Resolute Forest Products Inc (RFP) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Resolute Forest Products Fourth Quarter Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Marianne Limoges. Thank you. Please go ahead, madame.

Good morning. Welcome to Resolute's fourth 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 on the webcast using the link in the Presentations and Webcasts 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 appendix to the slides includes 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 statements in our press release and on Slide 2 of today's presentation.

I will turn the call over to Yves.

(foreign language) Marianne. Good morning, and thank you for joining us. Today, we reported $129 million of adjusted EBITDA in the fourth quarter, compared to $140 million in the third quarter. Our results reflect strong pricing for lumber and our wood products segment's ability to drive bottom line impact with strong end markets, like those we've seen in the second half of 2020 with the rebound in U.S. housing starts and robust demand for repair and remodeling.

We also noted an increase in paper shipments in the fourth quarter, signaling the gradual recovery for those markets is underway. But it remains unclear whether they will recover enough to justify restarting the capacity we temporarily idled due to the rapid drop in demand during the outset of the pandemic, specifically, the Amos and Baie-Comeau newsprint mills for which we recorded noncash charges of $80 million in the fourth quarter.

By segment, we reported quarterly adjusted EBITDA of $2 million in market pulp, the same as the third quarter; $2 million for tissue, down by $4 million. Wood products was unchanged at $139 million; and negative $1 million for paper, down by $7 million.

For the whole year, adjusted EBITDA was $338 million, compared to $213 million in 2019. The better performance reflects a significant increase in lumber pricing, the [united] contribution of the U.S. sawmills we acquired early in 2020, lower overall manufacturing costs and better performance from the tissue segment. But it also reflects an unfavorable effect of global pulp and paper pricing and lower paper shipments, largely due to the economic impacts of the pandemic.

Let's review our individual segments, beginning with market pulp. Global demand for chemical market pulp in 2020 rose by 4% through November compared to 2019, with demand for hardwood increasing by 8% and softwood decreasing by 2%.

Demand in China rose by 9%, and 6% in North America, as at-home tissue consumption during the pandemic outpaced lower printing and writing demand. The higher demand pushed producer inventories [well within] the normal range: 37 days for hardwood and 33 days for softwood by end of November.

In the quarter, our average transaction price improved by only $3 per metric ton, due to softer pricing for fluff pulp and recycled bleached kraft pulp, which offset incremental gains in hardwood.

Our shipments increased by 11,000 metric tons, and finished goods inventory fell to 53,000 metric tons at year-end, a historical low.

Through December, U.S. at-home tissue demand grew by 16% compared to 2019, due to the structural shift in consumption patterns caused by the pandemic. But by the same token, the away-from-home market has been far more challenging, as demand dropped by 9%.

Our realized price, pricing for parent rolls and [covered] products, continues to improve quarter-over-quarter with our efforts around customer portfolio and mix optimization. But our reported average transaction price slipped by $77 per short tons, or 4%, this quarter because of the parent roll destocking initiative and productivity gains on the Calhoun tissue machine.

In December, we completed the acquisition of a converting facility located in Hagerstown, Maryland, with 3 bath tissue and towel converting lines. The Hagerstown assets will improve our converting capacity, extend our product offering and expand our territory to the attractive Northeast market.

Despite the sluggish [third quarter] in tissue, the segment did make $17 million of EBITDA in 2020, and we expect it will continue to improve.

Fourth quarter U.S. housing starts averaged 1.6 million on a seasonally adjusted annual basis, up by 11% compared to the previous quarter, with single-family homes, which consume more lumber, up by 12% and multifamily starts down by 2%.

Lumber prices have come off their recent highs [about midway] through the quarter, down by as much as $450 per thousand board feet [from being in some grades]. But despite the expected seasonal slowdown, they snapped back later in the quarter on strong demand. As a result, we closed the fourth quarter with an average transaction price relatively unchanged compared to the third quarter, up slightly, by $8 per thousand board feet, to $608.

Our shipments also rose, by 5 million board feet, compared to the previous quarter, reducing our inventory to 97 million board feet, which is an historical low.

Following our planned capital investment over the last few months, we started bringing the El Dorado sawmill online in December. We expect to start selling its output mid-quarter, in line with previous expectations. We are also making plans to bring our Ignace facility in northwestern Ontario back to one-shift operation in the coming weeks in light of market conditions.

