RFP (2020 - Q2)

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Second 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, July 30, 2020 at 9:00 a.m. Eastern Time. I would now like to turn the meeting over to Ms. Marianne Limoges, Treasurer and Vice President, Investor Relations. Please go ahead, Ms. Limoges. Marianne

Thank you, Operator. Good morning, and welcome to Resolute's second 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 & 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 the 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.

Thank you, Marianne. Good morning and thank you for joining us today. We reported US$37 million of adjusted EBITDA in the second quarter, a US$5 million improvement compared to US$32 million in the first quarter. The second quarter's results reflect better pricing for pulp, an increase in lumber shipments, and the favorable impact on the weaker Canadian dollar despite the significant drop in paper demand due to the COVID-19 pandemic. By segment, we reported quarterly adjusted EBITDA of US$16 million in market pulp, up by US$13 million from the first quarter; US$3 million for tissue, down by US$3 million; US$5 million for wood products, up by US$9 million; and US$4 million for paper, down by US$10 million. Operating in a pandemic has not been easy, but we focus our attention on key short-term priorities to see us through, including operating under rigorous protocols for all the health and safety of our employees, contractors, and suppliers, reducing our paper production consistent with the dramatic decrease in economic activity affecting demand, maintaining discipline liquidity management, monitoring customer credits risk and controlling spending our SG&A and capital expenditures. We stay on high power [ph] as situation evolves and new risks develop such as the risk of production interruptions in hotspots to minimize the spread of the virus. World shipments of chemical pulp rose by 8% in the first five months of the year compared to the same period last year, reflecting a 13% increase in the demand for hardwood and a slight increase in softwood. The trends generally reflect higher tissue demand with the ongoing pandemic and inventory swings, offset by a significant decrease in printing and writing demand. Chinese demand grew by 12% in the period with all growth coming from hardwood. North American demand grew by 6% for softwood, but it was 10% lower for hardwood. Mobile industry operating rates in the period average 93% for softwood and 91% for hardwood. The average transaction price in the market pulp segment rose by US$34 per metric ton in the quarter, or 6%. But shipments were 45,000 metric tons lower, mostly due to the timing of annual outages just at the Calhoun and Thunder Bay mills and the shortage of recycled raw material. EBITDA in the segment improved by US$13 million to US$16 million. While pulp benefited from higher demand for higher quality tissue. The lower printing and writing shipments has started to put some downward pressure as those markets stabilized in the ongoing dynamic economy. Not surprisingly, the tissue business has seen an overall pick up and demand in this pandemic environment, but also a significant shift in consumption patterns. U.S. at-home demand grew by 19% in the first five months of the year compared to 2019, while demand for away-from-home was down by 4%. While pricing in tissue segment improved by 4% in the quarter, shipments slipped by 4,000 short tons, or 14%, due to a shortage of inventory as we adjust that to meet despite in customer demand in early stages of the pandemic. The price improvement reflects a favorable mix between converting projects converted as well as pricing gains in both the retail and away-from-home segments. But the lower volume drag EBITDA down to US$3 million in the quarter. Finished goods inventory at quarter-end remained low at 5,000 short tons. We will continue to focus on customer portfolio optimization in the tissue business, particularly in the retail segments, where we going to do to make inroads as we praise volume with new customers and the most rate quantity of our products. Overall, we expect to continue to gain momentum in the coming quarters. After a 26 drop in April, U.S. oiling starts to recover to a very encouraging seasonally adjusted level of US$1.2 million by June. From the end of the first quarter to the end of the second, the benchmark price for 2/42 and better deliver Great Lakes is up by about US$100 per thousand board feet. While the benchmark price for comparable 8 wood start is up by about US$150 per thousand board feet. This reflects stronger than expected housing starts while also robust demand from the (inaudible) revising market. June retail sales at-home and garden sensors is reported to be up by 18% compared to last year. Wood product shipments rose by some of 78 million board feet in the quarter, reflecting the added capacity for a full quarter of operations for our U.S. Army's acquired on February 1, as well as the impact of Canadian railroad blockades in the first quarter. But the average transaction price slipped by US$9 per thousand board feet compared to the first quarter, which lags to the benchmark prices, as I just mentioned, reflecting markets uncertainly with the early stages of the unfolding pandemic. EBITDA in the lumber segment improved by US$9 million in the quarter to US$25 million. The lumber market lately has been a bright spot against what were pessimistic expectations in April, driven by the strength of the repair & remodeling market and stronger housing starts, giving us the opportunity to bring back to production some of the sidelined Canadian capacity, such as two of our idle saw mills in Quebec. The integration of the U.S. lumber assets is progressing well, as they have also benefitted from an above-seasonal surge in demand for decking. As lumber demand remains promising, we are pursuing our plan to bring the El Dorado facility on-line in early 2021. Pandemic has had a substantial effect on the paper segment, as the dramatic reduction in economic activity has been particularly hard for marketing dependent projects like newspapers, insurers, flyers, and commercial papers. North American demand for uncoated mechanical papers and newsprint fell by 24% and 23% respectively in the first half for 2020 compared to the same period last year. This reflects the growth of 30% to 40% in supercalendar grades, 17% for standard grades, and 23% for both newspaper publishers and commercial printers. The shipment-to-capacity ratio for all uncoated mechanical papers was 72% compared to 84% last year, while North American newsprint was 79% compared to 85% last year. Global demand for newsprint was down by 18% should May, and the world newsprint shipment-to-capacity ratio was 74%, down by 11% for year-over-year. We adjusted to this reality by curtailing production capacity by nearly 30% against our run rate capacity heading into the crisis, leading to a drop in shipments by 132,000 metric tons or 27% across all grades. Accordingly, we recorded approximately 180,000 metric tons of downtime in the quarter, and we reduced finished goods inventory by 20,000 metric tons from the end of the first quarter. The average transaction price remained relatively stable, decreasing by US$8 per metric ton, mostly due to newsprint. Nevertheless, segment EBITDA was positive at US$4 million. The significant slowdown in economic activity we have an ongoing effort of paper, and we will continue to adjust our capacity as conditions evolve. I will now have Remi to discuss our financial performance.

