RFP (2020 - Q1)

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products First Quarter 2020 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, Thursday April 30th, 2020 at 9 A.M. Eastern Time.I would now like to turn the meeting over to Mr. Remi Lalonde, Senior Vice President and Chief Financial Officer. Please go ahead, Mr. Lalonde. Remi Lal

Thank you, operator and good morning, everybody. Welcome to Resolute’s first quarter earnings call. You can follow along with the slides for today’s presentation by logging on to the webcast, using the link in the Presentations & Webcasts page under the Investor Relations section of our website and you can download the slides.Today’s presentation will include non-US GAAP financial information, our press release and the appendix to the slides include a reconciliation of non-GAAP information to US 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.And I will turn the call over to Yves Laflamme, President and Chief Executive Officer.

Good morning. Thank you for joining us. We reported $32 million of adjusted EBITDA in the first quarter compared to $4 million in the fourth. The first quarter’s results reflect the momentum in market prices for lumber that began late in 2019, as well as lower maintenance costs in pulp and paper, which were offset in part by lower newsprint prices.By segment, we reported quarterly adjusted EBITDA of $3 million in market pulp, up by $15 million from the fourth quarter, $6 million for tissue up by $2 million, $16 million for wood products up by $12 million, breakeven for newsprint, a reduction of $7 million and $14 million for specialty papers up by $4 million from the previous quarter.While we continue to operate across all of our business segments, we’ve had to take a number of measures in the face of the dramatic reduction in economic activity due to coronavirus pandemic, such as reducing our operational footprint to different levels consistent with essential needs, drawing our credit facilities to keep higher levels of cash, reducing SG&A expenses and suspending our different capital spending.Through February, global demand for chemical pulp was 7% higher, reflecting a 13% increase in demand for hardwood and no change for softwood, but operating rates averaged 92% for softwood and 78% for hardwood.Producers’ inventories at the end of February stayed within a normal range, 46 days for hardwood and 34 days for softwood. Our shipment volumes were – 10,000 metric tons higher in the quarter, due mostly to the timing of the Saint-Felicien annual outage in Q4.Against our earlier expectations, the average transaction price slipped by $16 per metric tons as the pandemic created more uncertainty in demand starting in China against what were gradually improving market conditions.But now again, we see resilient global demand as higher quality tissue demand outpaces the reduction in printing and writing end uses, which makes us cautiously optimistic for sustained volume and improving pricing.After two negative quarters, EBITDA in the segment improved to $3 million, finished goods’ inventory remained low in the first quarter – the third consecutive quarter, ending at 69,000 metric tons.Total tissue consumption was unchanged in February compared to the same period last year, but that means literally considering the changes we’ve seen since March as the impact of the pandemic [shook up] [ph] consumption patterns with a significant increase in at-home demand and the corresponding decrease in away-from-home.Our whole tissue business is progressing well in the context of disruptive consumer demand and supply chains, which has opened opportunities for Resolute to demonstrate our products and capabilities as we grow our customer base and improve our customer mix.Accordingly, our shipment grew by 22% in the quarter and our inventory is down to only 5,000 short tons. With the $15 per short tons improvement in the average transaction price and our lower capital costs in the segment EBITDA was $6 million in the quarter.US housing starts have reached $1.5 million on the secondary adjusted basis in the first quarter, up by 21% compared to the first quarter of last year. This reflects an 11% increase in single-family starts and a 45% increase in multi-family starts.The segment EBITDA improved to $16 million in the quarter, thanks to the $29 per thousand board feet increase in average transaction price and 53 million board feet increase in shipments, despite rail blockades in Canada and the economic fallout of the unfolding coronavirus pandemic.Excluding our recently acquired US sawmills, we recorded about 70 million board feet of downtime in the quarter, consistent with the second half of 2019. On February 1st, we closed on our acquisition of three sawmills in the US South, Cross City in Florida and Glenwood and El Dorado in Arkansas for $175 million including estimated working capital.The integration of this new sites got off to a good start with new sawmills contributing about $2 million to segment EBITDA in the quarter. We are making plans to bring El Dorado online early in 2021, subject to market conditions.Even at the lingering uncertainty of 2019 give way to much stronger housing starts, the negative momentum of the unfolding pandemic made for shortly recovery in market conditions. As of to-date, we are operating to about 85% of run rate capacity excluding our US sawmill, but projection for the near-term impact of housing starts in the current environment are sobering and it could force us to take further measures.On the other hand, we expect wood products to play a key role in the economic recovery as policymakers encourage an aggressive resumption of construction activity and even today we see surprisingly strong demand from the repair and remodelling segment.North American demand for uncoated mechanical papers contracted by 14% in the first quarter compared to the same period last year, reflecting a 20% drop in supercalendered grades and 10% for standard grades.Compared to the first quarter of 2019, the shipments’ capacity ratio for all uncoated mechanical papers was unchanged at 84%. The average transaction price slipped by $15 per short ton in the quarter, mostly reflecting weakness in supercalendered grades.Our quarter-over-quarter shipments however were unchanged against a seasonally stronger fourth quarter and inventory rose to 49,000 short tons. North American newsprint demand fell by 12% in the first quarter compared to the same period last year.Demand for newspaper publishers fell by 15%, while demand for publisher printers was down by 8%. The North American shipment to capacity ratio was 86% and falling in the current challenging environment.Global demand for newsprint was down by 12% in February and the world newsprint shipments to capacity ratio was 78%. As a result, the average transaction price slipped by a further $36 per metric ton in the quarter with most of the weakness coming in the offshore markets.Shipment volumes were down by 11,000 metric tons and finished goods and inventory was unchanged. The focus in our paper business will continue to be to maximize cash generation. While there are opportunities even in the current environment, some areas, particularly newsprint will likely come under stronger pressure.I will now have Remi to discuss our financial performance.

