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Resolute Forest Products (RFP) Q1 2019 Earnings Call Transcript

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RFP earnings call for the period ending March 31, 2019.

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Resolute Forest Products (RFP -0.05%)
Q1 2019 Earnings Call
April 30, 2019 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Welcome to the Resolute Forest Products Q1 2019 earnings conference call. [Operator instructions]. Please note that this call is been recorded today April 30, 2019 at 9:00 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 Travaglini -- Treasurer and Vice president, Investor Relations

Good morning. Welcome to Resolute first 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 the 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 slide.

We will also make forward-looking statements. Forward-looking information is based on our current assumptions, beliefs and expectations. All of which involves 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.

Yves Laflamme -- President and Chief Executive Officer

Good morning. Thank you for joining us. Today we reported $104 million of adjusted EBITDA for the first quarter compared to $105 million in the fourth quarter. This reflects better productivity, particularly in market pulp and the modest rebound in lumber prices, which allow us to absorb the impact of an increase in wood fiber costs at our pulp and paper mills seasonally at higher energy cost, capacity reduction following the divesture of the Catawba Mill and softening demand in the global newsprint market.

By segment, we reported quarterly adjusted EBITDA of $47 million in market pulp relatively unchanged from the fourth quarter minus 3 million for tissue at $2 million improvement, wood product was a $14 million of 13 million, newsprint $35 million down $10 million and $25 million in specialty papers a decrease of 3 million against the previous quarter. Our diversified asset base continued to produce strong results during a 13% overall EBITDA margin in the first quarter, including a 16% margin in paper despite building market pressure in some of our businesses, and also the elimination of $15 million of EBITDA from the Catawba sale. Our balance sheet also remained strong with almost $600 million of liquidity. Let's review our individual segments starting with market pulp.

World shipment of chemicals pulp grew by 1% in the first quarter of 2019 compared to the year-ago period, shipments to Western Europe and China were down 6% and 1% respectively, while shipments to North America rose by 9%. World shipments of hardwood were down 1% but softwood pulp shipments were 4% higher during the same period. Global softwood mills at 93% shipments to capacity ratio while hardwood mills were at 85% reflecting significant producer inventory accumulation mainly from Latin American producer. Fourth quarter momentum in North American markets carried into the quarter but came under pressure toward the end as a result our average realized transaction price for market pulp remained unchanged at $808 per metric ton.

Shipments were lower, reflecting the reduction in our pulp capacity following the sale of the Catawba and Fairmont facilities in 2018, representing approximately 300,000 metric tons annually. After adjusting for the impact of divestiture shipment rose as we had fewer schedule auditors and production distributors during the quarter. We took 4000 tons of scheduled maintenance downtime at our Coosa facility in the quarter. Total U.S.

tissue consumption grew by 4.4% through February, compared to the same period last year. Calhoun Tissue project shipments increased by 2.9%, including an improvement of 4% in the away from home sales, and 2.3% in at home sales. Our sales revenue was up another 11% this quarter reflecting improved product mix, price increases for away from home products and a 4% increase in shipments. For our Calhoun Tissue operation we have made good progress on improving product quality and increasing productivity of both the tissue machine and converting operation.

We also reduced warehousing and freight costs in the quarter due to the distribution center recently competed at Calhoun. Housing starts in the U.S. were 9% lower and are seasonally adjusted basis this quarter compared to 2018 as raising 1.93 million units which reflects the 20% decrease in multifamily starts and a 5% decrease in single family starts. Lumber prices improved from multi-year lows and our average transaction price increased to $374 per thousand board feet up $27.

Volumes however, declined as adverse weather conditions on both sides of the border effected transportation, log supplies and construction activity. Accordingly, we are temporarily preparing 30 million board feet of lumber production at several saw mills during the second quarter. North American newsprint demand fell by 15% in the first quarter of 2019 compared to the first quarter of 2018. Demand for newspaper publishers fell 17% reflecting the degrees in consumption and consumer inventory destocking, while demands from commercial printers declined 10%, the North American shipments, the capacity ratio dropped to 84% compared to 94% in the year-ago period.

