Resolute Forest Products Inc (RFP) 2021 Q1 法說會逐字稿

Good morning, and thank you for standing by. Welcome to Resolute Forest Products First Quarter Earnings Call. (Operator Instructions)

I would now like to hand the conference over to Marianne Limoges, Treasurer and Vice President, Investor Relations. Please go ahead.

Good morning. Welcome to Resolute first quarter earnings call. Today, we'll hear from Remi Lalonde, President and Chief Executive Officer; and Sylvain Girard, 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 webcast page under the Investor Relations section of our website, and you can download the slides.

Today's presentation will include non-U.S. GAAP financial information. Our press release and the appending include a reconciliation of non-GAAP information to U.S. GAAP financial measures.

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 the cautionary statement in our press release and on Slide 2 of today's presentation.

I will turn the call over to Remi.

Good morning, and thank you for joining us. Today, we reported $221 million of adjusted EBITDA for the first quarter compared to $129 million in the fourth quarter. This has been a very good quarter for our strong and growing wood products business, as the lumber tailwind continues. The segment delivered $232 million of EBITDA, an increase of $93 million from the fourth.

For the other segments, we reported adjusted EBITDA of $10 million in market pulp, up by $8 million; $3 million for tissue, up by $1 million; and minus $9 million for paper, down by $8 million.

We strengthened the balance sheet and made our business more competitive with the timely refinancing and deleveraging of our senior notes, and the refresh of our senior secured credit facility, as Sylvain will speak to in a few minutes.

Looking further ahead, we expect to benefit from about $30 million of annual free cash flow improvement once the implementation guidance from the recent U.S. pension relief measures take effect. We were to generate concrete value for shareholders on the heels of our strong cash generation by repurchasing 8.7 million shares of common stock in the last 10 months or 10% of the outstanding, including 1.7 million shares in the first quarter. Our average repurchase price for the 8.7 million shares is $5.33.

Let's talk about our individual businesses, starting with wood products. Despite a weather-related setback in February, first quarter, U.S. housing starts were at $1.6 million on a seasonally adjusted basis, up by 2% from the previous quarter, reflecting strong fundamentals and accommodative interest rate environment. Lumber consumption for home improvement projects is expected to continue to grow this year after a 12% year-over-year increase in 2020. Benchmark lumber prices attained record highs in March and, as a result, our average transaction price increased sharply in Q1 to $874 per 1,000 board feet, an increase of $266 per 1,000 board feet or 44% compared to the previous quarter.

Our shipments, however, worth $50 million board feet lower because of a seasonal shortage in railcars and trucks, which pushed finished goods inventory up by 46 million board feet to 143 million, in line with last year at the same time. We're making good progress with the ramp-up at our El Dorado and Ignace sawmills, both of which are running on 2 shifts as of this week. The sawmills have an annualized capacity to 295,000,000 board feet, but the volume impact will be incremental in Q2.

While benchmark prices hit record levels during the quarter, the momentum carried into Q2, giving us a strong order book at very attractive prices.

World demand for chemical pulp through February declined by 4%, but producer inventories were within normal ranges, and benchmark list prices rose sharply on the back of rapidly improving supply-demand dynamics. In the quarter, our average transaction price rose by $51 per metric ton or 9%, with gains in each virgin rate.

Shipments slipped by 12,000 metric tons, mostly due to the planned annual outage at the Coosa Pines pulp mill, but finished goods inventory also dropped by 7,000 metric tons to a very low level of 46,000 metric tons. The pace of price recovery from the pandemic impact picked up in the first quarter, and we expect that momentum to carry into the second quarter with further price improvements against what are still historically soft margins for high-quality virgin pulp.

While analysts expect higher per capita at-home tissue consumption over pre-pandemic levels with more the workforce working from home and a greater frequency of cleaning, we observed a drop in demand for at-home tissue products in March, as retailers now appear to be destocking inventories from what they built in the pandemic. The away-from-home space is still under pressure as results -- as a result of uneven recovery across the subsectors, such as commercial office buildings, restaurants, entertainment, hotels and cruise ships.

