Resolute Forest Products Inc (RFP) 2019 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Q1 2019 Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded today, April 30, 2019 at 9 a.m. Eastern Time.

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

Good morning. Welcome to Resolute's first quarter earnings call. Today, we'll hear from Yves Laflamme, President and Chief Executive Officer; and Remi Lalonde, 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 presentation 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.

I will now turn the call over to Yves.

Good morning. Thank you for joining us. Today, we reported $104 million of adjusted EBITDA for the first quarter compared to $105 million in the fourth quarter. This reflects better productivity, particularly in market pulp and a modest rebound in lumber prices, which allowed us to the absorb the impact of an increase in wood fiber cost at our pulp and paper mills, seasonally higher energy costs, capacity reduction following the divestiture of the Catawba mill and softening demand in the global newsprint market.

By segment, we reported quarterly adjusted EBITDA of $47 million in market pulp, relatively unchanged from the fourth quarter, minus $3 million for tissue, a $2 million improvement. Wood products was at $14 million, up $13 million; newsprint $35 million, down $10 million. And $25 million in specialty papers, a decrease of $3 million against the previous quarter.

Our diversified asset base continued to produce strong results delivering a 13% overall EBITDA margin in the first quarter including a 16% margin in paper despite building market pressure in some of our businesses and also the elimination of $15 million of EBITDA from the Catawba sale. Our balance sheet also remains strong with almost $600 million of liquidity.

Let's review our individual segments starting with market pulp. World shipments of chemical pulp grew by 1% in the first quarter of 2019 compared to the year ago period. Shipments to Western Europe and China were down 6% and 1% respectively while shipments to North America rose by 9%. World shipments of hardwood were down 1% but softwood pulp shipments were 4% higher during the same period.

Global softwood mills ran at 93% shipments to capacity ratio while hardwood mills were at 85% reflecting significant producer inventory accumulation, mainly from Latin American producers.

Fourth quarter momentum in North American markets carried into the quarter but came under pressure towards the end. As a result, our average realized transaction price for market pulp remained unchanged at $808 per metric ton. Shipments were lower reflecting the reduction in our pulp capacity following the sale of the Catawba and Fairmont facilities in 2018 representing approximately 300,000 metric tons annually.

After adjusting for the impact of divestitures, shipment rose as we had fewer scheduled outages and production restrictions during the quarter. We took 4,000 tons of scheduled maintenance downtime at our Calhoun facility in the quarter.

Total U.S. tissue consumption grew by 4.4% through February compared to the same period last year. Converted product shipments increased by 2.9% including an improvement of 4% in the away-from-home sales and 2.3% in at-home sales. Our sales revenue was up another 11% this quarter reflecting improved product mix, price increases for away-from-home products and a 4% increase in shipments. For our Calhoun tissue operation, we have made good progress on improving product quality and increasing productivity of both the tissue machine and converting operation. We also reduced warehousing and freight cost in the quarter due to the distribution center recently completed at Calhoun.

Housing starts in the U.S. were 9% lower on a seasonally adjusted basis this quarter compared to 2018 averaging 1,193,000 units, which reflects the 20% decrease in multifamily starts and a 5% decrease in single-family starts. Lumber prices improved from multiyear lows and our average transaction price increased to $374 per thousand board feet up $27. Volumes, however, declined as adverse weather conditions on both side of the border affected transportation, log supplies and construction activity. Accordingly, we are temporarily curtailing 30 million board feet of lumber production at several of our sawmills during the second quarter.

North American newsprint demand fell by 15% in the first quarter of 2019 compared to the first quarter of 2018. Demand from newspaper publishers fell 17% reflecting the decrease in construction and consumer inventory destocking while demand from commercial printers declined 10%. The North American shipment-to-capacity ratio dropped to 84% compared to 94% in the year ago period. Global demand for newsprint was down 7% for February compared to the same period last year with North America down 14%, Asia 8% and Western Europe 3%. The world newsprint shipments-to-capacity ratio was also 84%. Even with pricing pressure, our overall average realized pricing remain stable at $634 per metric ton. Shipments dropped by 14% this quarter and finished goods inventory rose reflecting seasonality, the timing of export sales and softening market conditions.

North American demand for uncoated mechanical papers was down 9% this quarter compared to the year ago period. Lower demand for standard grades and consumer inventory destocking drove this decline decreasing 6% while demand for supercalendered grades was essentially unchanged.

