RFP (2020 - Q4)

Ladies and gentlemen, thank you for standing by and welcome to the Resolute Forest Products Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I would like to now hand the conference over to Marianne Limoges. Thank you. Please go ahead, madam. Marianne

Good morning. Welcome to Resolute's fourth quarter earnings call. Today we'll hear from Yves Laflamme, President and Chief Executive Officer; and Remi Lalonde, Senior Vice President and Chief Financial Officer. You can follow along with slide for today's presentation by logging on to the webcast, using the link in the Presentations & Webcast page under the Investor Relations section of our website and you can download the slides.

Merci, Marianne. Good morning and thank you for joining us. Today, we reported $129 million of adjusted EBITDA in the fourth quarter compared to $140 million in the third quarter. Our results reflect strong pricing for lumber and our wood products segment's ability to drive bottom line impact with strong end markets, like those we have seen in the second half of 2020, with the rebound in U.S. housing starts and robust demand for repair and remodeling. We also noted an increase in paper shipments in the fourth quarter, signaling the gradual recovery for those markets is underway. What is remained unclear whether they will recover enough to justify restarting the capacity we temporarily idle due to the rapid drop in demand during the onset of the pandemic specific all of the Amos and Baie-Comeau newsprint mills for which we recorded non-cash charges of $80 million in the fourth quarter. By segment, we reported quarterly adjusted EBITDA of $2 million in market pulp, the same as third quarter, $2 million for tissue, down by $4 million. Wood products wasn’t changed at $139 million and negative $1 million for paper, down by $7 million. For the whole year, adjusted EBITDA was $338 million compared to $213 million in 2019. The better performance reflects a significant increase in other pricing, the added contribution of the U.S. Sawmills we acquired early in 2020, lower overall manufacturing costs and better performance from the Tissue segment. What is also reflects unfavorable effect of lower pulp and paper pricing and lower paper shipments, largely due to the economy impacts of the pandemic. Let's review our retail segment beginning with Market Pulp. Global demand for chemical market pulp in 2020 rose by 4% through November compared to 2019, with demand for hardwood increasing by 8% and softwood decreasing by 2%. Demand in China rose by 9% and 6% in North America, as at-home tissue consumption during the pandemic outpaced lower printing and writing demand. The higher demand push producer inventories well within the normal range. 37 days for hardwood and 33 days for softwood by end of November.

Thank you, Yves. We reported net income of $45 million in the fourth quarter or $0.55 per diluted share excluding special items. This compares to net income, excluding special items of $62 million or $0.72 per diluted share in the previous quarter and a net loss, excluding special items of $53 million or $0.59 per share in the same period last year. Special items in the fourth quarter include $80 million of charges related to the temporary idling of the Baie-Comeau and Amos newsprint mills, non-operating pension and other postretirement benefit or OPEB costs of $24 million, foreign currency translation loss of $13 million for net monetary liabilities and other expenses of $15 million. Total sales in the fourth quarter were $769 million, up by $39 million compared to the third quarter on higher shipments for all business segments, but mostly paper. Manufacturing costs rose by $23 million in the quarter after removing the impact of volume and foreign exchange. Compared to the third quarter the all-in delivered cost for Market Pulp was essentially unchanged up by $2 per metric ton. EBITDA in the segment was also unchanged at $2 million.

Thank you, Remi. We're, we remain we call the and I'm not -- a problem of our mental health and safety as well, both for the communities in which we walk and leave. We continue to enhance the already meaningful relationships across our operating communities. Over the years together we have taken important steps in our cross formation and build a more sustainable and competitive organization. I want to thank to so many people in the forest products industry who have supported me during the almost 40 last years. I know that Resolute is going to be in good hands with Remi, our CEO and supported by a strong team of all of those of the organization that will lead it's full war. Thank you.

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

Thank you. Your first question comes from Hamir Patel of CIBC Capital. Your line is open.

Hi. Good morning.

Good morning, Hamir.

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

You mean increasing the capacity?

