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Resolute Forest Products, Inc. (NYSE:RFP)

Q4 2012 Earnings Call

February 12, 2013, 09:00 am ET

Executives

Rémi Lalonde - VP, Investor Relations

Richard Garneau - President & CEO

Jo-Ann Longworth - SVP & CFO

Analysts

Sean Stewart - TD Newcrest Securities

Bill Hoffman - RBC Capital Markets

Stephen Atkinson - BMO Capital Markets

Tarek Hamid - JP Morgan

Paul Quinn - RBC Capital Markets

Mike Riley - State Street Global Advisors

Operator

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products’ Fourth Quarter 2012 Earnings Call. I would now like to turn the meeting over to Mr. Rémi Lalonde, Vice President for Investor Relations. Please go ahead.

Rémi Lalonde

Thank you, Wayne. Welcome to Resolute’s fourth quarter earnings call. My name is Rémi Lalonde, Vice President for Investor Relations. I am joined by Richard Garneau, President and Chief Executive Officer and Jo-Ann Longworth, Senior Vice President and Chief Financial Officer. You could follow along with the slides we’ll be using for today’s presentation by logging on to the webcast, using the link in the Presentations and Webcast page under Investor relations section of our website. Slides are also available for download.

Before we begin, I direct your attention to the note forward-looking statements in this morning’s press release and the slides accompanying this presentation. We will discuss forward-looking matters today. Due to uncertainties inherent in these statements, actual results may differ. Our statements are not guarantees of future performance.

You can find additional, financial, and statistical information, including a reconciliation of non-GAAP financial measures in the press release and the slides. We will take questions from analysts and investors following our prepared remarks. We ask that media and others please direct your questions to our communications department following today’s call. Richard?

Richard Garneau

Good morning and thank you for joining us today. 2012 marked our second full year as a restructured company. It was a year in which we responded aggressively to market challenges. We significantly improved the company’s competitiveness by optimizing the asset base and strengthening out financial position.

Before I review the details of our financial performance, I want to highlight some of the many changes we have accomplished this year. We grew the Pulp segment by adding the three Fibrek mills, one mill in bleached southwood kraft and the two recycle mills representing about 750,000 tons of capacity. This positions us well as a long term player in Pulp since we are now the fourth largest pulp producer in the North America.

We announced a number of projects that will help us grow our woods product business; capacity enhancement in Thunder Bay, Comtois, Senneterre, St-Thomas, La Dore and Girardville; and in addition to the announced restart of the Ignace saw mill and construction of the new Atikokan saw mill. When all completed by mid 2014, these projects will represent 400 million board feet of additional annual production capacity. These projects will help to offset the 150 million board feet of capacity plus as a result of the Oakhill closure with the sale of Mersey assets.

We also invested in power generation. We added 9.5 megawatt of capacity at Saint-Felicien and 28 megawatt at Dolbeau, which were fully operational in December. 65 megawatt of new capacity at Thunder Bay is now only weeks away from production. We will use these facilities to sell power to the grid in addition to the facilities we use only for internal consumption; Calhoun, Catawba, Coosa Pines with Hydro Saguenay and Fort Frances and it gives us an important advantage.

We have made significant progress toward optimizing our paper asset base this year while preserving our ability to generate cash flow. These steps provide for a leaner and more efficient mill network. Here is other few examples. As part of our efforts to manage exposure to export market where the relative trend of the US dollar has created difficult conditions for North American producers, we idled and subsequently sold our Mersey newsprint mill.

We restored a high gloss paper machine in Dolbeau. This machine is of superior quality and the machine was built in 1999. Together, with power generation we are confident that Dolbeau will be an integrated state-of-the-art operation. But given the unmistakable drop in demand for specialty papers and our strategy to focus production on our most productive facilities and machines, we closed higher cost machine and low run in addition to the Kénogami machine closed in late 2011.

We idled a coated paper machine in Catawba to improve overall efficiency and reduce the labor and other manufacturing costs. We independently idled both mill as well as the high bright and book paper machine in Fort Frances and in order to drive better efficiency and lower overall labor costs, we implemented more efficient manning structure at the number of sites. In the fourth quarter, we announced the elimination of 112 positions in Alma, 75 in Clermont and 40 in Thorold. We've also begun discussion at the Saint-Felicien scrap mill to optimize manning and costs.

At the corporate level, we completed the transfer of the remaining corporate function from South Carolina to our Montreal head office and we also absorbed Fibrek and saved $11 million. It is efforts like this that help maintain our low cost SG&A to sales ratio.