As we've said many times before, the pandemic has been particularly hard for marketing-dependent paper products. In 2020, North American demand for uncoated mechanical papers and newsprint fell by 23% and 29%, respectively, compared to 2019. Supercalendered grades dropped by 29% and standard white grades fell by 17%. Global newsprint was down by 23% in the year. All this pushed operating rate [unsustainably] low in 2020, forcing capacity reductions.

We reduced our operational footprint to adjust to the dramatic reduction in economic activity by temporarily idling capacity, including 2 newsprint mills since the spring, representing in aggregate 28% of run-rate paper capacity. Accordingly, we recorded 143,000 metric tons of downtime in the quarter and over 500,000 metric tons in the year. But this measure allowed us to run our remaining assets to capacity and, therefore, maximize the operating efficiency of our very competitive asset base and to control our inventory, all of which together allowed us to withstand the profound shock of the pandemic, operating at above a breakeven level.

We expect that overall paper pricing touched the bottom early in the quarter, leading to a reduction in our average transaction price by $11 per metric ton, or 2%, compared to the third quarter. But shipments improved by 43,000 metric tons, and inventory fell to 96,000 metric tons.

EBITDA in the quarter segment was negative by $1 million for the quarter.

I will now have Remi discuss our financial performance.

Thank you, Yves.

We reported net income of $45 million in the fourth quarter, or $0.55 per diluted share, excluding special items. This compares to net income, excluding special items, of $62 million, or $0.72 per diluted share, in the previous quarter and a net loss, excluding special items, of $53 million, or $0.59 per share, in the same period last year.

Special items in the fourth quarter include $80 million of charges related to the temporary idling of the Baie-Comeau and Amos newsprint mills; nonoperating pension and other post-retirement benefit, or OPEB, costs of $24 million; foreign currency translation loss of $13 million for net monetary liabilities; and other expenses of $50 million.

Total sales in the fourth quarter were $769 million, up by $39 million compared to the third quarter, on higher shipments for all business segments, but mostly paper.

Manufacturing costs rose by $23 million in the quarter, after removing the impact of volume and foreign exchange.

Compared to the third quarter, the all-in delivered cost for market pulp was essentially unchanged, up by $2 per metric ton. EBITDA in this segment was also unchanged, at $2 million.

The delivered cost in tissue increased by $112 per short ton, or 6%, and the average transaction price declined by 4%, due to the higher percentage of parent roll sales with a destocking effort at Calhoun. EBITDA for this segment decreased by $4 million, to $2 million.

In the wood products segment, the delivered cost rose by $12 per thousand board feet, or 3%, mostly due to higher stumpage fees for Canadian operations, which track lumber prices as well as higher maintenance costs. EBITDA was unchanged, at $139 million.

Paper's delivered cost remained relatively unchanged despite higher maintenance costs and lower internal power generation as shipments increased by 12%, but the average transaction price for the quarter slipped by 2%. EBITDA for this segment came in at negative $1 million.

We recorded a credit under the Canadian Emergency Wage Subsidy program in the quarter based on the drop in revenues in our pulp and paper segments through the end of October due to the pandemic. We're using this credit to partially offset the additional costs associated with keeping our Amos and Baie-Comeau mills in hot-idle mode.

On Tuesday, we closed a private offering of $300 million of unsecured senior notes due 2026 with a 4 7/8% coupon, issued at 100% of par value. We will use the proceeds from the offering, together with cash on hand, to redeem all of the $375 million aggregate principal amount currently outstanding of our 5 7/8% senior notes due 2023, at par. This refinancing allows us to deleverage the business, reduce our interest burden, gain more flexible terms and covenants and add 3 years of maturity runway in our capital structure. Concurrent with the refinancing activities, both Moody's and S&P revised the credit rating outlook from negative to stable.

With the strong EBITDA from lumber and a $122 million working capital release in the quarter, we generated $158 million of cash from operating activities in the quarter. Accordingly, our cash position closed at $113 million at year-end.

We also used our strong financial position to repurchase an additional 2.1 million shares of our common stock in the quarter, for a total spend of $10.5 million. For the year, we spent $30 million to repurchase 6.9 million shares, over 8% of the total outstanding.

Net debt fell by $93 million, to $448 million, by year-end, bringing our net debt to last-12-months adjusted EBITDA down to 1.3x. Our liquidity also improved, by $216 million, to $693 million, in part due to a new 10-year secured delayed term loan facility for up to CAD 220 million, which is undrawn.