Compared to the first quarter of 2018, the shipments-to-capacity ratio for all uncoated mechanical papers decreased from 91% to 83%. But our average transaction price rose by $12 per short ton compared to the previous quarter supported by the residual impact of Q4 price increases and the further price increase pressure implemented in uncoated freesheet in the quarter. The drop in shipment is almost entirely due to the sale of the Catawba mill at the end of 2018, which reduces our annual specialty papers capacity by about 350,000 short tons.

Shipments were also impacted by lower seasonal demand for supercalendered paper.

On the labor front, we announced on April 24 that unionized employees at 3 of our U.S. mills representing about 60% of our total U.S. pulp, paper and tissue production capacity voted in favor of a 4-year renewal of their master collective agreement. According to union management, partnership serves the best interests of our employees, customers, shareholders and the range of other stakeholders. I will now have Remi discuss our financial performance before I conclude with our outlook.

Thank you, Yves, and good morning, everyone. Today, we reported net income of $30 million in the first quarter or $0.32 per share excluding special items. This compares to net income excluding special items of $4 million or $0.04 per share in the previous quarter and $17 million or $0.18 per share in the same period last year. Special items in the first quarter include nonoperating pension and OPEB credits of $12 million. Our total sales in the first quarter were $795 million, down $137 million from the fourth quarter, almost entirely due to the divestitures of the Catawba and Fairmont facilities in 2018. Otherwise, overall volumes were slightly lower as better pulp production was more than offset by the decline in newsprint shipments. Pricing, however, was favorable overall, especially in wood products.

Manufacturing costs were relatively unchanged from the fourth quarter after removing the effects of volume, the impact of foreign exchange and the cost of goods sold related to the 2018 divestitures.

This reflects improved productivity given fewer scheduled outages and production disruptions offset by higher wood costs in our pulp and paper mills due to fiber shortages and a seasonal increase in energy costs. Compared to the fourth quarter, market pulps all-in cash cost decreased by $27 to $646 per metric ton, largely due to better production, which was partly offset by higher fiber costs increasing EBITDA per metric ton to $162. Accordingly, despite the sale of Catawba, EBITDA remained relatively unchanged at $47 million.

Cash cost in our tissue segment was relatively unchanged as lower freight expenses associated with our new distribution center were offset by higher pulp costs with the divestiture of Fairmont.

Pricing, however, increased by $102 per short ton, improving EBITDA by $2 million to minus $3 million. In wood products, the cash cost decreased by $4 per thousand board feet to $342. Lower market-based stumpage fees and maintenance more than offset an increase in freight costs and seasonally higher fiber usage. Together with an 8% increase in pricing, EBITDA rose by $13 million to $14 million this quarter.

Newsprint cash cost increased by $10 per metric ton to $528 in the quarter reflecting higher fiber and energy costs as well as lower sales volume despite the higher contribution from the Thunder Bay cogeneration assets following a turbine failure in the previous quarter and overall lower maintenance. As a result, EBITDA declined from $45 million to $35 million.

The cash cost in specialty papers improved by $18 per short ton to $643 as our exit from higher-cost coated mechanical grades more than outweighed the increase in wood cost due to abnormally wet weather, unfavorable energy expenses and higher scheduled maintenance costs. While EBITDA decreased to $25 million down from $28 million in the previous quarter, EBITDA per short ton rose by $30 to $125 due to the sale of Catawba.

We repurchased $225 million of our senior notes in the quarter, which contributed to the $235 million decrease in cash to $69 million. Net debt-to-EBITDA remained low at 0.6x and liquidity stood at a strong $595 million.

In the first quarter, we generated $23 million of cash from operations compared to $84 million in the previous quarter. Most of the difference is attributable to the seasonal buildup of log inventory and the increase in newsprint finished goods inventory.

We spent $26 million in capital expenditures, $35 million less than in the previous quarter. The fourth quarter included expenditures for the first phase of our Saint-Félicien strategic project to expand capacity as well as the new distribution center for Calhoun tissue. We continue to target CapEx of $160 million for 2019, which includes the next phase of Saint-Félicien as well as a number of investments to improve costs and productivity at sawmills.

For the quarter, we paid $14 million in softwood lumber duty deposits and we now have $117 million recorded on the balance sheet. We recovered in the quarter all $6 million of duties associated with the uncoated groundwood papers case. We contributed $19 million to pension plans in the quarter and made OPEB payments of $4 million with an expense of $9 million included in adjusted EBITDA. Consistent with our earlier guidance, we expect to make $100 million of pension contributions and $15 million of OPEB payments this year with an associated expense of $30 million in adjusted EBITDA.