On sustainability we continue to advance on our key efforts in the areas of responsible fiber sourcing, carbon footprint reduction, environmental compliance, product stewardship and sustainability disclosure. We became the world’s largest manager of FSC Certified Forests in 2012, with 65% of company-managed forests certified to FSC standards.

Finally, we returned $67 million to our shareholders through share buybacks. We reduced also working capital on the balance sheet by a further $81 million from the end of 2011 and we redeemed an additional $85 million of debt.

Compared to third quarter, we generated adjusted EBITDA it the fourth quarter of $36 million in Newsprint, down $8 million; $12 million in Coated, unchanged; $19 million in Specialty, down $18 million and $22 million in Wood Products, it's up $8 million and $30 million in pulp, up $22 million.

Our adjusted EBITDA for the full-year 2012 was $386 million, with $104 million in the fourth quarter. Adjusted EBITDA increased in Newsprint by $7 million and Specialty by paper, by $11 million and in Wood Products by $52 million; but we suffered from the weak pulp market, where adjusted EBITDA that segment dropped $121 million as we rode through the trough in the cycle all year. Adjusted EBITDA was also $46 million lower than Coated. A $173 million drop in volume mainly in paper was the biggest negative driver to the $95 million decline in adjusted EBITDA in 2012. But over half of the large volume stems from the effort I just described; our conscious decision to manage production and inventory levels and to focus production on our most productive facilities and machines at the same time driving for better efficiency by restructuring and reducing labor costs.

For example, we responded to weakness in export market pressured by the strong US dollars by adjusting our capacity instead of building inventory and we idled coating machine in Catawba to improve efficiency, reduce labor costs and as a result eventually generate more profit. As we continue with our strategy of profitable retreat from certain paper grades our philosophy remains the same; we run for profit not for tons. We do that by managing production and inventory levels resulting in only profitable returns and maintaining world class operational standards. I would like to note that even though we shipped 10% fewer tons in Newsprint and 16% in Specialty papers, we increased the adjusted EBITDA generated in those segments by 4% and 10% respectively thanks in large part to our cost focused strategy.

The addition of Fibrek to the Resolute family negatively affected our result by $3 million of adjusted EBITDA in the year despite a $10 million positive contribution for the US recycle mill. I will add that we are optimistic about the Pulp segment’s future and we expect stronger result as we start to benefit from external power sales in Saint-Felicien as well as other cost reduction initiative there. We can now put behind us the extensive catch-up maintenance and environmental work that was recorded that the mill including the dredging of many years of accumulative sludge in the lagoons as well as costly repairs to the electrostatic precipitator.

Total North American Newsprint demand declined just 1.2% in 2012 reflecting a 20% increase in demand from other users; mainly commercial printers. And a 6% declined in demand from newspapers; accordingly the average operating rates remained alleviated in 2012 at 92%. Global demand for Newsprint was down 3% in 2012, including 11% decline in Western Europe, 9% in India and 5% in Latin America.

We can see the impact of the stronger US dollars on world Newsprint market as North American export to Western Europe were down 30% to Asia down 32% and Latin America down 6%. After two years of stability, the price of Newsprint in North America has started to come under pressure mainly as a result of the competitors restart of the mill in the Quebec City and lower North American exports.

North American demand for coated and mechanical paper was down 2.2% in 2012. There was a 4% reduction in shipment within North America and an increase in import. The shipment to capacity ratio average was 94% in all of 2012, in part as a result of the idling of one of our machines and other industry closures.

The price improvement in North America is fragile and is under pressure because of demand softness and switching to mechanical high gloss grades. We are in the process of applying the same principle at the (inaudible) facility that we used to generate more profit on (inaudible) newsprint and specialty paper. But it is a long process and the equipment failures that we experienced in the fourth quarter are at least partly related to the expensive restructuring that's resulted in significantly reduced manning, 154 possessions to be exact.

We are in the process of retraining the remaining staff for the additional responsibilities. It is taking longer than we would have liked but we expect results to start showing in the coming quarters. Total North American demand for uncoated mechanical paper declined 16% in 2012, including a 20% drop in high gloss grades, 18% in light weight and 11% in higher (inaudible).

While the shipment to the capacity ratio averaged 92% in the year, it dropped down to 83% in December as a result of significant capacity additions with the restart of a large machine in Augsburg, Nova Scotia.

With the closure of our higher cost machines and the restart of Dolbeau, we will be more competitive in this challenging market. As I mentioned earlier, once fully ramped up, the integrated Dolbeau mill will have a low cost possession. The (inaudible) plant runs on wood waste from our adjacent saw mill and in addition to its external [sale] to power to the grid, it will also supply low cost steam to the paper machine.

