RFP (2021 - Q2)

Good morning. Welcome to Resolute’s Second Quarter Earnings Call. Today, we will hear from Remi Lalonde, President and Chief Executive Officer and Sylvain Girard, 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 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 statement in our press release and on Slide 2 of today’s presentation. I will turn the call over to Remi. Remi Lalonde: Th

Thank you, Marianne. Good morning, everyone and thank you for joining us. Today, we reported $445 million of adjusted EBITDA for the second quarter compared to $221 million in the first quarter, with benchmark lumber prices reaching record highs in May and our best ever quarterly shipments, the Wood Products segment generated $415 million of EBITDA, an increase of $183 million from the first quarter. In the other segments, we reported adjusted EBITDA of $36 million in market pulp, up by $26 million, minus $3 million for tissue, down by $6 million and $9 million in paper, up by $18 million. We used the exceptional cash generation from our Wood Products segment to make lasting changes to our business and to increase value for our shareholders. We reduced debt by $180 million, reaching our target leverage of $300 million in funded debt. We declared a special cash dividend of $1 per share or $79 million in total, which was paid earlier this month, and we announced an additional $50 million of high return, quick payback projects to further strengthen our Wood Products segment. Let’s talk about the individual businesses, starting with Wood Products. At $1.6 million starts on a seasonally adjusted annual basis in the second quarter, U.S. housing starts continue to point to a strong demand environment. Although the repair and remodeling sector cooled off over the summer as the population begins to return to normal, the accommodative interest rate environment, aging housing stock, low home inventory and encouraging demographic trends set the stage for continued strength in lumber demand. Benchmark lumber prices reached record highs in May, and as a result, our average transaction price increased sharply in Q1 to $1,156 per 1,000 board feet, an increase of $282 per 1,000 board feet or 32% compared to the previous quarter. Our shipments were 83 million board feet higher or 17% to $575 million, our best ever quarterly shipments and finished goods inventory reduced to $124 million. After restarting in Q1, our El Dorado and Ignace sawmills continue to ramp up operations with both running on two shifts since the end of April. We anticipate these sawmills to produce about 125 million board feet this year. Elsewhere, we expect to take about 25 million board feet of downtime in the third quarter for capital projects and to optimize summer production. World demand for chemical pulp was 2% lower in the first 5 months of the year compared to the same period last year, reflecting a 5% decrease in demand for softwood and a 1% decrease in hardwood, but the year-over-year comparison is difficult as the pandemic influenced market dynamics. The reality is that supply and demand conditions were tight in Q2. Producer inventories at quarter end closed within normal ranges and global industry operating rates averaged 89% for softwood and 93% for hardwood. Following the pandemic induced dip, our average transaction price rose sharply by $140 per metric ton quarter-over-quarter or 22% to $787 per metric ton with gains in all rates. But our shipments slipped by 19,000 metric tons or 7% due to the planned annual outage at the Calhoun mill and other production shortfalls. From a historically low level in the previous quarter, our finished goods inventory closed at a more normal level of 63,000 metric tons. We expected the second quarter to be challenging for the tissue segment as a result of the end market inventory rebalancing, and that is what we experienced with lower shipments and unfavorable product mix that pulled it down on our average transaction price. We took market downtime as a result of the pressure, keeping our finished goods inventory unchanged compared to Q1 at 8,000 short tons. Accordingly, our average transaction price decreased by $56 per short ton or 3% and shipments fell by 17% to 19,000 short tons. Reflecting the continued impact of the pandemic, North American newsprint demand declined by 10% year-to-date through June compared to 2020, and demand for uncoated mechanical paper was unchanged. As a result of capacity reductions in the pandemic, including our own, the shipment to capacity ratio for North American newsprint was 92% in the first half of the year compared to 83% last year. Uncoated mechanical paper was 87% compared to 72% a year ago. Compared to the previous quarter, the average transaction price in the Paper segment increased by $39 per metric ton during the second quarter or 7% and shipments improved by 4,000 metric tons due to a gradual recovery in global markets. Inventory decreased by 17% to 72,000 metric tons. EBITDA for the segment improved by $18 million to $9 million. I will now have Sylvain discuss our financial performance.

