Resolute Forest Products (RFP) Q1 2020 Earnings Call Transcript

Resolute Forest Products (RFP)
Q1 2020 Earnings Call
Apr 30, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products first-quarter 2020 earnings conference call. [Operator instructions] Please note that this call is being recorded today, Thursday, April 30, 2020, at 9:00 a.m. Eastern Time.

I would now like to turn the meeting over to Mr. Remi Lalonde, senior vice president and chief financial officer. Please go ahead, Mr. Lalonde.

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Thank you, operator, and good morning, everybody. Welcome to Resolute's first-quarter earnings call. You can follow along with the slides for today's presentation by logging on to the webcast using the link in the Presentations and Webcasts 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 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. And I will turn the call over to Yves Laflamme, president and chief executive officer.

Yves Laflamme -- President and Chief Executive Officer

Good morning. Thank you for joining us. We reported $32 million of adjusted EBITDA in the first quarter compared to $4 million in the fourth. The first quarter's results reflect the momentum in market prices for lumber that began late in 2019, as well as lower maintenance costs in pulp and paper, which were offset in part by lower newsprint prices.

By segment, we reported quarterly adjusted EBITDA of $3 million in market pulp, up by $15 million from the fourth quarter; $6 million for tissue, up by $2 million; $16 million for wood products, up by $12 million; breakeven for newsprint, a reduction of $7 million; and $14 million of specialty papers, up by $4 million from the previous quarter. While we continue to operate across all of our business segments, we've had to take a number of measures in the face of the dramatic reduction in economic activity due to coronavirus pandemic, such as reducing our operational footprint to demand levels consistent with essential needs, drawing our credit facilities to keep higher levels of cash, reducing SG&A expenses and suspending or deferring capital spending. Through February, global demand for chemical pulp was 7% higher, reflecting a 13% increase in demand for hardwood and no change for softwood, but operating rate averaged 92% for softwood and 78% for hardwood. Producers' inventories at the end of February stayed within a normal range, 46 days for hardwood and 34 days for softwood.

Our shipment volumes were 10,000 metric tons higher in the quarter due mostly to the timing of the Saint-Félicien annual outage in Q4. Against our earlier expectations, the average transaction price slipped by $16 per metric tons, and the pandemic created more uncertainty in demand, starting in China, against what were relatively improving market conditions. But now, again, we see resilient global demand as higher-quality tissue demand outpaces the reduction in printing and writing end users, which makes us cautiously optimistic for sustained volume and improving pricing. After two negative quarters, EBITDA in the segment improved to $3 million.

Finished goods inventory remained low for the third consecutive quarter, ending at 69,000 metric tons. Total tissue consumption was unchanged in February compared to the same period last year, but that means little considering the changes we've seen since March as the impact of the pandemic shook up consumption patterns with a significant increase in at-home demand and the corresponding decrease in away-from-home. Our own tissue business is progressing well in the context of disruptive consumer demand and supply chains, which has opened opportunities for Resolute to demonstrate our products and capabilities as we grow our customer base and improve our customer mix. Accordingly, our shipments grew by 22% in the quarter, and our inventory is down to only 5,000 short tons.

With the $15 per short tons improvement in the average transaction price and our lower costs in the segment, EBITDA was $6 million in the quarter. U.S. housing starts have reached 1.5 million on a seasonally adjusted basis in the first quarter, up by 21% compared to the first quarter of last year. This reflects an 11% increase in single-family starts and a 45% increase in multifamily starts.

The segment EBITDA improved to $16 million in the quarter, thanks to the $29 per 1,000 board foot increase in average transaction price and 53 million board feet increase in shipments despite rail blockades in Canada and the economic fallout of the unfolding coronavirus pandemic. Excluding our recently acquired U.S. sawmills, we recorded about 70 million board feet of downtime in the quarter, consistent with the second half of 2019. On February 1, we closed on our acquisition of three sawmills in the U.S.

South: Cross City in Florida, and Glenwood and El Dorado in Arkansas for $175 million, including estimated working capital. The integration of these new sites got off to a good start, with new sawmills contributing about $2 million to segment EBITDA in the quarter. We are making plans to bring El Dorado online early in 2021, subject to market conditions. Even as the lingering uncertainty of 2019 gave way to much stronger housing starts, the negative momentum of the unfolding pandemic made for short-lived recovery in market conditions.

As of today, we are operating to about 85% of run rate capacity, excluding our U.S. sawmills. But projection for the near-term impact on housing starts in the current environment are sobering, and it could force us to take further measures. On the other hand, we expect wood products to play a key role in the economic recovery as policymakers encourage an aggressive resumption of construction activity.

