Resolute Forest Products Inc (RFP) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Resolute Forest Products Third Quarter Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

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

Thank you, operator. Good morning. Welcome to Resolute's Third Quarter Earnings Call. Today, we'll hear from Yves Laflamme, President and Chief Executive Officer; and 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 Presentations 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 appendix to the slides 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 statements in our press release and on Slide 2 of today's presentation.

I will turn the call over to Yves.

Merci, Marianne. Good morning, and thank you for joining us.

Today, we reported $140 million of adjusted EBITDA in the third quarter, $103 million improvement compared to $37 million in the second quarter, which is largely due to recent rally lumber prices. It also includes a $29 million contribution from the U.S. sawmills that we acquired earlier this year.

By segment, we reported quarterly adjusted EBITDA of $2 million in market pulp, down by $14 million from the second quarter; $6 million for tissue, up by $3 million; $139 million for wood products, up by $114 million; and $6 million for paper, up by $2 million.

Together with our strong Canadian lumber business, the onetime acquisition of U.S. sawmills positioned us well for the recent spike in lumber prices, contributing $38 million to our EBITDA this year. While the pulp and paper segments continue to face difficult pandemic economics, the tissue business is picking up steam. With the $6 million of EBITDA generated in the quarter, it has generated $19 million of EBITDA, corresponding impact of lower worldwide printing and writing demand, which has been unfavorable to soft. This helps to explain industry inventory trends as producer stocks at the end of August were reported to be on the low end of normal range for hardwood, but above for soft. But this data does not change our long-term view on pulp, particularly softwood, as global inventories appear now to be stabilizing towards better levels. Accordingly, we are cautiously optimistic that markets will improve with overall economic conditions.

In the quarter, our average transaction price in the market pulp segment slipped by $26 per metric ton or 4%. Finished goods inventory fell to 71,000 metric tons and shipment increased by 15,000 metric tons from the outage affected second quarter. EBITDA in the segment was $2 million. On tissue, the pandemic-driven increase in retail demand for tissue products carried into the third quarter, but the base as is since the Q2 peak.

Through September, U.S. at-home demand grew by 16% compared to 2019, but conditions in the away-from-home market have been far more challenging as demand has been down by 9%. The away-from-home market continues to be impacted by the pandemic due to the drop in commercial activity. Pricing in our tissue segment improved by 4% in the quarter or $71 for short term, which reflects our progress around customer mix. But shipments slipped by 3,000 short tons due to lower demand in away-from-home, which is about 1/3 of our business.

Finished goods inventory at quarter end was 6,000 short tons. Quarter-over-quarter, segment EBITDA improved by $3 million to $6 million.

Going forward, we will focus on initiatives around customer portfolio optimization and productivity improvements.

On the wood products, the benchmark prices for 2x4 random length doing better and 8-foot stud delivered Great Lakes rose, respectively, by about $500 and $450 per thousand board feet from the end of Q2 to the end of Q3, both reaching more than $1,000 per thousand board feet in September, while the benchmark prices for southern yellow pine 2x4 doing better were up by about $475 per thousand board feet, reaching close to $1,000 per thousand board feet at the end of the quarter.

The U.S. housing starts increased to a seasonally adjusted annual rate average of 1.4 million units in the quarter, and the repair and remodeling market also remained strong.

Our wood product shipment rose by 16 million board feet in the quarter, and finished goods inventory was unchanged at 121 million board more feet. The average transaction price rose by $217 per thousand board feet or 57% compared to the second quarter. As a result, EBITDA improved by $114 million in the quarter to $139 million. Although market prices have been off their high in recent weeks, the demand from the repair and remodeling sector as well as robust housing starts speak to strong market fundamentals, as both the National Association of Home Builders and Forest Economic Advisers have recently said, existing home inventories remain at low levels, while the number of both household has been growing steadily over the past years, contributing to another build market.

Accordingly, we are making a high priority of bringing our newly acquired El Dorado, Arkansas sawmill online as soon as we can. We are a currently on target for an early 2021 restart.

As we've said before, the dramatic reduction in economic activity during the pandemic has been particularly hard for marketing-dependent paper products. Though the premium demand for uncoated mechanical papers and newsprint fell by 24% and 27%, respectively, year-to-date compared to the same period last year. For uncoated mechanical papers, this reflects a drop of 30% in supercalender grades and 19% for standard grades, while the decline in newsprint is explained by a drop of 30% for newspaper publishers and 23% for commercial printers. The shipments to capacity ratio for all uncoated mechanical paper was 73% compared to 83% last year, while North American newsprint was 75% compared to 83% last year.

Global demand for newsprint was down by 22% in September, and the more newsprint shipments to capacity ratio was 71%, down by 12 points year-over-year.

