RFP (2019 - Q3)

Good morning, everyone. Welcome to the Resolute Forest Products' Third Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation we will conduct a question-and-answer session. [Operator Instructions] Please note, that this call is being recorded today October 31, 2019 at 9:00 AM 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. Silvana

Good morning. Welcome to Resolute's third 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 to 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 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 now turn the call over to Yves.

Good morning. Thank you for joining us. Today, we reported $23 million of adjusted EBITDA for the third quarter, $59 million lower than $82 million we reported in the second quarter. The decline principally reflects pricing pressures across most of our segments but mainly in market pulp. While our results benefited from lower freight costs and a decrease in share-based compensation expense, these favourable items were outweighed by the impact of more plant maintenance outages this quarter and an increase in chemical usage. Our tissue business contributed positively to reserve, as we build on gains of the previous quarter, while lumber reserves were largely consistent with those of Q2. By segment, we reported quarterly adjusted EBITDA of negative $5 million in market pulp, down $37 million from the second quarter, $1 million for tissue, wood product was at $4 million down to $2 million, newsprint $11 million, a reduction of $14 million and $15 million in specialty papers, down $11 million from the previous quarter. Leveraging our strong financial situation earlier this week, we've extended and increased our senior secured credit facility. This renewal and upsize gives us an additional $175 million of liquidity for more than $740 million in total, and at very competitive rate without pledging any additional collateral. This is another tool to further enhance our financial flexibility in the execution of our strategic transformation initiatives. As reported by several of our peers, this has been a challenging third quarter for the industry. The proactive steps we have taken to strengthen our balance sheet position us well to continue to execute on our strategy despite this current cyclical downturn. Let's review our individual segments beginning with market pulp. World shipments of hardwood were down 3% in the first eight months of the year compared to the year ago period, while softwood pulp shipments were 4% higher in the same period. The softwood pulp growth was led by the third quarter rebound in Chinese demand. It's important to note that global softwood mills ran at 93% shipment to capacity ratio, while hardwood mills were at 83% as hardwood producers and [indiscernible] remain elevated. The ongoing weakness in global pulp markets weighed heavily on our realized pricing. The average transaction price dropped to $625 per metric ton, the lowest ever since the beginning of 2017. With production relatively stable compared to the previous quarter, shipments rose this quarter, particularly for softwood pulp, as we work down our finished goods inventory to more normal levels. Total US tissue consumption grew by 2.5% through August compared to the same period last year. Converted product shipment increased by 2% including an improvement of 3% in away-from-home sales and 2% in at-home sales. Our tissue business performance continues to improve with productivity and pricing gains. With most of the technical issue behind us, the Calhoun tissue machine is now demonstrating that it can meet our expectations. We continue to focus on customer portfolio optimization with better quality and increasing our average transaction price with favorable product mix and better pricing for away-from-home products. Our priority is to improve converting operations to reduce the sales of [indiscernible] and optimize our customer portfolio to generate better margins. Housing starts in the US were 2% lower on a seasonally adjusted basis in the first nine months of the year compared to the same period in 2018, averaging 1,250,000 unit which reflects a 2% decrease in single family starts and a 1% decrease in multifamily starts. While benchmark pricing was up compared to Q2, our average transaction price slipped $7 per 1,000 board feet due to unfavorable sales mix this quarter. Given ongoing weakness in demand, we continue to manage production and maintain our finished goods inventory at normalized level by taking over 70 million board feet of down time in the quarter for nearly 170 million board feet year-to-date. Our sales volume fell accordingly. North American newsprint demand fell by 14% in the first nine months of 2019 compared to the same period in 2008. Demand from newspaper publishers fell by 16% while demand from commercial printers declined 9%. Even with the slower pace of demand decline in the third quarter, the North American shipments to capacity ratio dropped to 83%. Global demand from – demand from newsprint was down by 10% through August compared to the same period last year and the world newsprint shipment to capacity ratio was also 83%. Our overall average realized pricing dropped 4% this quarter with a more significant decrease in the export sales. Due to the ongoing softness, we continue to take temporary downtime to maintain our finished goods inventory at normalized levels. As a result shipments fell by over 10% compared to the previous quarter with almost all the degrees coming from offshore sales. Our new newsprint segment generated a 6% EBITDA margin this quarter. North American demand for uncoated mechanical papers contracted by 15% in the first nine months of 2019 compared with a year ago period. Whole market [indiscernible] grade switchings and costumer destocking led to a 20 percent decline in demand for standard grades while demand for super and other grades dropped by 9 percent. Compared to the first nine months of 2018 the shipment to capacity ratio for all uncoated mechanical papers decreased from 92% to 83%. Our average transaction price declined by $21 per short ton compared to last quarter while sales volume remained relatively unchanged. EBITDA margin was 11 percent this quarter. I will now have Remi discuss our financial performance before I conclude with our outlook.