Thank you, Yves. We reported a net loss of US$22 million in the second quarter, or US$0.25 per share, excluding special items. This compares to a net loss, excluding special items of US$29 million, or US$0.33 per share in the previous quarter, and net income excluding special items of US$11 million, or US$0.12 per diluted share in the same period last year. Special items in the quarter include US$15 million from the settlement of an insurance claim related to the 2015 acquisition of Atlas tissue for which we expect to receive the proceeds in Q3. A net gain on disposition of assets for the sale of our Augusta facility for US$9 million, and other net income from foreign exchange translation and non-operating pension and OPEB credits. Note that, in the second quarter, we combine the results of our newsprint and specialty papers segments into a new paper segment, is better reflects our internal analysis, given the diminishing percentage of newsprint and specialty papers in our product portfolio. The total sales in the second quarter were US$612 million, down by US$77 million from the first quarter, which reflects the impact of the COVID-19 pandemic on paper demand, with shipments down by 27%, partially offset by the additional volume of our U.S. sawmills and the first quarter impact of Canadian rail blockade on lumber shipments. Manufacturing cost is rose by US$7 million in the quarter, after removing the favorable impact of the weaker Canadian dollar and the lower volume. Compared to the first quarter, the all-in delivered cost for market pulp decreased by US$14 per metric ton, or 2%, which combined with a US$34 per metric ton improvement pricing produced US$16 million of EBITDA in the quarter, a US$13 million in the previous quarter. The delivered cost in tissue increased by US$167 per short ton in the quarter, or 10%, mostly reflecting the impact of lower shipments and maintenance costs associated with the annual outage in Calhoun. EBITDA for the segment was US$3 million, down from US$6 million in the previous quarter. In the wood products segment, the delivered cost fell by US$25 per thousand board feet, or 7%, reflecting better productivity. Combined with the 14% increase in transaction prices, EBITDA rose to US$25 million, US$9 million better in the last quarter. Papers delivered cost was US$20 per metric ton, higher in the quarter due to the impact of downtime. EBITDA was US$4 million down by US$10 million. We generated US$125 million of cash from operating activities in the quarter, largely due to a US$92 million reduction in working cap, including a seasonal decrease in roundwood inventory. We spent US$37 million in capital expenditures in the first half of the year, compared to US$45 million in the same period year of 2019. As we mentioned last quarter, in light of the uncertain economic environment, we are reducing our annual capital spending expectations to US$90 million, including capital to be invested in the U.S. sawmills. We took the opportunity to reduce borrowings under our revolving credit facilities by US$191 million in the quarter, repaying all of the amounts borrowed in Q1, except for a US$180 million 10-year term loan that we used to finance the acquisition of U.S. sawmills. The term loan carries a floating rate of interest of about 2% as of today, net of an expected patronage dividend. With quarter end cash of US$27 million, our liquidity improved by US$47 million from the end of the first quarter, to US$396 million. We made US$17 million in softwood lumber duty deposits in the quarter, bringing our total deposits to US$194 million, which is recorded in other assets on the balance sheet. Finally, we contributed US$16 million to pension plans in the quarter, and we made OPEB payments of US$3 million with a combined expense of US$8 million included in adjusted EBITDA. The contribution reflects a temporary benefit from the deferral, pursuant to the U.S. stimulus bill of US$ 8 million to U.S. plans in the quarter. We expect to differ up to a total of US$34 million in contributions for the year. But considering that the catch-up is due on January 1, which is a bank holiday, the deferred amounts will need to be funded before year ends. Accordingly, our pension contributions for the year will be US$112 million, and we will make US$13 million of OPEB payments. The net pension and OPEB liability on the balance sheet was essentially unchanged from the end of the first quarter because of the offsetting the impact of payments and the weaker Canadian dollar. While asset values have recovered somewhat from the turbulent first quarter, we've seen a further deterioration of prevailing interest rates, which would weigh against the funding ratio on an accounting basis and on a funding basis, implying higher contributions in the future. As usual, we will conduct the assessment only at year-end based on the conditions at the time in accordance with applicable accounting and pension funding [indiscernible]. Yves?