To adjust the prevailing market conditions, we continue to operate with a 30% reduction against run rate capacity, recording 171,000 metric tons of downtime in the quarter. Despite the difficult conditions with this leaner production footprint to cope with dramatic reduction in economic activity during the pandemic, our shipments remained stable at 351,000 metric tons. We reduced finished goods inventory by 5% and the average transaction price improved slightly in the quarter to $595 per metric ton or 1%. EBITDA in the quarter segment improved by $2 million to $6 million, following a very difficult stretch over 6 months. There are signs that paper markets activity is slowly and gradually starting to recover. But we expect that the pandemic will have caused some measure to step change in the secular demand decline trend.

I will now have Rémi discuss our financial performance.

Thank you, Yves. We reported net income of $62 million in the third quarter or $0.72 per diluted share, excluding special items. This compares to a net loss, excluding special items of $22 million or $0.25 per share in the previous quarter and a net loss, excluding special items of $34 million or $0.37 per share in the same period last year. Special items of $5 million in the quarter include other expense from foreign exchange translation and nonoperating pension and OPEB credits.

Total sales in the quarter were $730 million, up by $118 million compared to the second quarter, mostly led by the significant increase in lumber pricing, including the strong contribution from our U.S. sawmills.

Manufacturing costs rose by $5 million in the quarter after removing the impact of volume and foreign exchange. Compared to the second quarter, the all-in delivered cost for market pulp increased by $27 per metric ton or 5%, mostly due to planned major maintenance. Together with the lower average transaction price, EBITDA decreased to $2 million.

The delivery cost in tissue decreased by $55 per short ton in the quarter or 3% due to the timing of maintenance outages. With a 4% increase in the average transaction price, EBITDA for the segment improved by $3 million to $6 million.

In the wood products segment, the delivered cost rose by $6 per thousand board feet or 2%, mostly due to Canadian stumpage fees, which track lumber market prices. Combined with the significant increase in transaction prices, EBITDA rose to $139 million, $114 million better than the last quarter. Papers delivered costs remained relatively unchanged. The average transaction price improved slightly and EBITDA for the segment came in at $6 million for the quarter. Yesterday, we entered into a 10-year secured delayed term loan facility with Investissement Québec for up to $167 million with an initial availability approximately of $114 million, subject to certain conditions.

Borrowings under the Canadian dollar-denominated facility are secured by our duty deposits and will bear interest at a commercial floating rate of interest equal to 1.45% above the Canadian bankers acceptance rate, which is about 20 basis points higher than our ABL facility. A facility is meant to be used to finance activities and support obligations in Québec.

The strong EBITDA from wood products helped to generate $100 million of cash from operating activities quarter. We used the tailwind to further delever the balance sheet by repaying all of the $69 million of outstanding revolving borrowings under our credit facilities, except for the low interest 10-year term loan used to finance the acquisition of the U.S. sawmills. We also contributed to shareholder value by opportunistically repurchasing 4.5 million of our shares or 5% of outstanding for a total spend of $18 million in the quarter. At quarter end, our liquidity had strengthened by $81 million to $477 million, not including the new financing facility and net debt dropped by $62 million to $541 million. We spent $53 million in capital expenditures in the first 9 months of the year compared to $82 million in the same period of 2019. We're still targeting $90 million for annual capital spending. We made $20 million in softwood lumber duty deposits in the quarter, bringing our total deposits to $214 million, which is reported in other assets on the balance sheet.

On pension, we contributed $18 million to pension plans in the quarter, and we made OPEB payments of $2 million with a combined expense of $7 million included in adjusted EBITDA. The lower contribution reflects a temporary benefit from the deferral of $17 million to the U.S. plants in the quarter under the U.S. stimulus build. But after quarter end, we contributed $34 million to the U.S. plans and caught up on all amounts deferred in the year. The deferred amounts were otherwise due on January 1 and carry higher interest. Accordingly, consistent with earlier guidance, we expect pension contributions for the year to be $112 million and OPEB payments of $13 million.

We are pleased today to announce that Rémi Lalonde will take the reins of -- as President and CEO and serve on Resolute's Board of Directors as of March 1, 2021.

Although today begins the official transition, Rémi has already served as an indispensable partner on the range of strategic initiatives we have undertaken over the past few years. Rémi Lalonde has the enthusiastic support of the Board, I can generally say his colleagues are also today celebrating his success. Rémi represent the best of the Resolute's future. He's a great performer, and he has developed direct manufacturing experience by leading one of our key mills and the financial expertise as CFO as well in his previous corporate roles. He is also known for setting high-performance expectations for his people just as he does for himself. He is driven, transparent and inclusive and is well-known by the investment community and our range of stakeholders. The choice of Rémi is accredited to the internal talent developed by the company. Rémi's professional and personal qualities are a great fit for a tough and demanding industry in challenging times.