Thank you, Yves. Good morning everyone. Today we reported a net loss of $34 million in the third quarter or $0.37 per share excluding special items. This compares to net income excluding special items of $11 million or $0.12 per share in the previous quarter and $96 million or $1.03 per share in the same period last year. Special items in the third quarter reflect mainly non operating pension and OPEB credits of $12 million and a $23 million litigation charge recorded in other expense. Our total sales in the third quarter were $705 million down by $50 million from the second quarter. While pricing was lower across all segments except for issue, the most significant impact was the $114 per metric ton drop in market pulp pricing. metric ton drop in market pulp pricing. Overall sales volume was unchanged as lower lumber and paper shipments reflecting reduced production were offset by higher market pulp volumes as we took steps to reduce the inventory build from Q2 to more normal levels. Manufacturing costs increased by $19 million in the quarter after removing the impact of volume in foreign exchange reflecting more planned maintenance outages in the quarter and a largely seasonal increase in chemical usage. Compared to the second quarter market pulps all-in delivered cash costs increased by $33 to $643 per metric ton despite higher sales volume. This is largely attributable to added additional maintenance costs mainly incurred during the scheduled outages at two pulp mills. Combined with the reduction in average transaction price EBITDA decreased to negative $5 million. Delivered cash cost in tissue increased by $29 per short ton but the increase in costs was more than offset by the higher average transaction price leading to a slight improvement in EBITDA to $1 million. Delivered cash cost in the wood products segment improved to $331 per thousand board feet but that was not enough to offset the decrease in realized pricing and shipment. As a result, EBITDA decreased slightly to $4 million for the quarter. Newsprint delivered cash costs increased by $12 per metric ton to $537 driven by lower volumes and unfavourable chemical usage. Combined with a pricing decline of $24 per metric ton EBITDA decreased to $11 million for the quarter or $36 per metric ton. The delivered cash cost in specialty papers increased by $28 per short ton to $647 primarily attributable to higher maintenance and lower cogeneration contribution associated with downtime mostly planned at one mill. Together with a decrease in realized pricing, EBITDA declined to $15 million or $85 per short ton. We ended the quarter with $69 million of cash and significant available liquidity of $566 million. Even with this quarter's decline in profitability net debt to adjusted EBITDA for the last 12 months remained low at 1.1 times. In the third quarter we generated $25 million of cash from operations, $47 million less than in the second quarter largely reflecting lower EBITA. We spent $82 million in capital expenditures in the first nine months of the year largely in line with our pace of spending so far, we expect to invest approximately $120 million for the full year lower than our previous estimate of $150 million. For the quarter we paid $13 million in softwood lumber duty deposits and we now have $149 million reported on the balance sheet. So far in 2019 we've returned $12 million of capital to our shareholders with the buyback of 1.8 million shares representing 2% of our total outstanding shares. There remains $12 million under the existing share repurchase program. Earlier this week we announced the extension and upsize of our senior secured credit facility the farm facility for up to $360 million replacing the existing $185 million facility entered into in September of 2016. The amended credit agreement includes a term loan facility of up to $180 million and a six-year revolver of up to $180 million. The term loan facility is available with a delayed draw period of up to 3 years and the choice of maturities of six to 10 years from the date of drawing. Without pledging any additional collateral this boosts our available liquidity by $175 million to over $740 million a 30% increase at very competitive rates and on favourable terms. In October, we paid C$19 million in connection with an unfavourable decision from the Quebec Superior Court related to our 2012 acquisition of Fibrek. The payment and timing of any additional consideration will depend on the outcome of the appeal process. Finally, we contributed $33 million to pension plans in the quarter and made OPEB payments of $3 million with an expense of $9 million included in adjusted EBITDA. We continue to expect to make $100 million of pension contributions and $15 million of OPEB payments in 2019 with an associated expense of $30 million in adjusted EBITDA. I will now turn it back to Yves for concluding remarks.

Thank you, Remi. We expect weak market conditions to continue to affect profitability of most of our business segments in the fourth quarter. For market pulp, despite current challenging conditions, we see encouraging signs and stronger industrial breathing arrays for softwood pulp which represents about two-thirds of our production capacity. We took 9,000 metric tons of production downtime for scheduled pulp outages in the third quarter. The planned major outage in [indiscernible] in the fourth quarter will represent approximately 12,000 metric tons of lost production. In addition the regular annual maintenance, the outage we all lost to implement the second phase of the mill organic expansion project for incremental tonnage. Our focus for tissue is to build on the recent sales growth and productivity gains delivering measurable but steady improvements over the next few quarters. Even as conditions in lumber markets remain somewhat uncertain, we believe wood products results will improve as reported industry capacity rationalizations begin to reduce the available supply. With benchmark pricing increasing late in the third quarter, we expect some improvement in the realized pricing in fourth quarter and into 2020. Although we expect to see marginal seasonal improvement in paper shipments in Q4, we will face sustained pricing pressures for all paper grades as operating rates remain low. Despite difficult markets, we are focused on maximizing margins and earnings power in the paper business. Our network of competitive assets and solid financial position provide us a strategic edge to wither current market headwinds and take advantage of future transformation opportunities.