Global demand for newsprint was down 7% for February compared to the same period last year when North America down 14%, Asia 8% and Western Europe 3%. The world newsprint shipments to capacity ratio was also a 84%. Even with pricing pressures, our overall average realized pricing remains stable at $634 per metric ton. Shipments dropped by 14% this quarter and finished goods inventory rose reflecting seasonality, the timing of export sales and softening market condition.

North American demand for uncoated mechanical papers was down 9% this quarter compared to the year-ago period. Lower demand for standard grades and consumer inventory destocking drove this decline decrease in 6% while demand for supercalendered grade was essentially unchanged. Compared to the first quarter of 2018 the shipments to capacity ratio for all uncoated mechanical papers decreased from 91% to 83%, but our average transaction price rose by $12 for short term compared to the previous quarter, supported by the residual impact of Q4 price increases and a further price increase pressure implemented in uncoated free sheet in the quarter. The drop in shipment is almost entirely due to the state of the Catawba mill at the end of 2018, which reduces our annual specialty paper capacity by about 350,000 times.

Shipments were also impacted by lower seasonal demand for supercalendered papers. On the [inaudible], we announced on April 24, that unionized employees at three of our U.S. mills representing about 60% of our total U.S. pulp paper and tissue production capacity, voted in favor of a four-year renewal of their master production agreement.

Our continued union-management partnership serves that the center is of our employees, customers, shareholders and a range of other stakeholders. I will now have Remi discuss our financial performance before I conclude with our outlook.

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Thank you Yves and good morning, everyone. Today we reported net income of $30 million in the first quarter or $0.32 per share excluding special items. This compares to net income excluding special items of $4 million, or $0.04 per share in the previous quarter, and $17 million or $0.18 per share in the same period last year. Special items in the first quarter include non-operating pension and OPEB credits of $12 million.

Our total sales in the first quarter were 795 million, down 137 million from the fourth quarter almost entirely due to the divestitures of Catawba and Fairmont facilities in 2018. Otherwise, overall volumes were slightly lower as better pulp production was more than offset by the decline in newsprint shipments. Pricing, however, was favorable overall, especially in wood products. Manufacturing costs were relatively unchanged from the fourth quarter after removing the effects of volume, the impact of foreign exchange and the cost of goods sold related to the 2018.

This reflects improved productivity, given fewer scheduled outages and production disruptions offset by higher wood costs in our pulp and paper mills due to fiber shortages and a seasonal increase in energy costs. Compared to the fourth quarter market pulp all in cash costs decreased by $27 to $646 per metric tons largely due to better production which was partly offset by higher fiber costs, increasing EBITDA per metric time to $162. Accordingly, despite the sale of Catawba EBITDA remained relatively unchanged at $47 million. Cash cost in our tissue segment was relatively unchanged, as lower freight expenses associated with our new distribution center were offset by higher pulp costs with the divestiture of Fairmont.

Pricing however increased by $102 per short ton improving EBITDA by $2 million to minus 3 million. In wood products the cash costs decrease by $4 per thousand board feet to 342. Lower market based stumpage fees and maintenance more than offset an increase in freight costs and seasonally higher fiber usage. Together with an 8% increase in pricing, EBITDA rose by $13 million to $14 million this quarter.

Newsprint cash cost increased by $10 per metric to 528 in the quarter, reflecting higher fiber and energy costs as well as lower sales volume, despite the higher contribution from the Thunder Bay co-generation assets following a turbine failure in the previous quarter, and overall lower maintenance. As a result, EBITDA declined from 45 million to 35 million. The cash cost and specialty papers improved by $18 per short ton to 643 as our exit from higher cost coated mechanical grades more than outweighed the increase in wood costs due to abnormally wet weather, unfavorable energy expenses and higher scheduled maintenance costs, while EBITDA decreased to $25 million, down from 28 million in the previous quarter EBITDA per short ton rose by $30 to 125 due to the sale of Catawba. We repurchase $225 million of our senior notes in the quarter, which contributed to the $235 million decrease in cash to 69 million.