The average transaction price increased by $21 per short ton or 1% in the quarter, but for the reasons I just mentioned, pricing and volume will be under more pressure in the second quarter.

North American demand for newsprint fell by 25% in Q1 over 2020, indicating that demand has yet to recover from the impacts of the pandemic. We've reduced our capacity accordingly, having recently confirmed the indefinite idling of our Baie-Comeau and Amos newsprint mills, which had been temporarily idled since the spring of 2020. As difficult as these decisions may be, and they are, our 4 remaining newsprint mills with less than 1 million tons of capacity are very strong mills with structural advantages, such as internal power generation and favorable market access, which will allow us to compete for a bigger piece of a shrinking pie.

Along the same lines, demand for uncoated mechanical papers fell by 14% in the quarter. Having said that, operating rates have been tightening for all of our paper grades, including newsprint. The average transaction price in the paper segment increased by $13 per metric ton during the first quarter or 2%. Shipments slipped by 16,000 metric tons due to the seasonally higher demand in the fourth quarter, and inventory decreased by another 9%. With the improving order book, we expect paper to return to positive EBITDA in the second quarter.

I'll have Sylvain discuss our financial performance.

Thank you, Remi. We reported net income of $119 million in the first quarter or $1.45 per diluted share, excluding special items. This compares to net income, excluding special items, of $45 million or $0.55 per diluted share in the previous quarter, and a net loss, excluding special items, of $29 million or $0.33 per share in the same period last year.

Special items in the first quarter included $37 million in losses related to lumber hedging contracts, including $14 million in unrealized losses, foreign currency translation loss of $5 million from net monetary liabilities and $3 million in closure-related charges for the indefinite idling of the Baie-Comeau and Amos newsprint mills.

Total sales in the quarter were $873 million, up by $104 million compared to the fourth quarter due to higher realized market prices in all segments, most importantly, in wood products with $100 million increase this quarter.

Manufacturing cost rose by $5 million in the quarter after removing the impact of volume and foreign exchange and includes a $12 million expense related to a process improvement program at our Calhoun operations. Compared to the fourth quarter, the all-in delivered cost for the wood products segment rose by $49 per 1,000 board feet or 13%, reflecting an increased variable compensation provision, higher fiber usage and the Canadian emergency wage subsidy credit received in the previous quarter. EBITDA in the segment improved by $93 million to $232 million.

In the market pulp segment, delivered cost increased by $22 or 4% per metric ton mainly due to higher weather-related energy and freight cost. EBITDA in the segment improved by $8 million to $10 million.

The delivered cost in tissue decreased by $28 per short ton or 1%, and EBITDA for the segment was $3 million. Paper's delivered cost increased by $31 per metric ton or 5% due to increased weather-related energy and freight cost as well as the Canadian emergency wage subsidy credit received in the previous quarter. EBITDA for the segment came in at negative $9 million.

In the quarter, we closed on a private offering of $300 million unsecured senior note due 2026, with a 4.78% coupon issued at 100% of par value. We used the proceeds and cash on hand to redeem at par, all of the $375 million aggregate principal amounts and outstanding of our 5 7/8% senior notes due 2023, which resulted in a net debt reimbursement of $35 million.

We generated $74 million of cash from operating activities in the quarter, which represents an increase of $123 million compared to Q1 last year. The cash from operating activities also includes an increase of $99 million in working capital, half of which reflects the seasonal buildup of logs ahead of the spring breakup, and the other half is related to growth in revenues across our segments, translating into more receivables.

With a net debt at $449 million at quarter end, our net debt to last 12 months adjusted EBITDA fell to 0.9x, excluding pension. We made $14 million in capital expenditures during the quarter. Despite the relatively low spending in the quarter, we plan to make about $100 million in net capital expenditures in 2021, including the level-setting investments around the U.S. saw mills we acquired last year.