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

Thank you. [Operator Instructions]. Your first question comes from the line of Hamir Patel from CIBC Capital Markets. Please go ahead.

Good morning. If you could give us your sense as to where you think inventories are today for lumber in the channel and maybe what you might be seeing in the various segments that you sell into?

Yes. What I see and we stood on the market with -- we've seen a lot of curtailments announcement and permanent closures. So some time might be a little balance with the adding capacity in the U.S., south. So about including our asset of the company as mentioned we've taken about 170 million board feet of capacity down in the year. So I mean in the last few weeks and as been said by analysts like you and we see the business that it takes a while between the announcement and before the laws and everything is processed and sold and consumed. So I mean the answer is that we're starting to feel more balance between the production and the demand right now. So and I think that means that the pipeline might be significant lower than it was a few months ago.

Great thanks. That's helpful and Remi just a question for you on CapEx. Do you have a preliminary estimate yet for 2020 and any major capital projects, are you starting to think about for next year?

Sure. I would probably work with a number that we're forecasting for this year Hamir, so 120 is probably a good number to use. As you know a good chunk of the CapEx is for asset maintenance. And we don't have -- I mean we do have a couple of projects including what we've talked about the Saint- Félicien capacity expansion and some projects to improve organic growth but no major add-on to that in terms of strategic project at this point.

Thank you. Your next question comes from the line of Paul Quinn from RBC Capital Markets. Please go ahead.

I guess, I mean you're facing very difficult newsprint and specialty papers markets but that's nothing new. But then you highlight in your press release your ability to take advantage of future transformation opportunities. Just wondering what those are for you guys?

Well I think that as we've been saying for a few quarters that the goal of the company is skewed to looking at the portions of course in lumber and how quickly can we grow and pulp as well and if possible to try to do better in tissue and maybe as far as we can be integrated maybe going in tissue as well. So that's the three focus we have and unique [ph] paper, the best we've done in the declining markets. So that's pretty much the way we're looking at.

So when you're talking transformation you're not talking a conversion from an existing you say newsprint or specialty and you say something like containerboard, it's more acquisitions or organic growth in those three main areas?

That's correct. I think that as far as packaging we -- we picked then I’m sure we went to went to tissue, so we keep focusing on tissue as far as towards buying the company so on the pulp and paper side.

Okay that's helpful. And then just on wood products, just you guys are down in price seven bucks quarter-over-quarter, just I'm trying to reconcile that with what I saw with Great Lakes being up about 30 on two by fours and studs kind of holding their own being up a little bit. So was it all mix because you’re --

Yes I think it's all mix. But when we’re talking about mix of course that when you are in Eastern Canada compared to Western Canada you have quite a few shot lands and lower [indiscernible] with the size of our three. So we have more two by threes and we have two by six sometimes makes different. The other thing is that also the band you know how much you sell in the US and Canada and markets with the discounts competitive duty sometimes that has more impact than we think and it -- that's what we see as being part of the mix when we're talking of both Canadian and U.S. markets.

[Operator Instructions]. Your next question comes from the line of Shawn Stewart from T.D. Securities. Please go ahead.

Thanks. Good morning. I got on the call a bit late so I apologize if this was addressed previously. I'm wondering if you could just provide a little more context on what you're seeing in offshore and newsprint markets. I gather that's where a lot of the pressure has been, but if you could go across some of the major regions you sell into in the export market and provide some context on fundamentals in those specific regions.

Well, we definitely see a lot of competition in the export market. And as we said, it's about 40 percent of our sales. So it's a really, really competitive market. There is a significant gap right now between the US and the North American market, I would say, in the export market. And we see that the going that way for at least the next quarter or we see, so that's what I would have to say on it.

And you envision sustaining that type of relative exposure in terms of your shipment mix to offshore markets going forward. Do you have a longer term objective of where you think that percentage goes to?

Well, I think that as we said, we've been taking significant down time and our paper inventory is pretty balanced right now. So -- and going forward we'll see what we're going to do. But where we're saying that there is market when there is demand right now and 40% there isn't so many places you can go. So it's -- we're going to have to do is look just the more results the more the whole industry, you're going to go where the market is or you're going to have to take more difficult decisions.

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

This concludes our conference call today. Thank you everyone for joining.

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