With the passing of the baton, Resolute is certainly in capable hands. Resolute will be well served by Rémi's leadership as we take the next steps in our strategic transformation.

Thank you very much, Yves. I want to thank the Board and our shareholders with their confidence, and for this incredibly exciting opportunity to assume the leadership of this company. I also want to thank Yves very much for his support and his guidance. Last 2 years of CFO have been a great development opportunity, and it has a lot to do with the confidence he's shown in me and the challenges that he gave me. This is going to the seventh role that I take on with Resolute in the 11 years that I've been here, having started as a securities lawyer in 2009 and growing with opportunities offered along the way. I've also been in charge of Investor Relations. I've been Treasurer and have had a wonderful opportunity to spend 2.5 years running one of our biggest and most profitable assets in Thunder Bay.

The perspective and the experience that I gained from these various roles have served me and, I think, the company very well each step of the way. Each of the roles is shaping in some way, and I'm certain that they will help me as I assume the leadership of the company in a few months.

My first priority in the transition will be to continue to be the best CFO that I can be to support Yves as CEO until his retirement, and to execute faithfully on our business priorities. The second will be to listen to the Board, the shareholders, to employees and to our communities about the things that are important to them. And third, practically speaking, is to begin an immediate search provide successor as CFO and to execute a smooth transition plan. I wholeheartedly believe that this company has a very bright future, and I am very excited for the opportunity to lead this talented team of 7,000 plus dedicated people. Our job is clear. We need to accelerate the evolution of our business to generate value for our shareholders and to drive sustainable economic activity in the communities where we operate. The road ahead is certainly not without its obstacles, which will require some hard choices, but we're up to the challenge.

I'm confident that Resolute's culture of dedication, rigor, teamwork, and setting high expectations is exactly what we need to build on our progress.

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

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

First off, congratulations to you both on the CEO transition. Rémi, very happy for you. I had to give this acknowledgment. A couple of questions. I'd like to get your context on the lumber price correction we've seen over the last 7 to 8 weeks. Hoping you can provide some thoughts on price variances from region to region and across grades? And I guess, especially for some of the decking grades we've seen in the U.S. South, where there's been extreme volatility. And more broadly speaking, do you have a sense that a floor is near for lumber markets in general? Let's start with some context there, if you can?

Yes. So of course, we've seen lately that prices were going down on lumber pretty fast, but it went up to breaking record prices for a little while. So as far as regional, I think that we closed the gap really importantly between stud grades and random length for a while, we had about $100, $120 per thousand board feet difference between the 2. That's something that has been closed. We saw the impact of repair remodeling, which most of the houses now build a 9-foot and 10-foot, the wall, I mean. But now you can see the repairs model the 8-foot. So and regionally, you were talking about decking, so we're pretty much involved in decking with the U.S. sawmills. And we are expecting this business going down. It's usually seasonally. And we're facing that a little now, but we still have a pretty good business on it. So as far as the bottom, I think that I don't think that all customers saw the list stopped the same day using lumber. It's about some speculation and inventory on the distributors, let's say, distribution channel. And I think we probably -- we saw lately the last couple of days that it's kind of coming back now, the demand. You have to replenish inventories. So we're not in the best time, November, December. But we know that the pipeline and inventory are pretty low on customer side and probably on the supplier side as well. So we're pretty all for going forward that we may have reached a floor, but telling you that we expect to go where we were about a month ago. I think that was pretty exceptional. So I wouldn't comment on that one.

The second question I have is on capital allocation for 2021. A couple of questions on that front. Your appetite for further returns of capital to shareholders into next year as the balance sheet continues to evolve. And initial thoughts on 2021 CapEx plans and any detail on specific initiatives you might be focusing on for next year?

Well, I think as far as the CapEx expenses, we're going to stay really disciplined. As you saw this year, we're still at the middle of this pandemic, and we've been very fortunate on the lumber side, but it's separately difficult on the other businesses. Of course, one of our priorities is to restart our El Dorado sawmill and keep going the investment CapEx plan we had at that mill. We are going with the first step, but we have other CapEx going forward to complete the program. So the rest is going to be pretty much business as usual. And as we said about 3 months ago, we certainly have projects that are more interesting, but still not ready to talk about it.

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

And Yves, congratulations on your retirement. And Rémi, congratulations as well on your new role.

I wanted to first start on the lumber side. And we've got the upcoming final determinations due later this month. I know with the preliminary figures, Resolute didn't see as much a reduction as the rest of the Canadian industry. Are you expecting any meaningful change in your sort of relative position when the final comes out?