And in light of the encouraging fundamental indicators around building materials, in addition to the ramp-up of our El Dorado and Ignace sawmills, we're looking at other potential opportunities to drive more growth in our wood product business, including incremental organic growth. We made $32 million in softwood lumber duty deposits in the quarter, bringing our total deposits to $275 million, which is recorded in other assets on the balance sheet.

At quarter end, we amended our existing and reducing the spread of our terminal facility by up to 10 basis points. At closing, we repaid the term loan with $155 million from drawings under the revolver facility and $25 million from cash on hand. This refinancing allows us to continue borrowing at very competitive rates, while providing additional flexibility for more debt repayment in the future.

Finally, we contributed $27 million to pension plans in the quarter and made OPEB payments of $3 million. During the quarter, we announced the indefinite idling of Baie-Comeau and Amos newsprint mills, the impact of lower interest rates on liabilities and also extend the amortization periods for funding shortfalls to 15 years rather than 7 on the previous rules.

We expect this law to provide approximately $30 million in contribution relief per year for at least the next 3 years, which is anticipated to be implemented in 2021 once guidance is issued by the authorities.

We previously provided guidance of $120 million in pension contribution for 2021. We anticipate the number to be slightly lower when the upcoming implementation of the U.S. pension relief measures take effect in 2021. We expect to benefit from the full impact of the new law in 2022.

Considering the significant increase in treasury rates and the positive gains of the equity markets in the quarter, if the year were to end on March 31, we would expect the funding ratio on an accounting basis and on a funding basis to have tightened, which would imply lower contributions in the future, but we will conduct that assessment only at year-end in accordance with applicable accounting and pension funding rules.

Thank you, Sylvain. This has been an exceptional quarter for EBITDA generation, which underscores the strength and scale of our growing lumber business. As in any business, there will always be challenges. And in our case, for now, that includes trade barriers like softwood lumber duties, but the long-term defining feature for Resolute comes down to fiber management infrastructure.

We built deep roots in Québec and Ontario to access high-quality [SFR] and we developed a sophisticated infrastructure to manage fiber flows from harvesting through transformation into a range of end products to maximize resource utilization and process efficiency.

As for near-term financial performance, we're optimistic that lumber will provide for another very strong quarter based on the market conditions and our healthy order book. While tissue should be more challenging in Q2 as a result of end market inventory rebalancing, we're looking for better contribution from pulp and paper as margin is normalized toward trend out of the heaviest impacts of the pandemic.

As there are a number of newer investors to the Resolute story, I want to underscore our recent announcement to set a 30% greenhouse gas emissions reduction target from 2015 levels by 2025. We were an early adopter of climate action as a cornerstone of our sustainability strategy, and I thought it was appropriate as one of my first actions as CEO to demonstrate our continued focus around this important issue. Today, 3 quarters of our total energy needs comes from renewable sources, such as hydroelectricity and carbon-neutral biomass. Our commitment to renewable energy is good for the environment, and it's good for the bottom line.

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 of CIBC Capital Market.

Could you speak to what are the opportunities to debottleneck the lumber platform? And what sort of volume uplift you think you could see over time?

Yes. So one of the areas of focus for us, Hamir, has been in the U.S. sawmills. So we talked about some of the level setting investments that we announced when we acquired the mills early last year, and that is coming along pretty well. There are additional opportunities that we think are pretty low-hanging fruit that we're going to pursue in the coming quarters, and we think our returns on those projects are very, very attractive even at trend lumber prices.

And we're talking just roughly, I'd say, probably 100 million board feet or so in the U.S. assets. But there's also some opportunities that we're considering in Canada and Québec, in particular. There's a couple of things that we're looking at for more incremental volume.

And then Remi, thoughts you could share on maybe what the M&A environment is for sawmills. I know we saw kind of a larger platform in Eastern Canada trade recently.

The synergies -- synergy opportunities, anything that would make sense within our network would be interesting. But you're correct. I think prices are fairly elevated. We're aware of a couple of opportunities, but we think about opportunities that make sense for us from a synergy perspective, a return perspective and also make sure that we're paying a reasonable price considering trend levels.