Thank you, Yves. We reported a net loss of $29 million in the first quarter or $0.33 per share, excluding special items. This compares to a net loss, excluding special items of $53 million or $0.59 per share in the previous quarter and net income, excluding special items of $30 million or $0.32 per diluted share in Q1 last year. Minus $28 million of special items in the first quarter include other income from foreign exchange translation and non-operating pension and OPEB credits.Our total sales in the first quarter were $689 million, up by $21 million from the fourth quarter. This reflects the capacity additions from the recently acquired US sawmills, an 8% increase in the price of lumber and a 22% increase in tissue shipments, all of which were partly offset by weaker pricing in shipments in the newsprint segment.Our manufacturing costs decreased by $31 million in the quarter on a comparable basis after removing the impact of volume and the write-down of inventory, following the Q4 idling of the Augusta newsprint mill.Compared to the fourth quarter, the all-in delivered cost per market pulp fell by $68 per metric ton or 10% on lower maintenance spending and the timing of the Saint-Felicien outage in Q4. Accordingly, market pulp EBITDA improved to $3 million.The delivered cost in tissue fell by $66 per short ton in the quarter or 4% mostly reflecting the sales volume impact leading to a $2 million improvement in EBITDA to $6 million.In the wood products segment, the delivered cost was essentially unchanged, but with the 8% increase in transaction prices, EBITDA in the segment improved by $12 million to $16 million.Newsprint delivered cost was $16 per metric ton lower in the quarter or 3% due to lower maintenance costs and – I’m sorry, due to lower maintenance and costs avoided with the closure of Augusta, but with the lower average transaction price, EBITDA fell to breakeven.The delivered cost in specialty papers fell by $40 per short ton or 6% due to lower maintenance costs and higher generation from internal power assets, which despite the lower average transaction prices in paper helped to improve EBITDA by $4 million to $14 million.We used $49 million of cash for operating activities in the quarter, including a $31 million increase in round wood inventory ahead of the spring breakup. We also made $21 million of capital expenditures compared to $113 million for all of 2019.To help manage liquidity in the months ahead, we’re trimming our 2020 capital spending expectations down to $90 million, including capital to be invested in the recently acquired US sawmills. We previously guided to roughly $115 million, excluding the US sawmills. We made $15 million in softwood lumber duty deposits in the quarter, bringing our total deposits to $177 million which is recorded in other assets on the balance sheet.The $372 million increase in total debt on the balance sheet reflects a drop of $180 million from our existing term loan facility to finance the acquisition of the US sawmills, an injection of over $120 million from existing credit facilities as a preventive measure in mid-March to build an immediately available cash cushion of liquidity and an inflow of roughly $70 million from existing facilities to support short-term working capital requirements.The term loans we used to finance the acquisition of the US saw mills have a 10-year maturity and carry a floating rate of interest of about 2% as of today, net of the expected patronage dividend. The ABL credit facility also carries a floating rate of interest of about 2%.Our cash balance at quarter end was $116 million for net debt of 705. Our liquidity also remains strong at $349 million. Finally, we contributed $23 million to pension plans in the quarter and we made OPEB payments of $3 million with a combined expense of $8 million included in adjusted EBITDA.While contributions payable for the year are $112 million in pension and $13 million of OPEB, we expect to take advantage of the recently announced measures under the US stimulus bill to defer up to $34 million of US contributions to January 1, 2021. Accordingly, our pension contributions for 2020 will be approximately $80 million and $13 million in OPEB.The $117 million reduction in net pension and OPEB liability on the balance sheet reflects the impact of the weaker Canadian dollar and payments made in the quarter. Considering the sudden and precipitous reduction in equity markets and falling treasury rates 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 widened, which would imply higher contribution in the future. But we will conduct that assessment only at year end in accordance with applicable accounting and pension funding rules.Yves?