We made $78 million in capital expenditures for the year. For 2021, we expect to spend approximately $90 million to $100 million in net CapEx.

We made $29 million in softwood lumber duty deposits in the quarter, bringing our total deposits to $243 million, which is recorded in Other Assets on the balance sheet.

During the fourth quarter, we contributed $51 million to pension plans, which, as previously disclosed, included a $34 million catch-up contribution to U.S. plans deferred from previous quarters under the stimulus bill. We also made OPEB payments of $3 million, with a combined expense of $9 million included in adjusted EBITDA.

We made $108 million of pension contributions in all of 2020 and $11 million of OPEB payments.

Our balance sheet net pension and OPEB liability increased by $102 million from year-end 2019, to $1.6 billion. The increase is due to the unfavorable impact of the 50-basis-point drop in the applicable U.S. GAAP discount rate over the course of the year.

As most of you know, we think about our net pension liabilities in terms of the funding deficit calculated in accordance with applicable pension legislation, because this is what determines our annual contributions. Using discount rates that more closely resemble our return on assets, the funding deficit stood at $629 million at year-end, slipping by $132 million in the year due to the 50-basis-point reduction in applicable discount rates.

Accordingly, we expect that for 2021 our annual contributions to pension plans will increase by roughly $15 million, to $120 million, plus $12 million of OPEB.

After the well-documented, pandemic-induced challenges of 2020, there are a number of encouraging signs to carry our recent momentum into 2021 across all 4 of our businesses. We expect that the strong level of U.S. housing starts and healthy repair and remodeling activity will provide a tailwind for lumber markets for at least some time to come even if prices come off their recent highs.

We're also encouraged with the recent marked pickup in pulp demand against lower industry inventories after the prolonged lag that followed the significant overbuilding of producer inventories in late 2018, especially hardwood in Latin America.

With the quality and competitiveness of our remaining paper assets, there is room to build with pricing on the fourth quarter volume gains, as publicly reported, as end markets gradually rebalance after the steep pandemic-induced demand drop of 2020.

For tissue, we will continue to drive performance improvements in the business with better portfolio mix and operating efficiency.

I'm excited to assume the leadership of this company in just a few weeks. I've spoken with many stakeholders since my nomination, and I'm encouraged by their response, the energy around the Resolute story and the talented team that will move this business forward. Our job now is to accelerate our evolution to generate long-term value for shareholders and to drive sustainable economic activity in the communities where we operate.

Let me take a minute as we close to wish Yves a happy and healthy retirement after almost 40 years with Resolute and its predecessor companies. After helping to build the lumber business to where it is today, he's closing his career after a very eventful 3 years as CEO. From the highs of 2018 to the very choppy waters and the existential scare of the pandemic, he has been a steady hand at the tiller.

We set a course to make us a better company, and he held to it, leading by example every step of the way with a tireless and selfless work ethic. He focused on cost reductions in difficult times and on long-term efficiency enhancements in better ones. He made Resolute a stronger, more competitive organization. He is a man of his word and Resolute, in turn, reflects this transparency and integrity.

On behalf of everyone at Resolute, Yves, thank you.

Thank you, Remi. We are weathering the COVID-19 storm with remarkable strength, and I'm proud of our commitment to health and safety as well as support for the communities in which we work and live. We continue to enhance the already meaningful relationships across our operating communities. Over the years together, we have taken important steps in our transformation and build a more sustainable and competitive organization.

I want to thank the so many people in the forest products industry who have supported me during the almost 40 last years. I know that Resolute is going to be in good hands with Remi as CEO and supported by a strong team at all levels of the organization that will lead it forward.

Thank you.

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

(Operator Instructions) Your first question comes from Hamir Patel of CIBC Capital.

Could you give us a sense as to how much COVID has affected your ability to increase lumber production? And has that varied between Canada and the U.S. South?

You mean increasing the capacity?

Yes. I'm just curious how much of a constraint that maybe COVID from a labor disruption standpoint has been.

Of course, we have had constraints with cases, COVID cases, pretty much all facilities, pulp and paper and lumber as well. So it slowed down a little, the operation that we had in the U.S., not necessarily cutting shifts but an impact on productivity, for sure, in Arkansas.