Great. Just last question for me. It seems like there was some lumber futures activity. I don't recall you guys being active there in the past. Is that maybe a shift in how you plan to kind of run that business on a go-forward basis?

I'll ask Sylvain maybe to weigh in on this.

Yes. So Hamir, it's a good question. It's not a shift. I think this has been going on at different times over the past years. I mean, it was basically a program that when lumber prices were reaching higher levels, we would get some futures. I mean, just to put in perspective, we have about 1,000 contracts outstanding at the end of March, and that's coming down actually at the moment.

So as prices were rise, we would enter into those contracts to basically prolong some of the benefit of high prices. Now the loss obviously comes from the fact that the price get going in higher and higher and even continued after the end of March to get a bit higher. So it's not a new thing. But like I said, we -- given that the order book is actually quite healthy, the benefit of those at this point has diminished, so we're not -- so we're basically decreasing our position at this moment on that.

Your next question comes from Sean Steuart of TD Securities.

A couple of questions. Remi, you referenced your strong lumber order book into the second quarter, and I'm wondering if you could just provide some context around that order file length now versus 3 months ago, particular areas of strength and what you're seeing and any evidence of inventory building at all at any point in the supply chain from your perspective right now.

Yes. Great question, Sean. Look, the order book, putting to you this way, is as strong as it's ever been. At this point, it's about 6 to 8 weeks out, so we're selling volume that we haven't saw yet. It's larger than the finished goods inventory that we have.

The order book has been strong for the last several months, but it continues to build, so this is a good thing for us. We expect a price uptick in Q2 -- an average price uptick in Q2 versus Q1 based on that order book. And barring any unforeseen challenges, we should be able to at least make up the volume that we put in inventory as a result of the logistics issues that we talked about in Q1 and take that back up in Q2.

So from a lumber perspective, things are pretty encouraging. Do we see signs of inventory building? I mean, I don't. Futures are healthy and rising, and Sylvain was just talking. We've been a bit victims of our success on price on the hedging side. But as far as we can see now, it's fairly -- it's pretty encouraging what we see at least in the next quarter.

Second question is the $12 million of cost at Calhoun. Can you go into a bit more detail on the process improvements you're undertaking there? And should we think of that as a recurring spend over the next few quarters? Or was this a one and done event?

I know it's not a recurring spend at that level, Sean. I mean, Calhoun has not been one of our best-performing sites in the last few years and in light of the difficult market conditions that we saw for its end products in 2018, 2019 and 2020, we wanted to try something different. So we worked with an outside firm to develop essentially an improvement plan, a turnaround plan, and that plan includes very specific milestones and some contingent payments.

So we recognized some contingent payments in the first quarter. That process is going to continue, but I expect that any expense that we recognize in the next few quarters will be much smaller than what we took in the first.

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

Just on wood products, it looks like shipments were a little bit less than we expected. Maybe you could just detail the railcar truck availability issues you had in Q1 and whether that cleared up right now.

Yes. No, that's exactly it, Paul. So we saw about $50 million that we put in inventory as a result of slowdowns. There was a cold snap, some snow in Arkansas and Texas, and that reverberated through the system in February and a couple of weeks thereafter. But since then, it has largely cleared up.

So as I mentioned, we think we will pick that volume back up in Q2, and it's kind of a happy circumstance that average transaction prices are higher in Q2 than they are -- they were in Q1. So we're pretty optimistic.

One of the challenges that we see, though, is around the Port of Montreal strike. So we don't think that will be a material impact on us, but any hindrance to the logistics system could have some impacts. We're not seeing, as I say, a material impact on us at this point, but we're watching it carefully.

Okay. And then noticing that you've got El Dorado and Ignace up on 2 shifts now. And seasonally, Q2 production is higher than Q1. What kind of volume lift you expect quarter-over-quarter?

So we're looking for about 160 million board feet incremental to 2020 and 2021. Sales in the first quarter were very, very low because the sawmills were just getting back up on their feet, so we had to build some inventory. We'll get a couple tens of thousands of board feet out in the second quarter. But for the year, I'd be looking for about 160 million board feet out of those 2 mills.