Yeah. Thank you, Remi. Governments across North America have recognized the importance of the forest products sector in the fight against the coronavirus pandemic. Resolute manufactures a number of key products, including lumber for our infrastructure, now and in the economic recovery to come, pulp for personal care products, food protective papers and medical supplies used by our healthcare professionals on the front lines. Bath tissue and paper towels to meet our basic needs for cleanliness and comfort and newsprint and other papers helping keep us all informed.As we navigate these highly uncertain times, our short-term priorities will be focused on the following. Operating our assets in accordance with rigorous protocols around health and safety, including special measures we’ve put in place to minimise the spread of the virus at all of our locations.Closely managing sources of liquidity and developing opportunities to access additional liquidity, should it be required. Working with all levels of government in the regions where we operate to support a speedy economic recovery.Closely monitoring the growing risk around credit exposures with some of our customers. Advocating with regular – regulators to minimise the risk of rising pension contributions should financial markets remain depressed and interest rates low. Adjusting capacity dynamically based on rapidly-changing conditions and keeping tight control on SG&A expenses and controlling capital spending.These are obviously unprecedented times. Before we complete this morning’s call, I would like to recognise our employees, contractors and suppliers. Our people have risen to the challenge. With some operations idled hundreds of people are directly and financially impacted.But across the company, they all have remained committed to a job well done. They’re loyal and hardworking. They recognise the importance of their role in providing our customers with essential products. And in spite of the pressure of work and family during these difficulties, they have remained focused on the world-class health and safety practices and remain engaged in their communities.We see countless acts of kindness and solidarity from volunteering time and financial and in kind donations. Our people are truly our greatest asset. They are making a difference every day and on behalf of the board of directors and executive team, I want to publicly thank them.

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 of TD Securities. Please go ahead. Your line is open.

Thank you. Good morning. A couple of questions. You referenced the dynamicdowntime approach you’re taking. I’m wondering if you can provide a little bit of detail across the business segments with respect to the amount of downtime taken during April, and how that’s trending into May for each of the segments as well?

Okay, so good morning, Sean first of all. The – as far as the downtime that’s been taken, if we go to newsprint, we’ve taken the downtime as applicable newsprint mill, which is about – it’s at the moment it’s two machine. It’s going to 100,000 ton on a yearly basis, 200,000 tons of it.And then we took as well the last four weeks or two weeks and we are – we informed the mill yesterday for another four weeks the Amos newsprint mill, which is one machine but close to the equivalent of volume. So those are temporary downtime for now.On the CPV grade that we took about a month of downtime, four week of downtime of La Dore SC mill, they restarted on Monday till at least the next holiday we’re going to have in June. And we also took a machine down in Alma which is about 70,000 ton per year on that paper.Other than that you know, we’re – on the paper side and pulp side, we’re running pretty much full operation. On the lumber side, we keep – we took a stud mill – few stud mills down in the fourth quarter, because of the big spread between the – you know, as you saw between start at random. So the Saint-Thomas sawmill is down, but the volume of logs been moved to a relevant mill which was pretty close as a facility.And we got the shifts in one of our random mill in Girardville. We have Comtois mill in Quebec as well as stud mills been known for two months now. The Ignace sawmill in Northwestern Ontario was down and you know was down earlier, so still down. That’s pretty much what we have in lumber.We took two weeks, additional two weeks and in the Baie-Comeau sawmills in line with the downtime of the paper mill, then we started the – about two weeks ago just we moved to after more newsprint mills. So other than that pretty much it from the represent about that thing is something like 20 you know all mixed together papers [technical difficulty] about 25% of our paper plastic.

