Resolute Forest Products (RFP) Q3 2019 Earnings Call Transcript

Resolute Forest Products (RFP)
Q3 2019 Earnings Call
Oct 31, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone. Welcome to the Resolute Forest Products third-quarter 2019 earnings conference call. [Operator instructions] Please note that this call is being recorded today, October 31, 2019, at 9:00 a.m. 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's third-quarter earnings call. Today, we'll hear from Yves Laflamme, president and chief executive officer; and Rémi 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 Presentations and 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 both non-GAAP numbers to U.S. GAAP financial measures is included in our press release and in the appendix to the slides.

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 now turn the call over to Yves.

Yves Laflamme -- President and Chief Executive Officer

Good morning. Thank you for joining us. Today, we reported $23 million of adjusted EBITDA for the third quarter, $59 million lower than the $82 million we reported in the second quarter. The decline principally reflects pricing pressures across most of our segments, but mainly in market pulp.

While our results benefited from lower freight costs and a decrease in share-based compensation expense, these favorable items were outweighed by the impact of more planned maintenance outages this quarter and an increase in chemical usage. Our tissue business contributed positively to results as we build on gains of the previous quarter, while lumber results were largely consistent with those of Q2. By segment, we reported quarterly adjusted EBITDA of negative $5 million in market pulp, down $37 million from the second quarter; $1 million for tissue; wood product was at $4 million, down $2 million; newsprint, $11 million, a reduction of $14 million; and $15 million in specialty papers, down $11 million from the previous quarter. Leveraging our strong financial situation earlier this week, we extended and increased our senior secured credit facility.

This renewal and upsize gives us an additional $175 million of liquidity for more than $740 million in total. And that's very competitive rate without pledging any additional collateral. This is another tool to further enhance our financial flexibility and the execution of our strategic transformation initiatives. As reported by several of our peers, this has been a challenging third quarter for the industry.

The proactive steps we have taken to strengthen our balance sheet, position us well to continue to execute on our strategy despite this current cyclical downturn. Let's review our individual segments beginning with market pulp. World shipments of hardwood were down 3% in the first eight months of the year compared to the year-ago period, while softwood pulp shipments were 4% higher in the same period. The softwood pulp growth was led by the third-quarter rebound in Chinese demand.

It's important to note that global softwood mills ran at 93% shipment-to-capacity ratio, while hardwood mills were at 83% as hardwood producers and inventory levels remain elevated. The ongoing weakness in global pulp markets weighed heavily on our realized pricing. The average transaction price dropped to $625 per metric ton, the lowest ever since the beginning of 2017. With production relatively stable compared to the previous quarter, shipment rose this quarter, particularly for softwood pulp as we worked down our finished goods inventory to more normal levels.

Total U.S. tissue consumption grew by 2.5% through August compared to the same period last year. Converted product shipments increased by 2%, including an improvement of 3% in away-from-home sales and 2% in at-home sales. Our tissue business performance continues to improve with productivity and pricing gains.

With most of the technical issue behind us, the Calhoun tissue machine is now demonstrating that it can meet our expectations. We continue to focus on customer portfolio optimization with better quality and increasing our average transaction price with favorable product mix and better pricing for away-from-home products. Our priority is to improve converting operations to reduce the sales of parent growth and optimize our customer portfolio to generate better margins. Housing starts in the U.S.

were 2% lower on a seasonally adjusted basis in the first nine months of the year compared to the same period in 2018, and reaching 1,250,000 unit, which reflects a 2% decrease in single-family starts and a 1% decrease in multifamily starts. While benchmark pricing was up compared to Q2, our average transaction price slipped $7 per thousand board feet due to unfavorable sales mix this quarter. Given ongoing weakness in demand, we continue to manage production and maintain our finished goods inventory at normalized level by taking over 70 million board feet of downtime in the quarter for nearly 170 million board feet year to date. Our sales volume fell accordingly.

North American newsprint demand fell by 14% in the first nine months of 2019 compared to the same period in 2018. Demand from newspaper publishers fell by 16%, while demand from commercial printers declined 9%. Even with the slower pace of demand decline in the third quarter, the North American shipments-to-capacity ratio dropped to 83%. Global demand for -- demand from newsprint was down by 10% through August compared to the same period last year.