The net pension and OPEB liability on our balance sheet decreased by only $11 million as ongoing pension contributions were largely offset by an unfavorable currency impact. With the adoption of new lease accounting standards, we recognized total liabilities of $66 million associated with operating leases and corresponding assets on the balance sheet as of quarter end.

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

Thank you, Remi. We took advantage of favorable market trends and value-added divestitures to strengthen our balance sheet heading in 2019, which provides us with significant financial flexibility and positions us well for future growth opportunities. This is particularly important now as we take a more conservative view of the road ahead following the impressive gains in 2018. For market pulp, prices have started to trend down and price realizations are expected to be lower in the second quarter. Our view on market pulp fundamentals, however, remains unchanged. We believe that the limited capacity additions and growing demand will support favorable market dynamics over the medium term. The expected annual pulp outage at our Calhoun facility led to 9,000 metric tons of lost production in April in addition to the 4,000 in the first quarter. The only order schedule outage in the second quarter is at Thunder Bay, which is expected to decrease our pulp production by approximately 4,000 metric tons.

Our tissue segment remains a key focus as we continue to build on the late year progress in terms of productivity and quality for both machine production and converting operations.

For lumber, we expect our cost performance to improve for the balance of the year, but we are more conservative with our expectation on our lumber markets. While our near-term outlook is more uncertain, our medium- to long-term outlook continues to be positive. We believe in the growth prospect for lumber markets. With ongoing global demand declines and currently low operating rates, we expect lower pricing for paper grades in the second quarter. But despite the softening market conditions, our paper business generated strong first quarter EBITDA margins, and we are confident that we can continue to produce attractive cash flow as we take specific steps to reduce inventory and maintain a competitive cost position.

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

(Operator Instructions). Your first question comes from the line of Hamir Patel with CIBC.

Yves, could you maybe share more about your thinking about lumber markets over the near term. It sounds like you're more cautious than some of the other companies out there. And with respect to the downtime, you referenced in the presentation $30 million board feet of market-related downtime in Q2. What's your sense as to how much downtime the Quebec and Ontario industries taking at the moment?

Okay. As far as the trend, when we're looking at what happened in the last year, the first half of the year and maybe the last half of 2017, we know that the reason why price went up -- pricing went up was more about difficulties that Western Canada had with fires and then after that with the car supplies for railroad. So as soon as the inventory was ready to ship, market went down significantly since the second half of 2018. So we saw that those difficulties didn't really happen and not as bad actually during the first quarter of 2019.

So -- and when you -- and the demand in the housing starts, I would say, stable, stable low in the range of the 1.2 million housing starts. So this is why I don't see in front of us, what could make really short term, the lumber demand better than it is now or pricing going up significantly unless what we've been feeling quite a few times lately the downtime taking by producers. That's why we see that as maybe being more conservative in the next quarter or so, I would say.

We are still confident that it's a good market to be in. We are still confident that the improvement and renovation is using more wood than ever and the economy is still pretty strong. So we are confident for the futures and with -- this is definitely a business, one we'd like to grow more. But as far as short terms, based on the reason I just said, so -- that's why we're saying that and that's the way we see that.

As far as the downtime, we look at the fiber supply and there is some shortage of fiber supply due to winter, transportation, infrastructure and all the reasons above in Eastern Canada, like -- probably other guys may have in the West as well. And when you're looking at the spread between stud and random and the market, so the spread between 2x4x8 and 2x4 random has been significant for a while we used to have in the past both $28, $30 per 1,000 board feet. Now we're playing more in the range of $70, $80.

So we said, if the market is not that great and we have to take some downtime, why not using the fiber we have and producing random instead of stud where the buildup is better. So that's why we're kind of addressing the market oversupply I would call it and at the same time kind of a shortage of wood that we manage in that way with the stud mills. So as for Eastern Canada, I would say that I don't know the number of our competitors, but I think they are probably not -- they are not in the better shape than we have as far as profitability of stud mills right now.

Fair enough. That's helpful. And Yves, there's been a lot of talk in Western Canada about changes in B.C. with respect to some of the habitat protection for the caribous. Are there any developments going on in Ontario or Quebec that could potentially limit industry production?

The -- we've been -- I think we've started to talk about this. There's 3 of them, I would say, for the industry of this caribou's protection since we have this law in -- on the Canadian government about the -- this being below 60% disturbance. And so -- and yes, when you're looking at possible impact, it's significant. And right now, the Canadian government is working with provinces to say that you have to present plans to improve the situation of what you're going to do with -- about caribou.

