December 2016.

Considering the improved position of the Ontario plan, we are not required to make contributions in 2019, thus reducing our annual contribution by CAD 9 million. Accordingly, we expect to make total pension contributions of $100 million and OPEB payments of $15 million in 2019 with an associated expense of $30 million in adjusted EBITDA. This represents a decrease of $60 million in annual pension contributions compared to the 2016 baseline.

Despite an increase in the applicable discount rate, the net pension and OPEB liability on our balance sheet increased by $182 million in the quarter to $1.3 billion. This largely reflects the negative equity market returns late in the year. Based on applicable funding regulations, our funding deficit stands at $586 million at the end of 2018, more than $530 million lower than the net accounting liability.

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

Thank you, Rémi. Our key business priorities in 2019 are as follows: First, build on the late-year momentum with the Calhoun tissue operation to increase productivity and enhance product quality; second, improve operational efficiencies and limit production disruptions across our network to maximize the value generation from our existing assets, reduce costs and further strengthen our competitiveness; third, focus on acquisitions and organic opportunities to further our business transforming strategy; finally, we will continue to build on our world-class safety performance of -- for our thousands of employees and support workforce attraction and retention.

Following a year of positive market trends across most of our business segments, we entered 2019 with cautious optimism. Despite weaker lumber markets, favorable economic conditions and the recent production curtailments give us reason to believe that markets will gradually improve in 2019. Accordingly, our long-term view for lumber is unchanged. We believe in the underlying fundamentals and growth prospects for this market.

Even with the recent softening in Chinese buying activity, we expect the fundamentals for market pulp to remain positive, given the limited capacity addition over the medium term. In 2019, pulp maintenance outages are scheduled at 3 of our mills, which will decrease our pulp production by approximately 25,000 metric tons.

Given lower seasonal demand as well as the continued structural decline, we expect lower paper shipments in the first quarter.

For tissue, we are very focused on improving productivity and quality at Calhoun, as educated earlier, as well as continuing to build our market presence with our attractive range of products. We are targeting positive earnings generation in the first half of 2019, and we remain optimistic about the long-term growth prospects for our tissue business.

Capitalizing on several of our market trends and value-added divestitures, we are entering 2019 with a strong balance sheet, which provides us with significant financial flexibility and positions us with -- well for future growth opportunities.

We also announced today the appointment of Suzanne Blanchet to serve on Resolute's Board of Directors. Madame Blanchet spent over 30 years with Cascades, including as Senior Vice President of Corporate Development from 2014 to 2017. From 1997 to 2014, she was President and Chief Executive Officer of Cascades Tissue Group and the only female president in Canada's paper industry. On behalf of Resolute's Board of Directors and executive team, I would like to formally welcome Suzanne to our organization. We are very pleased she has joined the board, and we look forward to benefiting from her experience and expertise.

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

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

So I'm a little confused on the tissue segment. Just in your commentary, you've got sales growth is on target and then you're highlighting that you've made significant progress in Q4 on quality and productivity. So EBITDA is flat. But is that basically meaning that pricing realization should come down to balance the positives with the negative or the flat EBITDA?

I think that we -- well, we made significant improvement on operation, but mostly in the last month of the quarter. So we see -- on quality, we're talking about the tissue machine on the caliper side, that gives more [quality] converting. This is why we haven't seen the benefit of that right now. So -- and with testing with suppliers, we had some productivity testing, I would say, that lowered the volume somehow in production. And also for the Florida tissue, so pulp cost was also higher. This is why we don't see the impact right now. So we're expecting better results than that in the next quarter.

Okay. And maybe you could just spend a minute on the quality, especially at the new machine, just because it's new technology there. Are you able to do the super premium? Or what type of grade output are you achieving at the facility?

Yes. So the [FDC] machine in Calhoun, we're definitely progressing in the right direction. I think at the bath tissue, we're really where we should be. We're still -- I think we -- on the premium side, on the towel, we're getting there so -- but not really where we'd like to be. But we can compete with the pretty good quality on the towel as well. So -- but yes, we really think we're where we want to be. And this is part of the improvement we're talking about. We worked really hard over the quarter with the supplier of the tissue machine. And when I'm talking about the caliper, this is exactly what I'm saying. Now we're meeting exactly, at least on the bath, and close to the towel, the quality we wanted to meet.

Okay. And just switching over to lumber segment. I mean, the drop in contribution was expected given the pricing drop. Just wondering if you could give us a forecast on log cost, what you're seeing and where you are with curtailments currently.

As far as curtailment, we put it back on track since the beginning of the year. So I mean, back to where we were before we curtailed over the last quarter. So productivity is okay. But as you know, winter is always tougher. So forecast on the first quarter should be okay but maybe not as good as we thought. I was looking, as an example, at the (inaudible) this morning. The weather was minus 41 before wind factor. So it's pretty -- so the other half, as far as the cost, we said that log cost went higher, as you know, when we -- the Quebec new origin system that -- saying new, but it's been there for a few years now, it's more connected to the market. And so when market went high like it did in the first half of the year, and it was pretty good also the previous year, for 2017, some [page] and wood costs are adapting to that, and there is always a lag. So now, when the price went down as fast as it went, of course, the cost is not going to readjust that fast. So this is why we had a significant gap between the lumber's selling price right now and the wood costs. So that is a pretty significant impact on our EBITDA, as you can see this morning, so...

Okay. Then just lastly, you've got a number of facilities that are down right now. And I think we saw something in the news around Fort Frances and I guess Thorold is also out there. Maybe you could give us an update on what your plans are with those facilities.