And the world newsprint shipments-to-capacity ratio was also 83%. Our overall average realized pricing dropped 4% this quarter, with the more significant decrease in export sales. Due to the ongoing softness, we continue to take temporary downtime to maintain our finished goods inventory at normalized levels. As a result, shipment fell by over 10% compared to the previous quarter, with almost all the decreases coming from offshore sales.

Our newsprint segment generated a 6% EBITDA margin this quarter. North American demand for uncoated mechanical papers contracted by 15% in the first nine months of 2019 compared to the year-ago period. Core market fundamentals, grade switchings and consumer destocking led to a 20% decline in demand for standard grades, while demand for supercalender grades dropped by 9%. Compared to the first nine months of 2018, the shipments-to-capacity ratio for all uncoated mechanical papers decreased from 92% to 83%.

Our average transaction price declined by $21 per short ton compared to last quarter, while sales volume remained relatively unchanged. EBITDA margin was 11% this quarter. I will now have Rémi discuss our financial performance before I conclude with our outlook.

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Thank you, Yves. Good morning, everyone. Today, we reported a net loss of $34 million in the third quarter or $0.37 per share, excluding special items. This compares to net income, excluding special items of $11 million or $0.12 per share in the previous quarter and $96 million or $1.03 per share in the same period last year.

Special items in the third quarter reflect mainly nonoperating pension and OPEB credits of $12 million and a $23 million litigation charge recorded in other expense. Our total sales in the third quarter were $705 million, down by $50 million from the second quarter. While pricing was lower across all segments, except for tissue, the most significant impact was the $114 per metric ton drop in market pulp pricing. Overall, sales volume was unchanged as lower lumber and paper shipments, reflecting reduced production, were offset by higher market pulp volumes as we took steps to reduce the inventory build from Q2 to more normal levels.

Manufacturing costs increased by $19 million in the quarter after removing the impact of volume and foreign exchange, reflecting more planned maintenance outages in the quarter and the largely seasonal increase in chemical usage. Compared to the second quarter, market pulp's all-in delivered cash cost increased by $33 to $643 per metric ton despite higher sales volume. This is largely attributable to additional maintenance costs mainly incurred during the scheduled outages at two pulp mills. Combined with the reduction in average transaction price, EBITDA decreased to negative $5 million.

Delivered cash cost in tissue increased by $29 per short ton, but the increase in cost was more than offset by the higher average transaction price, leading to a slight improvement in EBITDA to $1 million. Delivered cash cost in the wood products segment improved to $331 per thousand board feet, but that was not enough to offset the decrease in realized pricing and shipments. As a result, EBITDA decreased slightly to $4 million for the quarter. Newsprint's delivered cash cost increased by $12 per metric ton to $537, driven by lower volumes and unfavorable chemical usage.

Combined with a pricing decline of $24 per metric ton, EBITDA decreased to $11 million for the quarter or $36 per metric ton. The delivered cash cost in specialty papers increased by $28 per short ton to $647, primarily attributable to higher maintenance and lower cogeneration contribution associated with downtime, mostly planned, at one mill. Together with the decrease in realized pricing, EBITDA declined to $15 million or $85 per short ton. We ended the quarter with $69 million of cash and significant available liquidity of $566 million.

Even with this quarter's decline in profitability, net debt to adjusted EBITDA for the last 12 months remained low at 1.1 times. In the third quarter, we generated $25 million of cash from operations, $47 million less than in the second quarter, largely reflecting lower EBITDA. We spent $82 million in capital expenditures in the first nine months of the year. Largely in line with our pace of spending so far, we expect to invest approximately $120 million for the full year, lower than our previous estimate of $150 million.

For the quarter, we paid $13 million in softwood lumber duty deposits, and we now have $149 million recorded on the balance sheet. So far in 2019, we've returned $12 million of capital to our shareholders with the buyback of 1.8 million shares, representing 2% of our total outstanding shares. There remains $12 million under the existing share repurchase program. Earlier this week, we announced the extension and upsize of our senior secured credit facility, a foreign facility for up to $360 million, replacing the existing $185 million facility entered into in September of 2016.