And yes, Quebec and Ontario are doing their own things. So -- and they're conflicting the industry. All I can say about Quebec is that I think 2 or 3 weeks ago, the Forestry Minister said that he's going to make a huge consultation among the stakeholders including union industry and communities and everything. And assuming that it's going to take maybe a couple of years before he's done with that consultation and presenting a plan, even though they're doing some step.

The other thing that we have to mention is that in Quebec, and I believe in Ontario as well, the -- about 70% of the habitat of caribou is fully protected, what we call the Nelson's limit. So -- and it's sound to me that government is looking at that plan and trying to see what it can do about that limit and where it should go because the tendency now is the -- with the global warming, the caribou has a tendency to go north, more north, so -- and trying to disturb too much the forest industry, we want to make sure that all the analysis and the science is there taking into account all the changes that we see and weather and everything that making move that is not related to the industry at all. So -- but to answer in short -- short answer, yes, there are some threats in Eastern Canada as well.

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

A couple of questions. I'll start with newsprint. The inventory build you had in the quarter, how much of that was the delayed export shipments? And maybe if you can just speak to the -- your current comfort with inventory levels and potential plans for curtailments in that segment?

Yes. As far as the overseas shipments, I would say, maybe about 10,000 tons that would be represented in the inventory we have as far as the gap between the time we produce and we ship. So as far as the plan for the inventory, we already took action to, first of all, while I was talking about the wood supply earlier, so we have a -- next in the sawmill that couldn't supply the ship or couldn't run the sawmills for log supplies. So we took that opportunity to take -- or reduce capacity on one of our newsprint mill -- 2 actually. So in Quebec, so that's helping. And fortunately, that's really, really good, because we can produce, we don't -- but that's something we've done.

The other thing is that we have few shutdowns that are for repairs that was scheduled later in the year and so they were supposed to be done with contractors, which is more expensive. So what we did, we kind of advance those shutdowns earlier and extended those shutdowns to do those repairs by our own employees and by the same time, we kind of reducing production and kind of adjusting the inventory that -- we're reducing the inventory that we -- so that's pretty much what we're doing right now and have in mind going forward in Q2.

Okay. On the tissue segment. I think it was last call you suggested that you're anticipating a transition to a positive contribution at some point in the first half. Is that still a feasible timeline and maybe just a bit more context on the ramp at Calhoun and how you're expecting results to trend for that segment?

Yes. I think we're really close. I mean that's -- and of course, when you're looking at the numbers, you don't see that for facilities, but even the Florida facilities are doing okay right now. And so -- and we were talking about the ramp up, I said earlier on converting and I mean in the quarter, we made significant progress, quality and productivity on both, and I mean significant progress, I'm talking about double digits and percentage of improvement. And I can say right now in April, we're still improving at about the same pace, so which is really, really interesting and really positive.

The thing that I'm going to be careful about and I understand I said that in first quarter was something that I didn't take into consideration because nobody knew is that when I mentioned that we're going to lose about 7,000 ton of pulp from Calhoun on the extended outage in April. So that was not supposed to happen and we're pleased to be integrated but the bad news by being integrated, so by having problem with the pulp, we also have problems to supply the tissue machine in April with the right quality of pulp, so with the right volume. So that's impacted the tissue business in Calhoun. But I'm still hoping for something good at the end of the quarter. So -- and as I said that we are definitely improving every day on those assets.

And so the other thing that I'm a little more prudent of what I said in the first quarter is the problem, I said we just had in April, but it's more pulp problem but it's connected to tissue business. But we're definitely heading to the right direction.

Okay. One last question for me. You referenced the strength in the balance sheet even after the debt repayment, you have abundant liquidity. Broader thoughts on priorities for that liquidity beyond the CapEx program this year, has your thinking on returning capital to shareholders evolve in light of pulp and paper market weakness. Any context you can give us there.

Yes. I think that all the options are open, of course, when you have good liquidity, which is, I would say, it's a nice problem, if we see that, that way. As far as the CapEx was still aligned for the, at least, completing what we've done in Saint-Félicien, which so far, we see a significant payback on the investment we made last year. We're still completing the sawmills investment that we were -- we had on the list, the one that has been started or not started yet. The rest is about trying to be optimistic that there are something on the segment we mentioned that we see opportunity in our plans to transform the company. So -- and as we said, we see not necessarily a lot of positive sign in front of us in the market of those products, which may present some good opportunity while we're going to be careful the way we're going to approach those opportunities if there are any.

And there are no further questions at this time. I turn the call back over to our presenters.

So this concludes our conference today. We thank you all for joining us.

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.