Net debt to EBITDA remained low at 0.6 times and liquidity stood at a strong 595 million. In the first quarter we generated $23 million of cash from operations compared to $84 million in the previous quarter most of its difference is attributable to the seasonal buildup of log inventory and the increase in newsprint finished goods inventory. We spent $26 million in capital expenditures, $35 million less than in the previous quarter. The fourth quarter included expenditures for the first phase of our Saint-Felicien strategic project to expand capacity, as well as the new distribution center for Calhoun tissue.

We continue to target CapEx of $160 million for 2019 which includes the next phase of Saint-Felicien, as well as a number of investments to improve costs and productivity at sawmills. For the quarter, we've paid $14 million in softwood lumber duty deposits, and we now have 117 million recorded on the balance sheet. We recovered in the quarter all $6 million of duties associated with the uncoated groundwood papers case. We contributed $19 million to pension plans in the quarter and made OPEB payments of 4 million with an expense of $9 million included in adjusted EBITDA.

Consistent with our earlier guidance, we expect to make $100 million of pension contributions and $15 million of OPEB payments this year, with an associated expense of 30 million in adjusted EBITDA. The net pension and OPEB liability on our balance sheet decreased by only $11 million as ongoing pension contributions were largely offset by an unfavorable currency impact. With the adoption of new lease accounting standards, we recognized total liabilities of $66 million associated with operating leases and corresponding assets on the balance sheet as of quarter end. I will now turn it back to Yves for concluding remarks.

Yves Laflamme -- President and Chief Executive Officer

Thank you, Remi. We took advantage of favorable market trends and value added divestures to strengthen our balance sheet heading in 2019, which provides us with significant financial flexibility and positions us well for future growth opportunities. This is particularly important now as we take a more conservative view of the road ahead following the impressive gains in 2018. For market pulp, prices have started to trend down and price realizations are expected to be lower in the second quarter.

Our view in market for fundamentals are ever remains unchanged. We believe that the limited capacity additions and growing demand with favorable market dynamics over the medium term. The renewal of pulp [inaudible] at our Calhoun facility led to 9000 metric tons of lost production in April in addition to the 4000 in the first quarter. The only order schedule outage in the second quarter is at Thunder Bay, which is expected to decrease our pulp production by approximately 4000 metric tons.Our tissue segment remains a key focus as we continue to build on the late year progress in terms of productivity and quality for both machine production and converting operations.

For lumber, we expect our cost performance to improve for the balance of the year but we are more conservative with our expectation around lumber markets. While our near term outlook is more uncertain our medium to long term outlook continues to be positive. We believe in the growth prospect for lumber markets. With ongoing global demand declines and currently lower operating rates we expect lower pricing for paper grades in the second quarter.

But despite the softening market conditions, our paper business generated strong first quarter EBITDA margins and we are confident we can continue to produce attractive cash flow as we take specific steps to reduce inventory and maintain our competitive first position.

Silvana Travaglini -- Treasurer and Vice president, Investor Relations

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

Questions and Answers:


[Operator Instructions]. Your first question comes from the line of Hamir Patel with CIBC. Your line is open.

Hamir Patel -- CIBC -- Analyst

Could you maybe share more about your thinking about lumber markets over the near term, sounds like you're more cautious and some of the other companies out there and with respect to the downtime, you referenced in the presentation 30 million board feet of market related downtime in Q2, what's your sense as to how much downtime the Quebec and Ontario industry is taking at the moment?