Okay. That's great. And then just you talked about a little bit about M&A. But in the past, you guys have studied greenfield. Is that off the table now? Or are you still testing off those plans?

In terms of lumber, in particular, Paul?

Yes. In terms of sawmills.

Yes. Nothing on the drawing board.

Okay. And just last quick -- I guess, a couple. We've seen a flurry on pulp price increases. How materially do you think this -- the price rise between Q1 and Q2 will be, i.e., I mean, we've seen the price increase, just wondering how your realizations are going quarter to date in virgin pulp?

Yes. So we did plus $51 in the first quarter and maybe for the benefit of everybody, there's 2 factors to keep in mind versus what's announced. What are announced are list price increases, so there's always going to be a lag of probably a month or 2 before we can turn that into realized prices. And list prices are not transaction prices. There's a discount factor that applies.

So the numbers were pretty significant. We took a plus $51 in the first quarter. My expectation is that realized -- realizations will be strong. The supply-demand dynamics for pulp have tightened significantly in the last couple of months. Shanghai Futures are encouraging, and what we see is our own order book, and I'm encouraged by that.

So I think Q2, we're talking about a plus. We're going to see a stronger gain in Q2 than we saw in Q1.

Okay. And just lastly, with the -- I guess, the indefinite idling of Baie-Comeau and Amos, what are the plans for those mills? And what are the ongoing cost?

Well, so the largest piece of the cost that we were sustaining there, Paul, was heating costs in winter, which was about $2 million a month. You may recall that we've committed to heat the mills over the course of this last winter to preserve our options, and what we said was that we would see how demand develops. As I mentioned, newsprint demand in Q1 was down 25% versus last year. And so we took the difficult decision that it was time to say that the mills were indefinitely idle, pay employees their severance and then turn to something else.

So we're working with the local committees to think about options for repurposing or other alternatives for the mill. But as you know, when it comes to GNP newsprint mills, the inventory of potential options isn't very, very long. So we're having discussions with local committees, but nothing on the immediate horizon.

Your next question comes from [Timothy Stables], private investor.

Most of my questions were answered. Could you talk more specifically about capital allocation? I was pleased to see the company buy back 1.7 million shares in the quarter, $17 million, meaning your average cost was $10. So that means you bought some shares for more than $10. Lumber prices are obviously up even further.

Does this speak broadly about capital allocation if you can? Does this company -- it could be arguably debt-free by the end of the year, depending on lower prices. You obviously don't want to go to 0 debt. You could use a lot of money to buy back stock. You did a special dividend a few years ago of $1.50 a share with lumber. Do you see what I'm getting at? Can you discuss capital allocation beyond M&A.

Yes. No, fair enough, Tim, and thanks for your question. So I mean, on the near term, the focus is really around building cash and use the opportunity that we have with these high lumber prices to continue to deleverage the company. If we could bring ourselves down to $300 million being the senior notes, I think that'd be a pretty good level.

And we also want to make lasting changes to the competitiveness of the strongest parts of our business. So in no particular order of priority, the things that we're looking at are firstly to normalize CapEx back to what should be about $100 million this year. Our spending in Q1 was low, so that's going to pick up over the course of the year.

The second thing would be internal growth opportunities. I mentioned some low-hanging fruit in U.S. sawmills and some Canadian sawmills.

On debt reduction, we've actually reduced $100 million of our debt this year. Sylvain talked about the $75 million senior notes refinancing, net reduction there. And then when we did the retread of farm loan, we used cash on hand to bring the revolver balance to $155 million.

And then we're going to be opportunistic about share buybacks and other opportunities to return cash to shareholders. And in the case of acquisitions, as I mentioned earlier, we would look at acquisitions and we like pulp, we like lumber, but only at the right price, if it makes sense for us.

There are no further questions at this time. I'll turn the call back over to Marianne Limoges for closing remarks.

Yes. So thank you for joining us for our call today. Have a great day.

Thank you, everybody. Thank you. Bye-bye.

And this concludes today's conference call. Thank you for participating. You may now disconnect.