Didn't have any impact, as we said earlier, on the restart of El Dorado. Sometimes, we had to slow down a shift or 2. But as far as capacity, we're catching up pretty good by adding shifts, going forward, that we can do when the people are back.

So I wouldn't say -- on the pure volume, we don't see an impact midterm.

Okay. That's helpful. And Yves, do you see potential for a North American tissue price hike coming? I'm just thinking of given the significant move in pulp prices and the fact that most of the industry is nonintegrated.

It's hard to say. It's kind of a balanced demand right now between at-home and away-from-home, and we're trying to manage both right now. Of course, the pulp is going to have an impact on the cost of the tissue operation, not just for us but the whole industry. But fortunately, we're integrated.

Okay. That's helpful. And Remi, just a question for you. I'm just curious as you look to some of the changes that you might look to make in the first year as CEO, where do you see -- when you think of the portfolio, are there additional assets that you think you could look to monetize this year?

We always keep an eye on that, Hamir. I would tell you that we've done some moves in the past to try to optimize and balance our portfolio. We might look to it.

I think what I would say, though, to your larger question, my priorities essentially, moving forward, are to keep the focus and discipline around capital allocation. I think that's going to be very important as we move forward. And if we do decide to monetize some assets, then focus on taking a little bit more leverage out of the business.

I do want to focus on encouraging growth, especially as we look to replace the diminishing EBITDA coming from paper. I think there's potentially a couple of things we might look at, either bolt-ons or extensions, in the lumber segment. Yves talked about the importance of continuing to integrate and grow our U.S. assets. In the U.S., the El Dorado sawmill is coming online. So that's going to be able to -- important to push that forward. And also the restart of Ignace so we can get a bit of capacity growth there.

And I do want to focus on maintaining a fanatical focus on asset performance across the whole portfolio, consistent with Resolute's history and reputation as being excellent operators.

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

Congratulations, Yves. 40 years, almost 40 years there. Wow. The changes you must have seen through that company. It's a little bit mind-blowing.

Maybe to start in the wood products side. Just the additional volume you expect to get in 2021 through the restart of Ignace and start-up of El Dorado, what is that approximately?

On the yearly run rate, I would say it's probably about 200 million board feet. So if I think -- we're going to restart on the one shift at the beginning with Ignace, and the capacity of El Dorado is about 180 million, 185 million. So of course different mix, but full capacity about that.

Okay. And we've seen this big run-up in pulp prices. The way I look at it, global inventories are still pretty high. I'm just wondering what you expect in the coming quarters in terms of your realized prices to come up and how sustainable is the current market.

Paul, I'll take that one. So we looked at the PPPC stats, and certainly there's a lot of room in the corridor of what is normal. But when you look back over the build that occurred late in 2018, I think at one point we had 1.5 million extra tons of capacity sitting on the market, and that's largely worked its way through.

So we're seeing a pretty strong pickup in demand. Our own inventory is also very, very low. So in the business that we're doing now, we are seeing a pickup in activity and pricing in the pulp segment, and we should start to realize that in the first quarter. So we see conditions as pretty encouraging now.

Okay. And then just lastly, on the paper side, you guys have taken quite a bit of downtime in the sector. I guess you've got Amos and Baie-Comeau in hot-idle. But what's the plan, going forward? Is there some plan on permanent shuts and more restarts of these facilities? What is our plan here?

We'll see. As we said, we're hitting the mills. We have 2 machines on newsprint in Baie-Comeau and 1 in Amos. So we'll see what's going to happen on the market.

Of course, [it's too early]. To say that we're going to restart all that tonnage in newsprint might be difficult, but we also have people and communities looking for diversification. So we don't have the answer yet, but of course it's a lot of tonnage that is down right now. So that's for newsprint.

So we also have [white] paper machines that are smaller that we're using right now that we took down and they're back. So we're playing with the assets we have and do the best we can. But to answer your question, we don't really know what the market is going to do, going forward.

Your next question comes from Kasia Kopytek of TD Securities.

It's Kasia, at TD, filling in for Sean. Remi, you already provided some good context on capital allocation. Just wanted to circle back quickly. In so far as strategic initiatives are concerned, you talked about lumber. Anything on the pulp side that you're looking at?

Well, what we focused our efforts on in the last couple of years, Kasia, is really improving the operations that we have. As you know, we've got 2 fantastic pulp mills in Canada, in Saint-Félicien and Thunder Bay. And we've invested to provide for incremental capacity growth, specifically in Saint-Félicien, and that's been very good for us.