Thank you, Remi. Good morning, everyone. We reported net income of $300 million in the second quarter or $3.74 per diluted share, excluding special items. This compares to net income excluding special items of $119 million or $1.45 per diluted share in the previous quarter, and a net loss, excluding special items, of $22 million or $0.25 per share in the same period last year. Special items for the second quarter include $49 million in losses related to the lumber hedging contract. In the quarter, we closed all outstanding lumber futures positions. Total sales in the quarter were $1.1 billion, up by $267 million compared to the first quarter due to higher realized market prices in most of our segments. This variance was mainly driven by wood products with a $234 million increase this quarter, but also by our pulp and paper segments with respective contributions of $23 million and $17 million. Manufacturing costs rose by $19 million in the quarter after removing the impact of volume and foreign exchange. Compared to the first quarter, the all-in delivered cost in the Wood Products segment rose by $30 per 1,000 board feet or 7%, mostly as a result of higher stumpage fees and higher freight costs, partially offset by our variable compensation provision in the previous quarter. EBITDA in the segment improved by $183 million to $415 million. In the market pulp segment, delivered costs increased by $35 per metric ton or 6% due to higher fiber costs and the effect of lower volume. EBITDA in this segment improved by $26 million to $36 million. Delivered cost in tissue increased by $295 per short ton or 16%, reflecting the lower volume as a result of downtime in a sluggish demand environment. EBITDA for this segment fell by $6 million to negative $3 million. Papers delivered costs improved by $13 per metric ton or 2% due to seasonal reduction in energy expenses and cost savings from the indefinite idling of the Baie-Comeau and Amos newsprint mills in the previous quarter, offset in part by higher planned maintenance costs. Segment EBITDA improved by $18 million to $9 million. We generated $401 million of cash from operating activities in the quarter, which represents an increase of $276 million compared to Q2 last year. The cash from operating activities primarily reflects the strong performance in the Wood Products segment as well as a seasonal reduction in round wood inventory. We made $33 million in capital expenditures during the second quarter as we normalized capital spending toward a revised target of $125 million for the year. We reduced debt by $180 million in the quarter, representing all the amounts outstanding under our revolving and term credit facility, leaving as our only remaining debt, the $300 million of unsecured 4.875% senior notes due 2026. We concluded the quarter with cash and cash equivalents of $177 million, $1.1 billion in liquidity and net debt was $126 million at quarter-end. We made $57 million in softwood lumber duty deposits in the quarter, bringing our total deposits to $332 million, which is recorded in other assets on the balance sheet. We also announced a special cash dividend of $79 million, which was paid on July 7 to holders of record at the close of business on June 28. Finally, we contributed $27 million on pension plans in the quarter and made OPEB payments of $3 million. With higher long-term interest rates and positive gains from investments, our pension funding deficit was $445 million as of June 30, a $184 million improvement compared to the $629 million funding deficit disclosed at year end. In accordance with U.S. GAAP, the accounting figures will be remeasured only with year end results. In line with the American Rescue Plan Act of 2021, we expect our remaining U.S. pension contributions to drop by around $13 million this year. Accordingly, our total pension contribution guidance for 2021 is now around $107 million compared to our $120 million guidance provided earlier this year. I will pass it back on to Remi.