The amended credit agreement includes a term loan facility of up to $180 million and a six-year revolver of up to $180 million. The term loan facility is available with a delayed draw period of up to three years and the choice of maturities of six to 10 years from the date of drawing. Without pledging any additional collateral, this boosts our available liquidity by $175 million to over $740 million, a 30% increase at very competitive rates and on favorable terms. In October, we paid CAD 19 million in connection with an unfavorable decision from the Québec Superior Court related to our 2012 acquisition of Fibrek.

The payments and timing of any additional consideration will depend on the outcome of the appeal process. Finally, we contributed $33 million to pension plans in the quarter and made OPEB payments of $3 million, with an expense of $9 million included in adjusted EBITDA. We continue to expect to make $100 million of pension contributions and $15 million of OPEB payments in 2019, with an associated expense of $30 million in adjusted EBITDA. I will now turn it back to Yves for concluding remarks.

Yves Laflamme -- President and Chief Executive Officer

Thank you, Remi. We expect weak market conditions to continue to affect profitability of most of our business segments in the fourth quarter. For market pulp, despite current challenging conditions, we see encouraging signs and stronger industry operating rates for softwood pulp, which represents about two-thirds of our production capacity. We took 9,000 metric tons of production downtime for scheduled pump outages in the third quarter.

The planned major outage in St. Felicien in the fourth quarter will represent approximately 12,000 metric tons of lost production. In addition, the regular annual maintenance, the outage will allow us to implement the second phase of the mill organic expansion project for incremental tonnage. Our focus for tissue is to build on the recent sales growth and productivity gains, delivering measured but steady improvements over the next few quarters.

Even as conditions in lumber markets remain somewhat uncertain, we believe wood products results will improve as reported industry capacity rationalizations begin to reduce the available supply. With benchmark pricing increasing late in the third quarter, we expect some improvement in the realized pricing in fourth quarter and into 2020. Although, we expect to see marginal seasonal improvement in paper shipments in Q4, we will face sustained pricing pressures for all paper grades as operating rates remain low. Despite difficult markets, we are focused on maximizing margins and earnings power in the paper business.

Our network of competitive assets and solid financial position provides us a strategic edge to weather current market headwinds and take advantage of future transformation opportunities.

Silvana Travaglini -- Treasurer and Vice President, Investor Relations

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

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Hamir Patel from CIBC Capital Markets. Please go ahead.

Hamir Patel -- CIBC Capital Markets -- Analyst

Good morning. Yves, could you give us your sense as to where you think inventories are today for lumber in the channel and maybe what you might be seeing in the various segments that you sell into?

Yves Laflamme -- President and Chief Executive Officer

Yeah, well, what I see and we see in the market with the -- we've seen a lot of curtailments announcement and then permanent closures. So some of that might be a little balanced with the added capacity in the U.S. South. So about including ourselves, the company has mentioned, we are taking about 170 million board feet of capacity down in the year.

So I mean in the last few weeks, it has been said by analysts like you, and we see the business, that it takes a while between the announcement and before the logs and everything is processed and sold and consumed. So I mean, the answer is that we're starting to feel a more balance between the production and the demand right now. And I think that means that the pipeline might be about significantly lower than it was a few months ago.

Hamir Patel -- CIBC Capital Markets -- Analyst

Thanks. That's helpful. And Rémi, just a question for you on capex. Do you have a preliminary estimate yet for 2020? And any major capital projects that you're starting to think about for next year?

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Sure. I would probably work with the number that we're forecasting for this year, Hamir. So $120 million is probably a good number to use. As you know, a good chunk of the capex is for asset maintenance.

And we don't have -- I mean we do have a couple of projects, including what we've talked about, the St. Felicien capacity expansion and some projects to improve organic growth but no major add-on to that in terms of strategic projects at this point.

Hamir Patel -- CIBC Capital Markets -- Analyst

Great. Thanks, Rémi. That's all I had, and I'll turn it over.

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Paul Quinn from RBC Capital Markets. Please go ahead.

Paul Quinn -- RBC Capital Markets -- Analyst

Yeah. Thanks very much. Good morning.

Yves Laflamme -- President and Chief Executive Officer

Good morning.