And even today, we see surprisingly strong demand from the repair and remodeling segment. North American demand for uncoated mechanical papers contracted by 14% in the first quarter compared to the same period last year, reflecting a 20% drop in supercalendered grades and 8% for standard grades. Compared to the first quarter of 2019, the shipment-to-capacity ratio for all uncoated mechanical papers was unchanged at 84%. The average transaction price slipped by $16 per short ton in the quarter, mostly reflecting weakness in supercalendered grades.

Our quarter-over-quarter shipments, however, were unchanged against the seasonally stronger fourth quarter and inventory rose to 49,000 short tons. North American newsprint demand fell by 12% in the first quarter compared to the same period last year. Demand for newspaper publishers fell by 15%, while demand for commercial printers was down by 8%. The North American shipment-to-capacity ratio was 86%, following the current changing environment.

Global demand for newsprint was down by 12% from February and the world newsprint shipment-to-capacity ratio was 78%. As a result, the average transaction price slipped by a further $36 per metric ton in the quarter with most of the weakness coming in the offshore markets. Shipment volumes were down by 11,000 metric tons and finished goods inventory was unchanged. The focus in our paper business will continue to be to maximize cash generation.

While there are opportunities even in the current environment, some areas, particularly newsprint will likely come under stronger pressure. I will now have Remi discuss our financial performance.

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Thank you, Yves. We reported a net loss of $29 million in the first quarter or $0.33 per share, excluding special items. This compares to a net loss, excluding special items, of $53 million or $0.59 per share in the previous quarter and net income, excluding special items, of $30 million or $0.32 per diluted share in Q1 last year. Minus $28 million of special items in the first quarter include other income from foreign exchange translation and nonoperating pension and OPEB credits.

Our total sales in the first quarter were $689 million, up by $21 million from the fourth quarter. This reflects the capacity addition from the recently acquired U.S. sawmills, an 8% increase in the price of lumber and a 22% increase in tissue shipments, all of which were partly offset by weaker pricing and shipments in the newsprint segment. Our manufacturing costs decreased by $31 million in the quarter on a comparable basis after removing the impact of volume and the writedown of inventory following the Q4 idling of the Augusta newsprint mill.

Compared to the fourth quarter, the all-in delivered cost per market pulp fell by $68 per metric ton or 10% on lower maintenance spending and the timing of the Saint-Félicien outage in Q4. Accordingly, market pulp EBITDA improved to $3 million. The delivered cost in tissue fell by $66 per short ton in the quarter or 4%, mostly reflecting the sales volume impact, leading to a $2 million improvement in EBITDA to $6 million. In the wood products segment, the delivered cost was essentially unchanged, but with the 8% increase in transaction prices, EBITDA in the segment improved by $12 million to $16 million.

Newsprint's delivered cost was $16 per metric ton lower in the quarter or 3% due to lower maintenance costs and -- sorry, due to lower maintenance and costs avoided with the closure of Augusta. But with the lower average transaction price, EBITDA fell to breakeven. The delivered cost in specialty papers fell by $40 per short ton or 6% due to lower maintenance costs and higher generation from internal power assets, which, despite the lower average transaction price in paper, helped to improve EBITDA by $4 million to $14 million. We used $49 million of cash for operating activities in the quarter, including a $31 million increase in roundwood inventory ahead of the spring breakup.

We also made $21 million of capital expenditures, compared to $113 million for all of 2019. To help manage liquidity in the months ahead, we're trimming our 2020 capital spending expectations down to $90 million, including capital to be invested in the recently acquired U.S. sawmills. We previously guided to roughly $115 million, excluding the U.S.

sawmills. We made $15 million in softwood lumber duty deposits in the quarter, bringing our total deposits to $177 million, which is recorded in other assets on the balance sheet. The $372 million increase in total debt on the balance sheet reflects a draw of $180 million from our existing term loan facility to finance the acquisition of the U.S. sawmills, an injection of over $120 million from existing credit facilities as a preventive measure in mid-March to build an immediately available cash cushion of liquidity and an inflow of roughly $70 million from existing facilities to support short-term working capital requirements.

The term loans we used to finance the acquisition of the U.S. sawmills have 10-year maturity and carry a floating rate of interest of about 2% as of today, net of the expected patronage dividend. The ABL credit facility also carries a floating rate of interest of about 2%. Our cash balance at quarter-end was $116 million for net debt of $705 million.