Yeah. I'm just curious at how much of a constraint that -- maybe COVID from a labor disruptive standpoint has been?

Yeah. Of course, we have had cross rides with the Kansas -- go to Kansas , pretty much all facilities, pulp and paper and lumber as well. So, it's slowed all the little -- the operation that we had in the U.S. the cutting shifts, but having back on 42 for sure in Arkansas, didn’t have any impact as we said earlier on the restart of El Dorado. So -- and sometime we have to shoot on a shift or two, but as far as capacity, we catching up pretty good by adding shifts going forward that we can do when the people are back. So, I wouldn't say on the pure volume, we don't want to see an impact midterm. So.

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

It's just hard to say. It's kind of a better demand right now between at-home and away-from-home. So -- and we're trying to manage both right now. And of course, the pulp, it's going to have an impact on the cost of the tissue operation just for us -- for the whole industry. But fortunately, we're the greatest.

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

We always keep an eye on that, Hamir. I would tell you that we've done some moves in the past to try to optimize and balance our portfolio. We might look to it. I think what I would say though, to your larger question, my priorities essentially moving forward are to keep the focus and discipline around capital allocation. I think that's going to be very important as we move forward. And if we do decide to monetize some assets, then focus on taking a little bit more leverage out of the business. I do want to focus on encouraging growth, especially as we look to replace the diminishing EBITDA coming from paper. I think there's potentially a couple of things we might look at either bolt-ons or extensions in the Lumber segment. Yves talked about the importance of continuing to integrate and grow our U.S. assets in the U.S., the El Dorado sawmill is coming online, so that's going to be able to important to push that forward, and also the restart of Ignace. So, we can get some -- a bit of capacity growth there. And I do want to focus on maintaining a fanatical focus on asset performance brought -- the whole portfolio consistent with Resolute's history and reputation as being excellent operators.

Great. Thanks. Thanks, Remi. That's all I had and Yves all the best in retirement.

Thank you, Hamir.

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

Yeah. Thanks very much. Good morning. Congratulations, Yves, 40 years -- almost 40 years here. Wow. The changes you must have seen through that company. It's mind blowing. Maybe I start the wood product side, just the additional volume you expect to get in 2021 through the restart of Ignace and start up El Dorado. What is that approximately?

I think, the run rate, I would say probably about 200 million board feet. So, if I think -- we're going to restock on the one shoe from the beginning with Ignace and the capacity at El Dorado was about 180, 185. So, of course, different mix, but full capacity about that, yeah.

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

Paul, I'll take that one. So -- I mean, we looked at the PPC stats and certainly there's a lot of room in the corridor of what is normal. But when you look back over the bill that occurred late in 2018, I think at one point we had 1.5 million extra tons of capacity sitting on the market, and that's largely worked its way through. So, we're saying a pretty strong pick up in demand. Our own inventory is also very, very low. So, in the business that we're doing now, we are seeing a pickup in activity and pricing in the pulp segment, and we should start to realize that in the first quarter. So we see conditions is pretty encouraging now.

Okay. And then just laughing on the paper side, you guys have taken quite a bit of downtime in the sector. I guess you've got Amos and Baie-Comeau hot idols. What's the plan going forward? Is there some plan on permanent shots, more restarts of this facility? What is our plan here?

What -- as we said, we were hitting the mills and we have two machines on newsprint in Baie-Comeau and one in Amos. So, we see what will happen both on the market, of course, to say that, because we are going to restart all that thought, newsprint might be difficult, but we also will have people in the community looking for diversification. So, we don't have the answer yet, but of course, we set other studies on this time right now. So, that's about newsprint. So, we also have white paper machine that are smaller that we using right now, that we took the in their back. So, we bring with the assets we have and do the best we can. But to answer your question, we don't really know what the market's going to do going forward. So.

All right. That's all I have.

Thanks, Paul.

Thank you.

Your next question comes from Kasia Kopytek of TD Securities. Your line is open.

Hi. Good morning, everyone. It's Kasia T filling in for Sean.

Hi, Kasia.