Yves Laflamme -- President and Chief Executive Officer

OK, as far as the trend what we are looking at what happened last year, you know, the first half of the year and maybe the last half of 2017. We know that, you know, though, the reason why price went up, pricing went up, you know, was more about difficulties that Western Canada had with fires and then after that with the car supplies from railroad. So as soon as the inventory was ready to ship market went down significantly since the second half of 2018. And we saw those difficult, you know, didn't really happen and not as bad actually during the first quarter of 2019.

So when you-and the demand in the housing starts are pretty, you know, I would say stable low in the range of 1.2 million housing starts. So this is why I don't see in front of us what could make really short term, you know, the lumber demand better than it is now, or pricing going up significantly, unless, you know, what we've been feeling quite a few times lately. So downtime taking by producers, that's why, you know, we see that as maybe being more conservative in the next quarter or so I would say. We are still confident that it's a good market to be in, we're still confident that you know the improvement and renovation is using more wood than ever, and the economy is still pretty strong.

So we're confident for the futures and this is definitely a business where we'd like to grow more, but as far as a short term, you know, based on what the reason I just said, you know, so that's why we're seeing that, that's the way we see that. As far as the downtime, you know, we look at the fiber supply, and there is some shortage of fiber supplies due to winter, transportation, infrastructure and all the reasonable in Eastern Canada like probably other guys may have in the West, as well and when you're looking at the spread between start and random in the market. So the spread between 2 by 48 and 2 by 4 random has been significant for a while, you know, we used to have in the past both $28-$30 per thousand board feet now we play more in the range of 70-80. So we said if the market is not that great, and we have to take some downtime, you know, wind up using the fiber we have in producing [inaudible] made it better.

So that's why we're kind of addressing the market oversupply I would call it and at the same time, you know, kind of a shortage of wood word that we manage it that way with [inaudible]. So as for Eastern Canada, I would say that, I don't know the number of our competitors but I think they're probably not in better shape than we are as far as profitability of starts right now.

Hamir Patel -- CIBC -- Analyst

OK, fair, fair enough. Thanks. That's helpful. And you've spent a lot of talk in Western Canada about changes in DC with respect to some of the habitat protection for the Caribou.

Are there any developments going on in Ontario or Quebec that could potentially limit industry production?

Yves Laflamme -- President and Chief Executive Officer

We've been, I think we started to talk about this trend we see for the industry of this caribou protection. Since, you know, we have this law in the Canadian government about this being below 60% disturbance and so, and yes, when you're looking at possible add back is significant. And right now, the Canadian government is working with provinces to say that, you know, you have to present plans to improve the situation or what you're going to do with about caribou? And yes, Quebec and Ontario are doing their own thing and they're contributing to the industry. All I can say about Quebec is that I think two or three weeks ago, the forestry minister said that he's going to make a huge consultation among the stakeholders, including union, industry and communities and everything and assuming that, you know, it's going to take maybe a couple of years before he is done with that consultation and presenting a plan, even though they're doing some step.

The other thing that we have to mention is that in Quebec, and I believe in Ontario, as well, you know, about 70% of the habitat of caribou is fully protected what we call the northern limit. So it sounds to me that, you know, government is looking at that plan and trying to see what it can do about that limit and where it should built, because the trend we see now is-with a global warming, the caribou tendency to going off, you know, more north and so trying to disturb too much the forest industry, we want to make sure that all the analysis and the science is there taking into account all the changes that we see in weather and everything that we can move that is not related to the industry at all. But the short term answer, yes, there are some threats in Eastern Canada, as well.


[Operator instructions]. Your next question comes from a line of Sean Steuart with TD Securities. Your line is open.

Sean Steuart -- TD Securities -- Analyst

Couple of questions. Start with newsprint. The inventory build you had in the quarter how much of that was the delayed export shipments? And maybe if you can just speak to your current comfort with inventory levels and potential plans for curtailments in that segment?