That’s great detail. Thanks, Yves. Remi, a question on the balance sheet. You referenced the lower CapEx and the pension deferrals in the US. Can you go through some of the other levers you have to pull with respect to supporting the liquidity position, and I’m thinking of things like seasonal work in cap declines through the second and third quarters, property tax deferrals. I’m not sure if there’s any stumpage deferrals on that in Eastern Canada. Any thoughts there with respect to other measures?

Yeah. So just maybe to begin, Sean, our liquidity is starting from a pretty good position at $350 million as of quarter end. And so there’s some opportunities we think that we worked on. Nothing to announce at this time, but in terms of how things are evolving. We talked about the $34 million deferral on pension which is helpful.The first quarter is also pretty significant in terms of working capital consumption. So we expect that to reverse over the course of – over through the course of the year, that deferral of capital spending is going to reduce about $30 million in spending. There are programs that have been announced by provinces to defer some payments under the harvesting programs, but that’s mostly within the existing year.And then the other programs you talked about deferring property taxes that – those types of would be a little bit smaller. So that pretty much covers what we – what we’re working on, Sean.

Okay. And thanks, Remi. That’s all I have for now. Thank you.

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

Hi, good morning. Can you give us the sense as to how much graphic paper and newsprint demand is down year-over-year in April? And would you expect things to be even worse in May?

Yeah, so we see – while we have in a number. So the trend in the first quarter, our newsprint volume on I think 16% or so. But, you know, since the pandemic, as I mentioned earlier, we had to go best at that wasn’t expected, which represent about 25 of our paper business.On the newsprint side, you know, and even on the CPV side, we feel that there is probably an order of 10% to 15% more right now than you know we were expecting. The question about that of course is going forward when the – with some business coming back, how much going to come back on the paper side.So we expect as far as advertising on the SC as an example and you know, more specialty papers, hopefully, you know, some business going to come back, but it’s hard to see and to say how much you know how much going to come back? I would say, to answer your question more precisely, of course, you know, April is one of the most probably the most effective on the paper side.We don’t see that necessarily only doing any better. So we hope to have some business coming back. On the newsprint side is – it’s more complicated since you know, the overseas markets have been struggling a lot.And, you know, this part of the paper business, you know, even before as you know, we already took Augusta, Georgia mill down because of the lack of demand. So question is, how much of newsprint is going to be back. So we’ll see how it goes you know, but we don’t feel that everything is going to be back, but some of it was [technical difficulty].

Great, thank you. That’s helpful. And can you give us a sense as to maybe how product pricing for newsprint and graphic papers has trended since the end of the quarter?

You know, if you’re looking at – if you’re talking about the newsprint, of course, as I said, it’s – the offshore market is very bad. So we’re just pretty quiet right now on the shipments to the US to give you a precise price, you know it’s hard to say because it’s down almost every weeks of different environments you are in.On the CPV. So about the same thing you know like I don’t have precise number to give you right now as far as how much the market is going down per ton or something like that. But it’s definitely you know, not on the right side so.

Okay, thanks. And even your comments you mentioned R&R had been strong. Was that in relation to what you’re seeing out of your Canadian operations or from the one US sawmill you have operating today?

While you know, we see that on two different ways. You know, we have contracts with all centers even, you know on value-added like a furring strips, you know, kind of a business and you know at lumber as well for our Canadian operation. And we’ve seen the demand, you know, kind of going pretty good and even sometimes stronger in different products.So, with direct sales which is a pretty good measure to measure the demand and also in that business. On the US side, it’s more on the while you know, we’re producing decking so and we see a pretty good demand for you know, decking going to be the streets of business. So, and this [technical difficulty] is saying that as we speak you can see that that even sees the downtime of the coronavirus those business have been pretty good.