Yes. You're right. Unfortunately, we're going to be at a disadvantage compared to our Canadian competition, even with the ones that got the average starting sometime at the end of November. So if you look at the numbers, I always look at those tariffs 2 different ways. You have the antidumping case and the counter (inaudible) duties case, and as far as the antidumping, which is the one that we usually manage as a company. It's about marketing and sales strategy. So we are the gold-worth of the industry. So it means that we've been doing a pretty good job on it. Unfortunately, contrary to what happened in the last dispute with the U.S., the revision of the stumpage and forestry regime by provinces are not done with the province than the more they have done with the company. And we're kind of doing the benchmark for Ontario and Québec, and we are the only one. So scan up the results. So I'm not saying it's the right result. But I'm saying that's kind of the result that we got for Connecticut, Ontario and so we see what's going to going forward. And we think that, that rate is wrong. But we're going to have to live with it till the next review or maybe some victories that we got on the WTO readily. So that's all I can say right now, the rate of the antidumping -- not the antidumping but the other (inaudible) duty is kind of out of our control pretty much.

Okay. Great. And I saw there was a report recently, from, I think, the Montreal Economic Institute highlighting potential for Québec to increase its harvest. Do you see much runway there? And any sense as to where the government is and potentially making some changes?

No. We -- I mean, it is commitment from government to review the forestry system since we got the auction market and everything. So actually, we've got pretty good commitment in the Ontario government as well to try to see when they can do to get more supply. So -- and of course, after a certain period of time, it's going to be the second phase of this forestry regimes, and we have that -- we guided for about 6, 7 years now. So it's okay to be reviewed. But I can tell you right now that I haven't been -- and I haven't seen any announcement, and we don't know what it's all about. So I know the economic group last week talked about it. They were pushing for more wood supply. But it's really hard to say right now. We don't know what it's all about. So we don't -- we haven't seen the result.

Great. And Rémi, could you -- any indication yet on CapEx for 2021?

Yes. So as Yves mentioned, heading into next year, with the uncertainty that we're still facing in the market, lumber has been great. But the pulp and paper businesses haven't recovered to the full extent yet. So we're still going to manage fairly carefully into next year, Hamir. So I wouldn't expect any material increases, at least not at this point.

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

Congratulations, Yves, on the retirement. And Rémy, on the promotion.

I guess to start in lumber, just -- it looks like shipments were up $16 million in production, probably just slightly less than that, up 14% with the inventory change. What's your ability to increase this meaningfully in the short term? And how should we think about that start-up volume coming out of El Dorado when you get the mill back up?

Yes. We -- as far as increasing in Canada, the production is -- it's about pretty much wood supply. And as far as finished goods, the reason that the shipments we've had lately on this quarter, it is a good dollar still about the same. It's just the capacity of kilns, capacity -- and addressing the wood on the planner side. So -- but as far as a steady improvement in capacity in Canada, so we're pretty much running what we can with the lumber supply, with the wood supply we have. As far as the redo, it's 180 million board feet capacity mill. So we expect when we're going to start to restart on one ship for at least a couple of months. And then being probably full capacity 2 months after that. And hopefully, after 4 months or so, reaching the -- the level that we would like to be with this capacity 180 million board feet.

And the other one that we need to push a little better. We -- that was part of the plan. The integration is doing great. But the Glenwood, Arkansas is now back on 2 shifts. That's what we wanted to do, but we still have some ramp-up to reach full capacity with that behind one.

Okay. And then I think you were said you took 30% downtime in paper. And I guess in the spirit of accelerating the evolution of your business, just wondering when you're going to make the decision on paper machine or facility closures?

Yes. We -- you're talking about closure or?

Yes. I mean, it looks like there's a difficult supply in...

Yes. Yes. So we -- yes, so what we've done as far as -- the ones that are closed or still closed are the (inaudible). We met with the communities and unions lately, telling them that we don't see those mills restarting soon. So we're going to heat the mills till spring, I would say. And see what is going to come up. All of it.

On the other side, on the paper side, we are pretty good that flexible. mills can produce different grades of paper, and we took 2 machines down in Edmonton, on the white paper side. But the good news is now we restarted one of them on 4 days a week. We're having the biggest one running and we have the opportunity to make sure we can get orders of different of papers instead of losing the orders when there's beneficiary for the company. And kind of, I think, as an example, we have a big machine running, we can run a small machine like a sawmill, running that about 4, 5 days a week and doing maintenance over the weekend and restarting on the Monday, which has been pretty good for us right now.

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

Well, we want to thank you all for joining us today. I wish you all a great day. Thank you.

Thank you.

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