Hi. Good morning. Remi already provided some good context on capital allocation, just wanted to circle back quickly. Some of our strategic initiatives are concerned, you talked about lumber, anything on the pulp side that you're looking at?

Well, what we focused our efforts on in the last couple of years, Kasia, is really improving the operations that we have. As you know, we've got two fantastic pulp mills in Canada, in Saint-Félicien and Thunder Bay. And we've invested to provide for incremental capacity growth specifically in Saint-Félicien and that's been very, very good for us. So, we'll continue to focus on our pulp mills for incremental capacity growth and generating more value from the assets we have with cost reduction. That's what I'd see on the immediate term for pulp.

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

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

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

As far as El Dorado, as I mentioned, we restarted in December, so we're ramping up to the second shift as we go. We're training the employees, right? Also, we expect by the end of the second quarter to be pretty much running on two shifts. So, of course, a few bugs and ramping up, but between the second to the third quarter, we should be full production. As far as Ignace, it could be -- should be pretty fast as soon as we restart. We're talking about a pretty small one line stuff mill. So once you -- I believe that about a month and we'd be back at where we should be.

And -- but you guys plan to restart anything more than one shift eventually down the line, right, later this year, maybe.

Yeah. Yeah.

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

We -- it's 143,000 that we put in the market downtime, Kasia. And that represents the two mills in Amos and Baie-Comeau and a machine in Amos as well.

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

Well, from our perspective, we certainly saw in the fourth quarter an increase in shipments 43,000 tons, which was a welcome change from the 30% drop in demand that we've been living through. So, I think that's working its way through. Demand is starting to come back and it's getting reflected as I said with shipments that we see it and pricing as well. So, I mean, the task for us is just to make sure that we're optimizing the network. We're keeping our inventory low and try to satisfy customer demand wherever we can and be a good spark.

Okay. Great. Those are all the questions I have. Thanks very much.

Thank you.

Thanks, Kasia.

Your next question comes from Benoit Laprade of Scotiabank. Your line is open.

Great. Thank you. first of all, Yves, I want to add my voice to congratulating you on retirement and Remi obviously congratulations on your elimination as well. So wish you -- both of you -- wishing both of you all the best in this new chapter of your life. Quick one for me on. The Tissue side, just wanted to understand how we can reconcile the fact that the average transaction price actually decreased due to a higher percentage of parent rolls, but at the same time we had actually a 6% higher average delivered cost. So, I thought that producing more rolls would have also triggered a reduction in average costs.

Well, the transaction price for parent roll is obviously significantly lower than converted goods. What happened, Benoit, over the course of the last couple of quarters, is that productivity for the tissue machine in Calhoun has increased. And so we were building up inventory and we decided in the fourth quarter to reduce that to just be more efficient. So by doing that and reducing the average transaction cost, I would tell you that there are costs that we also picked up in the fourth quarter, one-time costs, that played into the average delivered cost as well. So, when you work all that through, it's how you end up with the $2 million of EBITDA. As we said, $2 million is a bit sluggish for the tissue business in the fourth quarter. And we think we can do better and we expect that we will.

Okay. So looking forward, the addition of that you're converting capacity, plus the absence of that inventory reduction, so we should expect, on average, everything else kept equals, better prices and better costs looking in coming quarters versus what we saw in Q4?

That's correct. That's correct. So, we did $17 million of EBITDA in 2020, by bringing the Hagerstown assets into our portfolio. It's going to allow us to increase the rolls, the parent rolls that we convert out of Calhoun, improve distribution of the business. If you look at the trend and we've got a slide in the deck that shows you for the tissue business the progression that we've made over the last two years with pricing. The trend is pretty clear. We've been focusing significantly on customer portfolio optimization and improving our mix. And you can see that in the segment. So, I think the fourth quarter was really more of a one-time thing. As we said we destock, and so took the hit on pricing, but the momentum we think is there and the business can do better than it did in fourth quarter.

Great. Thank you. That was -- that's it for me.

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

Everyone thank you for joining us today. Have a good day.

Thank you, everybody here.

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