Our liquidity also remains strong at $349 million. Finally, we contributed $23 million to pension plans in the quarter, and we made OPEB payments of $3 million with a combined expense of $8 million included in adjusted EBITDA. While contributions payable for the year are $112 million in pension and $13 million of OPEB, we expect to take advantage of the recently announced measures under the U.S. stimulus bill to defer up to $34 million of U.S.

contributions to January 1, 2021. Accordingly, our pension contributions for 2020 will be approximately $80 million and $13 million in OPEB. The $117 million reduction in net pension and OPEB liability on the balance sheet reflects the impact of the weaker Canadian dollar and payments made in the quarter. Considering the sudden and precipitous reduction in equity markets and falling treasury rates in the quarter, if the year were to end on March 31, we would expect the funding ratio on an accounting basis and on a funding basis to have widened, which would imply higher contributions in the future, but we will conduct that assessment only at year-end in accordance with applicable accounting and pension funding rules.

Yves?

Yves Laflamme -- President and Chief Executive Officer

Yes. Thank you, Remi. Governments across North America have recognized the importance of the forest products sector in the fight against the coronavirus pandemic. Resolute manufactures a number of key products, including lumber for our infrastructure, now and in the economic recovery to come; pulp for personal care products, food protective papers and medical supplies used by our healthcare professionals on the front lines; bath tissue and paper towels to meet our basic needs for cleanliness and comfort; and newsprint and other papers, helping keep us all informed.

As we navigate these highly uncertain times, our short-term priorities will be focused on the following: operating our assets in accordance with rigorous protocols around health and safety, including special measures we've put in place to minimize the spread of the virus at all of our locations; closely managing sources of liquidity and developing opportunities to access additional liquidity, should it be required; working with all levels of government in the regions where we operate to support a speedy economic recovery; closely monitoring the growing risk around credit exposure with some of our customers; advocating with regulators to minimize the risk of rising pension contributions should financial markets remain depressed and interest rates low; adjusting capacity dynamically based on rapidly changing conditions; and keeping tight control on SG&A expenses and controlling capital spending. These are obviously unprecedented times. Before we complete this morning's call, I would like to recognize our employees, contractors and suppliers. Our people have risen to the challenge.

With some operations idle, hundreds of people are directly and financially impacted. But across the company, they all have remained committed to a job well done. They are loyal and hardworking. They recognize the importance of their role in providing our customers with essential products.

And in spite of the pressure of work and family during these difficult days, they have remained focused on the world-class health and safety practices and remained engaged in their communities. We see countless acts of kindness and solidarity from volunteering time and financial and in-kind donations. Our people are truly our greatest asset. They are making a difference every day.

And on behalf of the board of directors and the executive team, I want to publicly thank them.

Remi Lalonde -- Senior Vice President and Chief Financial Officer

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 Sean Steuart of TD Securities. Please go ahead. Your line is open.

Sean Steuart -- TD Securities -- Analyst

Thank you. Good morning. A couple of questions. You referenced the dynamic downtime approach you're taking.

I'm wondering if you can provide a little bit of detail across the business segments with respect to the amount of downtime taken during April and how that's trending into May for each of the segments as well.

Yves Laflamme -- President and Chief Executive Officer

OK. So good morning, Sean. As far as the downtime which has been taken, if we go to newsprint, we've taken a downtime at our Baie-Comeau newsprint mill, which is about -- it has about two machines installed to 100,000 tons on a yearly basis -- 200,000 tons, sorry. And then we took as well the last four weeks -- two weeks, and we informed the mill yesterday for another four weeks the Amos newsprint mill, which is one machine but close to the equivalent of volume.

So those are temporary downtime for now. On the CPV grade, we took about a month of downtime -- four-week of downtime at our [Inaudible] SC mill. They restarted on Monday till at least the next holiday we're going to have in June. And we also took a mission down in Alma, which is about 70,000 tons per year on that paper.

Other than that, we're -- on the paper side and pulp side, we're running very much full operation. On the lumber side, we keep -- we took a stud mill -- two stud mills down in the fourth quarter because of the big spread between the -- as you saw between start and random. So the Senneterre sawmill is down, but the volume of large has been moved to a random-length mill, which is very close as a facility. And we cut a shift in one of our random mill in Girardville.

We have Comtois mill in Québec, as well as stud mill, has been down for two months now. The Ignace sawmill in Northwestern Ontario was down. And it was down earlier, so still down. That's pretty much what we have in lumber.

We took two weeks -- additional two weeks in the Baie-Comeau sawmills in line with the downtime of the paper mill. Then we restarted about two weeks ago shifts being moved to our Clermont newsprint mill. So other than that, that's pretty much the -- it's representative of -- I think it's something like 20...