Although benchmark lumber prices have come down significantly in recent weeks and remained volatile, we are confident in the underlying business fundamentals. We believe in our Wood Products business for the long-term, with the segment representing a key pillar of our ongoing transformation. This is why we announced in June an additional $50 million in capital investments for projects that will generate value across market cycles by improving the overall efficiency of our operations, reducing costs and incrementally increasing production capacity. For pulp, we look for the favorable momentum to carry into Q3 with higher realized prices and stronger shipments. As conditions normalize for paper, the price recovery should continue, which will support our cash generation strategy for this business segment. We see encouraging signs for the away-from-home space in our tissue business and we expect a return to normal demand trends in the coming months once the retail inventory rebalancing that affected the industry in the first half of the year passes. With more than $1 billion in available liquidity at quarter end, we are in a great position to pursue our transformation, committed to maintain a balanced approach to capital allocation using our free cash flow to generate value for shareholders to build a stronger company to drive sustainable economic activity in the communities where we operate.

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

Thank you. [Operator Instructions] And our first question will come from Hamir Patel from CIBC Capital Markets. Please go ahead. Your line is open.

Hi, good morning. Remi, I was wondering if you could comment a bit more about – you alluded to the sort of moderation in R&R demand. Any – I don’t know if you are able to quantify what you are seeing in that channel and maybe any differences you are seeing between Canada and the U.S.?

Yes. I mean, Hamir, prices have come down pretty significantly. And we think it started as a result of a slowdown as I indicated with the R&R activity. And quite frankly, what we have heard anecdotally is that people have other areas in which they want to spend their money this summer after being cooped up for over a year as a result of the pandemic. In our view, this doesn’t mean that the R&R segment boom is over. I think if you think about the underlying trends that drove it, a lot of it is related to nesting, if you will, as a result of the pandemic and increase of work-from-home. So in our view, I think things are cooling off over the summer, but we think there is still optimism around the continued strength there.

Fair enough. And Remi, given the strong balance sheet, has there been any change in how you approach the pension liability going forward?

Well, it’s come down pretty significantly, Hamir, as Sylvain indicated, two things. One is that discount rates are a little bit higher and our assets have actually performed well. So that has brought the deficit down from $630 million at the end of the year to $445 million. We’re always looking for ways in which we can reduce the risk and reduce the liability. One of those things that we will benefit from are the changes around the U.S. pension relief. That’s going to reduce the contribution that we have to make in the coming years, including in this one. So our contribution forecast is down by $14 million this year to $107 million as opposed to $120 million that we said earlier. And for next year, we expect it to come down a bit more as well. So I think that’s a good news story. But we’re always looking, Hamir, for ways in which we can reduce the risk around pension and reduce that deficit.

Okay, great. Thanks, Remi. That’s all I had. I will turn it over.

Thanks, Hamir.

Your next question comes from Sean Steuart from TD Securities. Please go ahead. Your line is open.

Thanks. Good morning everyone.

Good morning, Sean.

Good morning. With respect to the lumber downtime, you touched on the 25 million board feet. Was that all related to the capital projects? And are prices low enough in Eastern Canada that you would consider market downtime based on margins being low enough at this point that, that would make sense for you?

Yes, I think, Sean, the answer to your question is the 25 million board feet is related to the capital projects that we talked about. And also, as we say, schedule optimization. People have been working very hard in the last year, and we want to make sure that they can take their vacation. So some of that is about eliminating shifts here and there to allow people to take vacation and concentrate our operations. So that’s what we mean around optimizing our production schedule. As far as our profitability, our operating cost, all-in delivered is – was $452 per 1,000 board feet in the quarter. And so we think that means we’re pretty competitive in – even in a tighter pricing environment. But look, benchmark prices have been very volatile. We believe that things will normalize, that there is an encouraging demand strength to come, driven largely by homebuilders. We talked a little bit about the R&R earlier with Hamir. But I think homebuilding is the lion’s share of lumber consumption, and it’s a positive future there.

Okay, thanks for that detail. Second question, the balance sheet, you touched on basically where you want it in terms of leverage targets. Can you speak to M&A ambitions in wood products? I know we’re only a couple of months into this correction. But has the opportunity set for M&A opened up at all in recent weeks? And might you guys have ambitions in wood products beyond commodity lumber, engineered wood products, that type of thing, would that be of any interest?