Yes. I mean, as far as Thorold, we're still looking for -- we explored everything we could to restart that mill, but we came at the conclusion that it was not an easy thing to do, even with the different products. And we have some prospect to sell the mill. We're still looking at this. We don't have anything solid right now to announce, but we're working on it. As far as Fort Frances, I think it's been pretty public about what's happening with this potential new interest with [Caul and] Repap. So -- and so we have had one communication with those guys so far, and it's all we've done. I mean, as far as what they're doing or what they want to do, we're pretty much like you. We're [reading all] the newspaper and the news. What we are doing then, talking to them right now.

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

Yves, we've seen a lot of uncoated freesheet capacity slated to come out of the market and looks like pricing could be strong there for maybe the next 18 months. How much competing grades could you produce if you wanted to ramp that up? And would you have to spend any money to do so?

For us, I think we're pretty much where we can be right now with the mills we have. I don't think we see a way to add in any capacity right now. But the thing is that with the uncoated freesheet going up, and sometime, there is downgrade in the paper from the uncoated freesheet, that gives us some opportunities in the other grades and that we're feeling that right now. So it means that when we have other grades that the demand is going down and there is no, let's say, [closer] capacity, it has to cover the other [fires], and then we've been feeling that right now. So that's bringing the solid pricing, as you said, and not just on that grade, which is good for us. But as far as adding capacity, it's more preventing to curtail capacity right now.

Fair enough. And Rémi, just a question for you on the pension deficit. The -- I think it's Slide 18, it shows the funding purpose figure at $586 million. Is that after taking effect of the switch to a going-concern basis in Ontario?

Yes, it is, Hamir.

Your next question comes from the line of Sean Steuart from TD Securities.

A couple questions. I just want to follow up on tissue. And with respect to Paul's question, you gave some context on the Calhoun progress. And I guess I just want to reference the Atlas assets. And you've written it off effectively, and you referenced the frustration you had. Is there any fix for those assets, whether it's CapEx-related or capital-light initiatives, to turn that performance around?

I think as far as the performance, as what Rémi was saying is that, of course, it's a surprise that it didn't perform what we thought when we acquired that. But as far as improving the Atlas assets, we've done pretty good. I mean, as far as housekeeping, safety and productivity, we're definitely heading to the right direction. I mean, it's a big difference compared to when we bought. And also as far as investing, we've made significant changes over the quarter. We closed 2 converting lines in Sanford, moving that to Miami, and using -- stopped using an external warehouse and using the space we have at Sanford to -- significant saving that way as well. And we're looking, of course, at other opportunities. But I mean, the assets we bought, as we speak today, are definitely much different than it was at the -- we see in the beginning. So this is all I can say for now.

Yes, maybe if I can add too, Sean. I mean, what we wrote off was $81 million of goodwill, and then the long-lived assets was about $39 million.

Okay, got it. And when you say you expect to be profitable at Calhoun over the first half, are you talking operating earnings profitable or positive EBITDA?

I'm going to start with EBITDA for now. So hopefully -- and then hopefully, I can do both. But we didn't necessarily target one in particular. We just want to be profitable, and hopefully, we're going to start with EBITDA. So we'll see what we can do.

Okay. And for the 2019 CapEx budget, you're [safely saying], I suppose, that, that CapEx is fully embedded in 2019. The spending you have for the sawmills, should we think of that as a multiyear plan to optimize those assets? Or is it 2019-weighted?

I believe in 2019, we're going to be pretty much done on those assets as well because sawmill projects are usually completed in about 12 months. So -- and so we think the ramp-up is something different. But as far as completing the project, I would say that the one that's been approved so far is going to be completed in 2019.

And can you remind us of the expected capacity pickup in the sawmill assets once that capital's spent?

Yes. So the goal is to have an improvement in productivity of about 40 million to 50 million board feet a year. And so of course, when you see what we've done in the last quarter when we curtailed because of the market and log, but as -- if everything goes well, we're still aligned to meet that capacity. So that should be all of what we had before.

(Operator Instructions) Your next question comes from the line of George -- sorry, Roger Spitz from Bank of America.

This is Dylan for Roger. Do you expect any further near-term asset sales?

I mean, it's hard to say. I wouldn't say that -- maybe Fort Frances and Thorold. But other than that, if there are opportunities, as any company, we're going to look at everything as we did with the 2 last one that we sold. But to say that we have something that we're really looking at right now in the -- on our core assets, the answer would be no as we speak.

Got it. And how do you see working capital in Q1 '19 and full year 2019? Do you see this as a use or a source of cash?

Probably going to be a use. We tend to build logs, log inventory, over the course of the winter so that we have enough raw materials for the spring thaw. But net-net over a year, it should be -- it should work itself out.

Got it. And last question, how do you see 2019 sales and admin expenses versus the $165 million in 2018?

The -- sorry, you said the SG&A?

Yes.

Do you want to take it?

Yes, I think at the SG&A, we expect to be lower than where we were this year. Of course, with the Fairmont and Catawba being away as far as sale and expenses, so we expect a reduction in 2019.

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

Yes. Of the $160 million in CapEx in '19, what are we expecting to spend on the lumber operations?

I think it's about -- is it -- about $40 million, yes, about $40 million.

$40 million, yes.

Okay. And then you outlined the 40 million, 50 million board-feet tick up in production. [When] do you expect the cost to come down? Like if we look at...

Yes, of course. We expect. Yes -- so the answer is yes. If we keep the -- everything like it is today, like wood cost and everything, it would go down. So -- but hopefully, we expect to have lower cost coming more from the log side than the 40 million board-feet. Because 40 million board-feet out of about 2 billion capacity is not that big. So -- but yes, hopefully, with the lag I was talking about in price compared to [stock], it's going to shorten a little during the next year or so, at least the next quarter.

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

Yes. So this concludes today's conference call. I would thank you all for joining us today. Thank you.

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