Paul Quinn -- RBC Capital Markets -- Analyst

I guess, I mean, you're facing a very difficult newsprint and specialty papers markets, but that's nothing new, but then you highlight in your press release your ability to take advantage of future transformation opportunity. Just wondering what those are for you guys?

Yves Laflamme -- President and Chief Executive Officer

Well, I think that, as we've been saying for a few quarters, that the goal of the company is key to -- looking at opportunity, of course, in lumber, and how we -- can we grow in pulp as well, and if possible, to try to do better in tissue. And maybe, as far as we can be integrated, maybe going in tissue as well. So that's the three focus we have and managing paper the best we can in the declining market. So that's pretty much the -- what we're looking at.

Paul Quinn -- RBC Capital Markets -- Analyst

So when you are talking transformation, you're not talking a conversion from an existing newsprint or specially into, say, something like containerboard. It's more acquisitions or organic growth within those three main areas?

Yves Laflamme -- President and Chief Executive Officer

That's correct. I think that as far as packaging or -- we picked -- our cares went to tissue. So we keep focusing on tissue as far as diversifying the company, so on the pulp and paper side.

Paul Quinn -- RBC Capital Markets -- Analyst

OK, that's helpful. And then just on wood products. Just -- you guys were down in price $7 quarter over quarter. I just -- I'm trying to reconcile that with what I saw with Great Lakes being up about 30 on two by fours and studs kind of holding their own, being up a little bit.

So was it all mix because you're...

Yves Laflamme -- President and Chief Executive Officer

Yes, I think it's all mix. But when we're talking about mix, of course, that when you are in Eastern Canada compared to Western Canada, you have quite a few short lands and lower grades with the size of our trees. So we have more two by threes than we have two by six, sometimes makes different. The other thing is that also depends how much you sell in the U.S.

and Canadian markets with the discounts compared to the [Inaudible]. So sometimes, that has more impact than we think. And that's why we see as being part of the mix when we're talking about Canadian and U.S. markets.

Paul Quinn -- RBC Capital Markets -- Analyst

All right. That's all I had. Best of luck guys. Thanks.

Yves Laflamme -- President and Chief Executive Officer

Thank you.

Operator

[Operator instructions] Your next question comes from the line of Sean Steuart from TD Securities. Please go ahead.

Sean Steuart -- TD Securities -- Analyst

Thanks. Good morning. I got on the call a bit late, so I apologize if this was addressed previously. I'm wondering if you can just provide a little more context on what you're seeing in offshore newsprint markets, like I know that's where a lot of the pressure has been.

But if you could go across some of the major regions you sell into in the export market and provide some context on fundamentals in those specific regions?

Yves Laflamme -- President and Chief Executive Officer

Well, we definitely see a lot of competition in the export market. And as we said, it's about 40% of our sales, and it's a really, really competitive market. There is a significant gap right now between the U.S. and the North American market, I would say, and the export market.

And we see that going that way for at least the next quarter, I would say. So that's what I would have to say on it, no?

Sean Steuart -- TD Securities -- Analyst

OK. And you envision sustaining that type of relative exposure in terms of your shipment mix to offshore markets going forward? Do you have a longer-term objective of where you think that percentage goes to?

Yves Laflamme -- President and Chief Executive Officer

Well, I think that the -- as we said, we've been taking significant downtime, and our paper inventory is pretty balanced right now. And going forward, we see what we're going to do, but where we're saying that there is more -- where there is demand right now, in 40%, there's not so many places you can go. So we're going to have to -- it's not just about Resolute, it's about the whole industry. You got to go where the market is, or you're going to have to take more difficult decisions.

Sean Steuart -- TD Securities -- Analyst

OK. Thank you for that context. I appreciate it.

Yves Laflamme -- President and Chief Executive Officer

Thank you.

Operator

There are no further questions at this time. I turn the call back over to management for closing remarks.

Silvana Travaglini -- Treasurer and Vice President, Investor Relations

So this concludes our conference call today. Thank you, everyone, for joining.

Operator

[Operator signoff]

Duration: 25 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 Capital Markets -- Analyst

Rmi Lalonde -- Senior Vice President and Chief Financial Officer

Paul Quinn -- RBC Capital Markets -- Analyst

Sean Steuart -- TD Securities -- Analyst

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