The COVID pandemic and the ensuing economic slowdown have brought unprecedented challenges and business uncertainty. I want to take the opportunity to express my gratitude for the commitment of our employees, contractors, and suppliers, and their loyalty and the hard work; they pulled together, allowing us to operate as an essential business, to our commitment to world-class safety while remaining focused on the job well done. On behalf of the Board of Directors and the executive team, I want to send only thank them.

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

[Operator Instructions]. Your first question comes from the line of Paul Quinn from RBC Capital Markets. Your line is now open.

Yes. I have just a couple of questions. Maybe starting in market pulp. You guys called their short term weakness. Just how weak to expect it to be in the short term?

Paul, could you speak up a little -- it's very hard to hear.

Yes, sorry. You called out short-term weakness in market pulp and I'm just wondering, how we can expect it to be and how long so we can pull out [ph]?

It's really related to as I said the printing and writing business, and we own for something better coming into 2021 as we you know the forecast we have right now, but we expect the two next quarter to be in at a smaller than what we had in the second quarter.

Okay. And then on wood products, it looks like Eldorado, no change really in bringing that online early in 2021. Anyway to accelerate that given the market strength that we're seeing in wood products?

That's a good question. We definitely look at this very seriously and unfortunately the -- we going to do it. So that's something that we reevaluated seriously, and the possibility to do it and we came at the conclusion that we going to restart as soon as possible. And if we get on the one shift to -- with the CapEx we spending right now. So, if we succeeded to restart that Eldorado area maybe by the end of the year, this year would be more like a one ship start for training or something like that, but we don't see big, big volume coming into the market before the beginning of next year.

Okay. Just one thing that confused me, the insurance, in the US$15 million insurance from related to Atlas, is that related to Atlas acquisition or where’s that coming from?

Yes. So, Paul, it's Remi. So, we had record warranty insurance as part of the transaction. So, we made a claim following the acquisition and reached a settlement. So, it's US$15 million. The cash is expected in Q3 and it is not in adjusted EBITDA and other income.

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

Yves, the 70 million board feet of downtime that you've been taking in Canada in the last 3 quarters, is any of that still down today?

Yes, we still have that volume, we have to take into consideration, we had three stud mills down and also you know we have mills that we don't have the wood supply to run in Canada full potential. So having said that, we restarted two of the stud mills as mentioned in the, my script, but we still have one stud mill in the Northwestern Ontario Ignace that is still down.

Okay. And when did those two restart?

They restarted about I would say, pretty much at the beginning of this quarter.

In the third quarter. So in July.

Yes, sorry. Yes. In the third quarter. Sorry. Saying this quarter, I'm talking about July. Yes, but thank you, Remi.

Okay, great. And Yves, I think you mentioned in your remarks. I think I heard a figure of June retails and the R&R market sales up 18%, if I heard that right. Was that your own volumes through that, that --?