Remi Lalonde -- Senior Vice President and Chief Financial Officer

About 25%.

Yves Laflamme -- President and Chief Executive Officer

All mixed together, paper side, about 25% of our paper capacity.

Sean Steuart -- TD Securities -- Analyst

That's great detail. Remi, question on the balance sheet. You referenced the lower capex and the pension deferrals in the U.S. Can you go through some of the other levers you have to pull with respect to supporting the liquidity position? And I'm thinking of things like seasonal working cap declines through the second and third quarters, property tax deferrals.

I'm not sure if there's any stumpage deferrals on deck in Eastern Canada. Any thoughts there with respect to other measures?

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Yes. And just maybe to begin, Sean, our liquidity is starting from a pretty good position at $350 million as of quarter-end. And so there's some opportunities, we think, to be worked on. Nothing to announce at this time.

But in terms of how things are evolving, we talked about the $34 million deferral on pension, which is helpful. The first quarter is also pretty significant in terms of working capital consumption, so we expect that to reverse over the course of the year. The deferral of capital spending is going to reduce about $30 million in spending. There are programs that have been announced by provinces to defer some payments under the harvesting programs, but that's mostly within the existing year.

And then the other programs you talked about deferring property taxes, those tend to be a little bit smaller. So that pretty much covers what we're working on, Sean.

Sean Steuart -- TD Securities -- Analyst

Thanks, Remi. That's all I have for now. Thank you.

Operator

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

Hamir Patel -- CIBC Capital Markets -- Analyst

Good morning. Yves, can you give us a sense as to how much graphic paper and newsprint demand is down year over year in April? And would you expect things to be even worse in May?

Yves Laflamme -- President and Chief Executive Officer

Yeah. So we see the -- what we have as a number, we saw the trend in the first quarter. Newsprint was about 15% or so. But since the pandemic, as I mentioned earlier, we had to close capacity that wasn't expected, which represent about 25% of our paper business.

On the newsprint side and even on the CPV side, we feel that there is probably another 10% to 15% more right now than we were expecting. The question about that, of course, is going forward when there is some business coming back, how much is going to come back on the paper side. So we expect as far as advertising on the SC, as an example, and the more specialty papers, hopefully, some business is going to come back. But it's hard to see and to say how much is going to come back.

I would say, to answer your question more precisely, of course, April is one of the -- after the virus, probably the most affected on the paper side. We don't see May necessarily doing any better, so we hope to have some business coming back. On the newsprint side, it's more complicated since the overseas market has been struggling a lot. And as part of the paper business, even before, as you know, we already took our Augusta, Georgia mill down because of the lack of demand, so the question is how much of newsprint is going to be back.

So we'll see how it goes, but we don't feel that everything is going to be back. But some of it, we would expect, absolutely.

Hamir Patel -- CIBC Capital Markets -- Analyst

Great. That's helpful. And can you give us a sense as to maybe how product pricing for newsprint and graphic papers has trended since the end of the quarter?

Yves Laflamme -- President and Chief Executive Officer

If you're looking at -- if you're talking about newsprint, of course, as I said, the offshore market has been hit really bad. So we're just really quiet right now on the shipments to the U.S. To give you a precise price, it's hard to say because it's down almost every week because of the environment you are in. On the CPV, so about same thing.

I don't have a precise number to give you right now as far as how much the market's going down per ton or something like that. But it's definitely not on the right side, I would say.

Hamir Patel -- CIBC Capital Markets -- Analyst

OK. And even in your comments, you mentioned R&R had been strong. Was that in relation to what you're seeing out of your Canadian operations or from the one U.S. sawmill that you have operating today?

Yves Laflamme -- President and Chief Executive Officer

We see that on two different ways. We have contracts with home centers, even on value-added like furring strips kind of business and lumber as well for our Canadian operation. And we've seen the demand kind of going pretty good and even sometimes stronger on different products. So with direct sales, which is a pretty good measure to measure the demand in that business.

On the U.S. side, it's more on the -- as you know, we're producing decking. And we see a pretty good demand for decking going to the strips business, and this [Inaudible]. We're seeing that as we speak.

We can see that, even since the downtime of the coronavirus, business has been pretty good.

Hamir Patel -- CIBC Capital Markets -- Analyst

And just the final one for me. Remi, if we have a prolonged period of market weakness, you've already indicated the sort of run-rate capex has been reduced by 30%. Is there still room to carry that back further if need be?

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Well, as you know, Hamir, we're a pretty capital-intensive business, so it takes about $70 million to $80 million to keep the lights on. So yes, we could compress capex a little bit, but beyond that, we're not doing ourselves any long-term favors.