Overall chemical market pulp demand rose 2.4% in 2012, driven by a 7% increase in Chinese demand. Demand in North America and Western Europe improved in the fourth quarter, resulting in declines for the year of only 0.8% and 1% respectively. Global demand for soft wood pulp which represents about 80% of our virgin fibre capacity was up 2.4% for 2012, also a result of stronger demand in the fourth quarter.

Demand for northern and southern hardwood pulp was also up by 2.2%. We remain optimistic with the long-term outlook for pulp particularly as the world economy slowly improves and there is reason for cautious optimism that the pulp market is gradually (inaudible).

(Inaudible) in 2012 where 780,000, 28% higher than in 2011. Wood products should continue to show progress as housing starts gain momentum. Our ongoing growth projects, the capacity arrangement in Thunder Bay, in addition to the announced restart of the Ignace saw mill and the construction of the new Atikokan saw mills to be completed in 2014 further enhance our possession in the lumbar segment for the future.

Before I turn the call over to Jo-Ann, I want to stress that we've made significant progress this year despite challenging conditions in markets. Our assets are more competitive, our costs are lower and our financial position is stronger. Our cost focus and asset optimization strategies remain stronger and [center]. But based on the changes we had already made, we don’t currently expect to reduce our paper capacity to the same extent we have in the last few years, at least not in the year ahead.

In fact, we plan to reopen the Gatineau facility in early May, at which point we will rearrange our network of mills to ensure that production continues to be balanced with our customer orders. Duane?

Jo-Ann Longworth

Thank you, Richard and good morning everyone. Today, we reported a net loss of $36 million or $0.38 per share in the fourth quarter on sales of 1.1 billion, excluding 70 million of special items; we generated net income of $34 million or $0.35 per share. For the year ended December 31, 2012; we incurred a net loss of $2 million or $0.02 per share on sales of 4.5 billion.

Net income was $79 million or $0.81 per share excluding special items of 81 million. The special items are described in this morning’s press release, but I would like to highlight the more significant ones. In the fourth quarter, net of tax special items included $60 million charge related to asset impairment and closure cost, mainly for the capacity reduction at Fort Frances and Laurentide as well as the sale of Mersey. A $6 million gain related to sale of assets and $6 million of startup cost at Dolbeau and Gatineau.

Of the 70 million of special items in the fourth quarter, only about 50 million are cash related. Total special items again net of tax for the year included a $112 million charge related to asset impairments and closure costs for our various mill restructuring initiatives in addition to the mill I just mentioned. A $23 million non-cash gain on the translation of Canadian dollar net monetary assets and a $22 million gain related to the sale of miscellaneous assets.

Total sales in the fourth quarter were 1.1 billion, down 2% from the third quarter. We shipped 27,000 more tonnes of pulp in the quarter or 8% as we ran the Saint-Felicien mill for about four days following a five-week outage in the third quarter for maintenance and environmental work.

Shipments were also up 1.5% in wood products, but were down in paper grades, 2% in newsprint to the lower export sales, 3% in specialty product on lower demand and 4% in coated due to equipment failure Catawba mill. Average transaction price in the coated segment increased $18 per short ton, while remain stable for lumber and specialty papers.

Newsprint slipped $6 per ton in the quarter mainly on sales to export markets pressured by the strong US dollar and pulp dropped another $23 per ton.

Cost of sales was down $19 million or 2% compared to the third quarter due to favorable effect of maintenance timing, lower labor costs, lower recovered paper costs and favorable wood products inventory adjustments. Cost of sales included $4 million of additional cost with the ramp up of Dolbeau and $10 million of obsolescence charges for slow-moving spare parts.

It also included $5 million of start-up for the upcoming restart of Gatineau which we have included in special items. Distribution costs were down 1.5% quarter-over-quarter as a result of lower shipments in the paper grades more than offsetting the additional pulp shipments.

Fourth quarter selling, general and administrative expenses were down $6 million from the third quarter of 2012, due to the collection of previously written-off receivables and the reversal of the capital tax reserve.

Closure costs and related charges were $82 million, $77 million higher than in the previous quarter. This relates to our various mill restructuring initiatives including the investment idling of a Kraft mill and the high gloss and book paper machine at Fort Frances, a permanent closure of a high bright paper machine at Laurentide, and additional cost related to the sale of Mersey.

We have also recorded a $7 million settlement loss as certain US [pensioners] elected to receive their benefits in one lump sum payment. The $2 million decrease in the interest expense in the quarter to $15 million resulted from the October reduction of another $85 million of our senior secured notes.