No, that's the -- that we got from home centers statistics that was published. So that's also from own volumes that are also so thank you to gardening and everything. So it's not just about lumber.

Okay. And then for that your southern mill that has a lot of decking exposure. What are you seeing -- are you seeing any signs of deceleration yet? And at some point the demand has to seasonally weaker. Now, when do you see that playing out this year?

Yes, so first of all, you're right. We [indiscernible] can volume of thinking into so obvious. Just to remind you that the Glenwood sawmill was not produce any when we acquired that's they are, but I see pretty good on it. And to ensure your question, we were expecting that coming for just, for the month ago or so, but right now we're not sitting down at all. So, we know that going to go is going to happen, but it's kind of unusual and everybody that business thing to say and we -- we don't see that slowdown as we speak.

Yes. All right, that's helpful and then just on the Augusta mill. Could you say who you sold that site to and what their intentions are for that machine?

We sold it to its neighbor to Graphic Packaging. So we're not sure what they intend to do, Hamir, but that you could add that my. I don't think it's to restart to operate newsprint.

Fair enough. And then I'm just curious, Remi, how you think about the option now or if you resolve the optionality in the remaining paper fleet and when you think about potential alternative products? What products might that include?

Well, I think we -- as we've been doing in the last few, the last few years, we're transforming the company with tissue pulp and a number as we, you can see we grow in lumber as forest transforming the assets, of course, we certainly have some potential asset that could be transform something else, but as we speak with the pandemic situation and the cash and everything's up, I don't think we have anything on the table right now that is ready to go, so.

Fair enough. And just last one from me. Remi, could you comment on, what are -- was the sort of government grants that you may have had access to. In Q2, how much was that and what level would you expect in Q3?

Yes. No. Good question, Hamir. So, we actually did not qualify for the program for Trudeau needed [ph] Emergency Wage Subsidy. We did not qualify in Q2. In light of the changes that the government has adopted, we expect to qualify in Q3, but they're not going to be huge sums. It might be -- it obviously depends on the revenue. There is a factor that you applied to the revenue loss, but it could be maybe a couple of million dollars. And what we will see how the revenue plays out, but zero in Q2.

Your next question comes from the line of Sean Steuart from TD Securities.

Couple of questions. The pulp costs this quarter trended much better than we would have expected given the downtime at Calhoun and Thunder Bay. Can you give us any context on other variables in that mix and what might have contributed to the positive trend in costs despite the maintenance downtime this quarter?

Yes. I'll let Remi answer that; we're certainly have to place as the fiber cost that was cheaper. But it does that we had, we more needed.

So to answer your question specifically, Sean, we capitalize and defer the major maintenance outage costs over the period between outages. So that's why we spread it out to minimize potential variability from month to month, but quarter-over-quarter other than that, you will see the costs really did move around Q2 much, fiber costs were okay. There was all around maintenance. Overall, we are seeing a trend and we've been focusing intently on reducing our spend, controlling spend, especially in light of the pandemic environment. We have moved a couple of outages out just to preserve cash. But we're trying to be very disciplined about how we spend our money; there is a bit of a tailwind also of the natural gas and electricity prices, obviously with the pandemic here in the last couple of months.

Okay. And, Yves, I'm wondering if you can differentiate conditions between domestic and offshore publishing paper markets right now, and further to that, it seems like most of the curtailments to this point are just about all of them have been temporary. Is there a point at which you consider indefinite or permanent shuts to rightsize your capacity based on the paper side?

Yes, I mean, I think that as far as the market, the offshore market on the paper side is definitely very, very difficult as far as our shipment, when you look at the COVID-19 situation in India, which is a pretty significant consumer newsprint. It's definitely an area where it's hard rather than the non-commercial right now even though, it's not; it's not that easy to break it either. So as far as the assets, yes, it's all temporary. As we -- we have two machines that, not machines but three machines has been down. The two in the Calhoun and the one in Clermont and we also have two white paper machine at Amos and Alma. So, and we have the flexibility with few mills of paper machine to produce FC [ph] or newsprint or even wide which has cost to manage the -- how much markets going to come back and not the solely have to restart the big machine in the same time. So, long story short is just our worry and it's really hard to measure right now some of this going to become permanent or not as we go. So but so it was pretty obvious that, not just for Resolute but the whole market will be back to where there were in about three months ago. So I think that's something is going to happen in the industry at least.

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

Well thank you everybody for joining us today. Have a great day.

Thank you.

Thank you.