Hamir Patel -- CIBC Capital Markets -- Analyst

OK, great. That's all I had. OK. I'll turn it over.

Thanks.

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Thanks, Hamir.

Operator

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

Paul Quinn -- RBC Capital Markets -- Analyst

Good morning, guys.

Yves Laflamme -- President and Chief Executive Officer

Good morning.

Paul Quinn -- RBC Capital Markets -- Analyst

Hey, just some clarification on the wood products side. I think you mentioned the EBITDA contribution from the newly acquired U.S. South mills is $2 million for the two months. Is that right?

Yves Laflamme -- President and Chief Executive Officer

Correct.

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Correct. That's correct, yes.

Paul Quinn -- RBC Capital Markets -- Analyst

OK. And maybe you could just outline the shifting of those mills currently.

Remi Lalonde -- Senior Vice President and Chief Financial Officer

The shifts we're operating at...

Yves Laflamme -- President and Chief Executive Officer

Yes. We operate in Cross City, Florida, as they work to shift, I would say. And big part of it, as I said earlier, is more is decking, which is pretty good right now. So we're very pleased with what we're doing with that mill.

When we made the acquisition, Glenwood, Arkansas, was running -- sawmill was running on 1.5 shifts. So our goal was to restart -- completing the second shift. We're still working on it. What we're looking at right now is for having a swing shift between the [Inaudible] two shifts and then going running the sawmills in two shifts because of the pandemic and training and other things, so it's a little more complicated.

But we're very pleased with the results that we have as well, and we see good opportunities. And the integration is going well. And [Inaudible], as you know, is down, but we're still forecasting to restart at the beginning of 2021. It depends on the market, of course, and the demand, but our plan is very well aligned on the [Inaudible].

So this is the situation for now.

Paul Quinn -- RBC Capital Markets -- Analyst

OK, great. And then just switching to market pulp here. I was surprised of the price drop, that $16 quarter over quarter, given where I saw most of the benchmark prices moving. Maybe you could give us an outline of where your pulp is going regionally and any mix shift for that that explains that price drop.

Yves Laflamme -- President and Chief Executive Officer

Yes. So as we said, the market in the first quarter was not as expected, and we have different mix of pulp. We have Southern pulp and hardwood and softwood in Calhoun, Tennessee. We have the kraft pulp in [Inaudible], and of course, we do have the softwood pulp in Saint-Félicien.

We have a mix of hardwood and softwood pulp in Canada. So we have some -- have wood, which is tougher, I would say. And it's the mix of the whole thing. Same thing about the fluff pulp that has been as good as was supposed to be.

But the good news in the outlook, as you heard, that we're pretty optimistic about what's going on right now, including on the fluff pulp. And our Calhoun mill has been much better on the pulp side and even better since we have a better mix with doing more softwood right now. But this is what I explained very much what happened in the first quarter. Maybe, Remi, I don't know if you have more details on the pricing itself or that's pretty much it.

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Yes. That pretty much covers across the grades, yes.

Paul Quinn -- RBC Capital Markets -- Analyst

All right. And then just lastly on tissue. Maybe if you could give us an idea of the split that you've got between consumer and the away-from-home in terms of sales and then how does that ramp at Calhoun is progressing.

Remi Lalonde -- Senior Vice President and Chief Financial Officer

So most of the business is focused on retail. Everything out of Calhoun is retail. So that's about, call it, 60,000, 65,000 tons a year. The Florida mills are largely away-from-home with a portion of retail in there.

As far as how the segment is doing, the tissue machine in Calhoun is producing very well in the last two quarters. As we've indicated in the past, our priorities there were to improve the converting operations, and we're making some encouraging progress there. And the other thing that we were talking about also is improving customer mix. So the reality of the last couple of months is that it's given us opportunities as there are more customers looking to fill up store shelves, particularly on the retail side.

It's given us opportunities to get into some of those places and demonstrate the quality of our product and our ability to support it. So it's been pretty positive. We pointed out there was a 22% increase in shipments, and our inventories today on the tissue side are very low.

Paul Quinn -- RBC Capital Markets -- Analyst

All right. That's all I had. Thanks again.

Operator

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

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Good. Thank you, everybody, for joining today. Have a good day.

Yves Laflamme -- President and Chief Executive Officer

Thank you.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Remi Lalonde -- Senior Vice President and Chief Financial Officer

Yves Laflamme -- President and Chief Executive Officer

Sean Steuart -- TD Securities -- Analyst

Hamir Patel -- CIBC Capital Markets -- Analyst

Paul Quinn -- RBC Capital Markets -- Analyst

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