So we'll continue to focus on our pulp mills for incremental capacity growth and generating more value from the assets we have with cost reductions. That's what I'd see on the immediate term for pulp.

Okay. And any number that you can quantify in terms of that incremental capacity growth that you expect?

No, not necessarily. It's always -- like the investments that we made in Saint-Félicien was about 40,000 tons over the last couple of years of improvements, and we're seeing that in the throughput today, and it's encouraging. So we continue to chip away at it and improve wherever we can.

Got you. Okay. And just going back to Paul's question around the El Dorado and Ignace restarts, when do you expect those sawmills to be running at the full run rate that you mentioned?

As far as El Dorado, as I mentioned, we started in December. So we're ramping up the second shift as we go. We're training the employees right now. So we expect by the end of the second quarter to be pretty much running on 2 shifts. So of course a few bugs in ramping up. But between the second and the third quarter, we should be full production.

As far as Ignace, it should be pretty fast, as soon as we restart. We're talking about a very small one line stud mill. So one shift. So I believe that about a month and we'll be back at where we should be.

But you guys plan to restart Ignace at more than 1 shift eventually down the line, right? Later this year, maybe?

Yes.

Okay. Great. And Yves, I think you mentioned you took some paper downtime this quarter. I didn't quite catch the number. Would you be able just to repeat it?

It's 143,000 that we put in the market downtime, Kasia, and that represents the 2 mills in Amos and Baie-Comeau and a machine in Alma, as well.

Got it. Okay. And just the last question, on markets maybe. We've seen prices move in newsprint higher in North America, and there's some higher prices going on in some key markets offshore, as well. Any context you can provide just around those markets and where you see things trending over the next little while?

Well, from our perspective, we certainly saw in the fourth quarter an increase in shipments of 43,000 tons, which was a welcomed change from the 30% drop in demand that we've been living through. So I think that's working its way through. Demand is starting to come back, and it's getting reflected, as I said, with shipments, and we see it in pricing, as well.

So the task for us is just to make sure that we're optimizing the network, we're keeping our inventory low and try to satisfy customer demand wherever we can and be a good supplier.

Your next question comes from Benoit Laprade of Scotiabank.

First of all, Yves, I want to add my voice to congratulating you on retirement. And Remi, obviously, congratulations on your nomination, as well. So wishing both of you all the best in this new chapter of your lives.

A quick one for me. On the tissue side, I just wanted to understand how we can reconcile the fact that the average transaction price actually decreased due to a higher percentage of parent rolls, but at the same time we had actually 6% higher average delivered cost. So I thought that producing more roles would have also triggered a reduction in average cost.

Well, the transaction price for a parent roll is obviously significantly lower than converted goods. What happened, Benoit, over the course of the last couple of quarters is that productivity for the tissue machine in Calhoun has increased. And so we were building up inventory. And we decided in the fourth quarter to reduce that to just be more efficient. So by doing that, it reduces the average transaction cost.

I would tell you that there are costs that we also picked up in the fourth quarter, onetime costs, that played into the average delivered cost, as well. So when you work all that through, it's how you end up with $2 million of EBITDA. As we said, $2 million is a bit sluggish for the tissue business in the fourth quarter, and we think we can do better and we expect that we will.

Okay. So looking forward, the addition of that new converting capacity, plus the absence of that inventory reduction, we should expect, on average, everything else kept equal, better prices and better cost looking in coming quarters versus what we saw in Q4?

That's correct. That's correct. So we did $17 million of EBITDA in 2020. By bringing the Hagerstown assets into our portfolio it's going to allow us to increase the roles, the parent rolls, that we convert out of Calhoun, improved distribution of the business.

If you look at the trend, and we've got a slide in the deck that shows you for the tissue business the progression that we've made over the last 2 years with pricing, the trend is pretty clear. We've been focusing significantly on customer portfolio optimization and improving our mix, and you can see that in the segment.

So I think the fourth quarter was really more of a onetime thing. As we said, we destocked, and so took the hit on pricing. But the momentum we think is there, and the business can do better than it did in the fourth quarter.

There are no further questions at this time. I'll turn the call back over to the presenters.

Excellent. Thank you for joining us today. Have a great day.

Thank you, everybody.

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