Great. And just a final one for me. Remi, you know we have a prolonged period of market weakness, you know, you’ve already indicated there sort of run rate CapEx has been reduced by 30%. Is there still room to carry that back further, if need be?

Well, as you know, Hamir, we’re pretty capital intensive business. So it takes about $70 million to $80 million to keep the lights on. So yes, we could compress CapEx a little bit. But beyond that, we’re not doing ourselves any long-term favours.

Fair enough. Great. That’s all I had. I’ll turn it over. Thanks.

Thanks, Hamir.

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

Yeah. Thanks very much Good morning guys.

Good morning, Paul.

Hey, just some clarification on the wood products side. I think you mentioned the EBITDA contribution from the newly acquired US South mills is $2 million for the two months. Is that right?

Correct. That’s correct. Yeah.

Again and maybe you could just outline that shifting of those mills currently?

The ships we’re operating –

Yeah, we – we operate in Cross City, Florida, you know, as they work two shift, I would say. And a big part of it, as I said earlier, is more is decking which is pretty good right now. So we’re very pleased with what we’re doing with that mill.We had, you know, when we made the acquisition, Glenwood, Arkansas was running a sawmill while running on the one shift and a half. So our goal was to restart the – completing the second shift. We’re still working on it. What we’re looking at right now is we’re having a swing shift between – the two shifts and then going running into sawmills on two shifts, because of the pandemic, you know and training and everything is a little more complicated, but we’re pretty pleased with the result of that mill as well and we see good opportunities.And the integration is going well and as or otherwise you know is down but we’re still forecasting to you know to restart at the beginning of 2021 depends on market forces the demand. But our plan is pretty well aligned on the [indiscernible] this is the situation for now.

Okay, great. Thanks for that. And then just switching to market pulp here. I was surprised as the price dropped at $16 quarter-over-quarter you know, given where I saw you know, most of the benchmark prices moving. Maybe you could give us an outline of where your pulp is going regionally and any you know, mix shift for that, you know, that explains that price drop?

Yeah, so as we said, you know, the market on the first quarter was not as expected. And we have different mix of pulp you know, we have a southern pulp you know and the hardwood and softwood in Calhoun, Tennessee. We have the fluff pulp in Alabama. And of course we do have the softwood pulp at Saint-Felicien we have a mix of hardwood and softwood pulp and kinds of like.So we have some, you know, that was you know tougher, I would say and it’s the base of the whole thing. The same thing about the fluff pulp is as good as was supposed to be. But the good news is, the outlook as you heard that we’re pretty optimistic about what’s going on right now, including the fluff pulp and the Calhoun mill has been much better on the pulp side and even better since we have a better base with doing more softwood like right now.So this is why I explained pretty much what happened in the first quarter maybe Remi I don’t know if you any more details on the pricing itself, well that’s pretty much –

Yeah that pretty covers a in a wide and above the range. Yeah.

Sorry and then just lastly on tissue. Maybe you could give us an idea of the split that you got between consumer and the away-from-home in terms of sales and then how’s does that ramp at Calhoun’s progressing?

So most of the business is focused on retail, everything out in Calhoun is retail. So that’s about call it 60,000 tons, 65,000 tons a year, the Florida mills are largely away-from-home with a portion of retail in there. As far as how the segment is doing, the tissue machine in Calhoun is producing very well in the last two quarters. As we’ve indicated in the past, our priorities there were to improve the converting operations and we’re making some encouraging progress there.And the other thing that we were talking about also is improving customer mix. So the reality of the last couple of months is that it’s given us opportunities as there are more customers looking to fill up our store shelves, particularly on the retail side has given us opportunities to get into those – some of those places and demonstrate the quality of our product and our in our abilities to support it. So it’s been pretty positive. We pointed out that was a 22% increase in shipments and our inventories today on the tissue side are very low.

All right, best of luck. Thanks guys.

Thanks, Paul.

Thank you.

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

Thank you, everybody for joining today. Have a good day.

Thank you.

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