Yves Laflamme -- President and Chief Executive Officer

Yes, as far as the overseas shipment, I would say maybe about 10,000 tons that would be represented in the inventory we have as far as the gap between the time we produce and we ship. So as far as the plan for the inventory, we already took action to first of all I was talking about the wood supply earlier so we have next to the sawmill that, you know, couldn't supply the ship or couldn't run the sawmills for log supplies. So we took that opportunity to take or reduce capacity on one of our of our new spin mill two actually. So that's helping unfortunately that's not really good because we can produce but that's something we have done.

The other thing is that we have few shutdowns that are for repairs that was scheduled later in the year and so they were supposed to be done with contractors which is more expensive. So what we did, we kind of advanced those shut downs earlier, and extended those shut downs to do those repairs of our own employees and by the same time, you know, we kind of reducing production and kind of adjusting the inventory that we're reducing the inventory that way. So that's pretty much what we're doing right now and having mine going forward in Q2.

Sean Steuart -- TD Securities -- Analyst

OK. On the tissue segment, I think it was last call, you suggested that you're anticipating a transition to a positive contribution at some point in the first half. Is that still a feasible timeline? And maybe just a bit more context on the ramp at Calhoun? And how you're expecting results to trend for that segment?

Yves Laflamme -- President and Chief Executive Officer

Yes, I think we're really close. I mean, that's, and of course, when you're looking at the numbers, we don't want to see that for facilities, but even the [inaudible] facilities are doing OK, right now. So we were talking about the ramp up, I said earlier on converting, and I mean, in the quarter we made significant progress, quality and productivity on board. And I mean, significant progress, I'm talking about double digits and percentage of improvement and I can say, right now in April, we still, you know, improving at both the same pace so which is really, really interesting and really positive.

The thing that I got to be careful about, as I said in the first quarter was something that I didn't take into consideration, because nobody knew is that when I mentioned that we are going to lose about 7000 ton of the [inaudible] from Calhoun on the expensive outage in April. So that was not supposed to happen and we're pleased to be integrated, but the bad news by being integrated so by having problem with the pulp we also had problems to supply the tissue machine in April with the right quality of pulp with the right volume. So that impact the tissue business in Calhoun but I'm still hoping for something good at the end of the quarter. And as I said, we're definitely improving every day on those assets.

And so the other thing is, I'm a little more prudent of what I said in the first quarter is the problem I said, we just had an April, that is more pulp problem, but you know, it's connected to the tissue business, but we're definitely heading to the right direction.

Sean Steuart -- TD Securities -- Analyst

OK. One last question for me. You referenced the strength of the balance sheet even after the debt repayment, you have abundant liquidity. Broader thoughts on priorities for that liquidity beyond the CapEx program this year? Has your thinking on returning capital to shareholders evolved in light of pulp and paper market weakness? Any context you can give us there?

Yves Laflamme -- President and Chief Executive Officer

Yes, I think that all the options are open, of course, you know, when you have good liquidity, which is I would say it's a nice problem if we see it that way. As far as the CapEx, we are still in-line for the you know at least completing what we've done in Saint-Felicien oh so far, you know, we see us I think it can pay back on the investment we made last year. We're still completing the sawmills investment that we had on the list, the one that's not been started yet. The rest, you know, it's about trying to be optimistic that there are something on the segment, we mentioned that we see unfortunately in our plans to transform the company.

And as we said we see not necessarily a lot of positive sign in front of us on the market of those products, which may present some good opportunity while we're going to be careful the way we're going to approach those opportunities if there are any.


And there are no further questions at this time. I will turn the call back over to our presentors.

Silvana Travaglini -- Treasurer and Vice president, Investor Relations

So this concludes our conference today. We thank you all for joining us.


[Operator signoff]

Duration: 31 minutes

Call Participants:

Silvana Travaglini -- Treasurer and Vice president, Investor Relations

Yves Laflamme -- President and Chief Executive Officer

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Hamir Patel -- CIBC -- Analyst

Sean Steuart -- TD Securities -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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