So our strategy around acquisitions and particularly in the lumber space, there is two things that we want to do overall with our strategy. We want to pursue growth in the strongest areas of our business. And for us, that is pulp and lumber. For lumber, acquisitions is a logical strategy. We were pretty successful with the acquisition of three sawmills in the U.S. South last year from Conifex. And so we’re always looking at opportunities. They have to be at the right price. We like to think of ourselves as pretty shrewd buyers, so right time, right price, right opportunity. So we look at a lot of things. To the answer on broadening beyond just a commodity base, I’ll point out that in our portfolio of assets, Sean, we do have assets that are engineered wood products. We have two La Dore facilities in the Lac St-Jean area, which is a joint venture with LP, and that’s very successful. And we have other engineered wood facilities as well. So that is something that we know. And I wouldn’t necessarily rule it out. But as I say, it has to be right time, right price, and it has to make sense, right, in terms of synergies and the business rationale for doing it.

That’s very detailed. That’s all I have for now. Thanks, Remi.

Okay, thanks, Sean.

Your next question comes from Paul Quinn from RBC Capital Markets. Please go ahead. Your line is open.

Yes. Thanks very much. Good morning guys. Just in wood products, you noted your costs were up $30 per 1,000 board feet. Just wondering where that stumpage increase was, was that Ontario, was it Quebec, was it U.S. South?

Yes. So a lot of that, Paul, was stumpage increases, both Ontario and Quebec. In my mind, the way we look at it, we think that with benchmark prices trailing off and as you know, stumpage is a function ultimately of lumber pricing. So we think that stumpage fees and our fiber costs have peaked in the second quarter. I expect that to start coming down in Q3 as the lower benchmark prices work their way down the chain. It comes down more quickly, just the way the formulas work, it comes down more quickly in Ontario than it does in Quebec. But the net-net impact is that I expect it to be a favorable variance in Q3 and Q4.

Okay, thanks for that. And your tissue results were weaker than I expected. Just – you noted downtime. Just how much downtime where you took that downtime and how can you fix this business going forward here?

Yes. No, it’s a good question, Paul. So basically, as I said before, we knew the second quarter would be tough because of the inventory rebalancing. We’ve heard from other producers who’ve faced some headwinds in this space as well. And so the downtime for us was a tissue machine that we took down at Miami. And then we took a couple of weeks of downtime on the tissue machine in Calhoun and some of the converting operations as well, all of which was designed to make sure that we were not building inventory in a sluggish market. The signs are that as more people go to the ballparks and museums and hopefully, schools in the next couple of weeks. The away-from-home space is picking up. And the retail, we think, will normalize also in the coming months. One of the factors that’s at play here is that a lot of the tissue producers are facing higher costs as a result of rising pulp costs, which, for us, we get the benefit of integration to our pulp assets. So we will get the benefit of hopefully rising prices here. But really, the focus on higher shipments is the idea. So we just need to let things normalize and not make rash decisions for what was admittedly very, very difficult quarter as a result of the market conditions.

Okay. And then just lastly, just on pulp, it looks like it’s rolled over in China here a couple of months back and that’s working its way around the globe. Just wondering what your market assessment is?

Yes. We think there is a bit of a headwind, Paul. We have less exposure to China, as you know. There is a bit of headwind. My sense is that prices will peak in July and then probably soften a little bit. But based on what we see and the demand, people still need pulp, and conditions are strong for producers. So we think that it could soften a little bit, but if it does, it should be fairly modest.

Alright. That’s all I had. Thanks, Remi.

Thanks, Paul.

We have no further questions. I would like to turn the call over to Marianne Limoges for closing remarks.

Okay. Thanks, everyone. Thank you for joining us today, and have a great day.

This concludes today’s call. You may now disconnect.