We recorded a $26 million income tax benefits in the quarter, primarily due to our release of valuation allowances in connection with an internal pact reorganization of our US Fibrek assets. We expect our effective accounting tax rate to be approximately 30% on a normalized basis, excluding currency translation impact and other adjustments. We do not expect to pay meaningful cash taxes in the medium term. Unit operating costs in the news print segment increased by $6 per ton in the quarter, compared to the pervious of 1%, mainly on account of a lower shipment and a $4 million obsolescence charge for slow moving inventory.

Unit operating costs were $22 per short ton in the coated paper segment as equipment failure led to a 14% drop in shipments compared to the third quarter. In specialty, operating costs per unit rose by $44 per short ton, largely as a result of lower volume, the $4 million of costs associated with the wrap up of Dolbeau and a $3 million obsolescence charge for slow moving inventory.

Unit operating costs declined 12% or $85 per ton in the pulp segment, mainly as there was no major maintenance in the quarter. Shipments also rose by 27,000 metric tons. Due to higher market prices of the lumbar products, we reversed $4 million of inventory write down taken in prior periods, while in the third quarter we took a $3 million provision. Together with the higher shipment volume this helped to reduce operating costs per 1000 board feet by $20.

Turning to the balance sheet and cash flow items; cash and cash equivalents decreased by $80 million in the quarter closing at $263 million, important elements included $85 million for the partial redemption of our senior secured notes and $22 million spent to repurchase $1.9 million shares. We generated $74 million in cash flow from operating activities in the fourth quarter, up $55 million from the prior quarter for a total of $256 million year-to-date.

Asset backed lending availability remains high and our liquidity stands at $782 million compared to $872 million at the end of the third quarter. Solid sheet working capital decreased $89 million in the quarter to $775 million. This was due in part to a $27 million reduction in trade accounts receivables in line with lower sales, the reclassification of $56 million of deferred income tax assets from current to non-current, offset by a $10 million net increase in inventory.

I would add that in the fourth quarter we collected $31 million of [load] credits for prior years and approximately $75 million for the full year 2012. Capital expenditures were $67 million up from $44 million in the third quarter. For the year, CapEx was [$169 million]. In 2013, we expect spending on compliance and maintenance of business at 55% to 65% of depreciation and amortization, with an increase in spending related to value creating project.

Pension contributions were 30 million in the fourth quarter and a 124 million for the 12 months of 2012. Funding in excess of expense was 24 million in the quarter and 95 million for the year. For 2013, we expect to make approximately 130 million of pension contribution of which 40 million will be expense. These numbers exclude additional contribution if any as part of the corrective measures relating to the solvency deficit in our material Canadian plant.

We are currently working towards a solution with interest of party but we won't have a firm answer on corrective measures until the second quarter. As we said before, we do not expect to contribute money to the effective plant or corrective measures, unless we’ve reached the outcome that is consistent with what we believe was the purpose of the funding release measure or we're compelled to do so.

I will add that yields on government securities in Canada as at December 31, 2012 were lower than those of December 31, 2011, making the discount rate, used to calculate liabilities for solvency purposes even lower than last year. Accordingly, we expect that the aggregate solvency deficit will increase as of December 31, 2012. Also, the accounting liability for pension and other post-retirement benefit obligation on the balance sheet increased by over 400 million to 1.9 billion as a result of the lower discount rates.

The increased liability is net of a 35 million reduction resulting from the sale of Mersey and the payment of lump sum benefits to certain US pensioners both of which are permanent. I will close by noting that we faced significant challenges in 2012. We spent the year at the (inaudible) of the pulp cycle, which outweighed the encouraging signs of recovery in the wood products segment. But we returned 67 million to our shareholders through share buyback, reduce balance sheet working capital by a further 81 million from the end of 2011, and redeemed an additional 85 million of debt. All of this despite an acquisition of Fibrek.

Our net debt stood at 271 million as of the end of the year; this underscores our efforts to continue to strengthen the balance sheet and pay down debt, while at the same time emphasizing our commitment to deliver value to our shareholders.

Rémi Lalonde

Wayne we will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Sean Stewart from TD Securities. Please go ahead.

Sean Stewart - TD Newcrest Securities

I have a few questions and I will jump back in the queue. Richard wondering let’s start first with newsprints. Have you seen any indication yet that your offshore shipment program is stabilized. I guess in light of the extensive capacity closure announcements we have seen Europe, any indication that things are settling on that front?

Richard Garneau

Well certainly the increase there will be euro as is going to help, so few days ago it was our [435] and I think that affected. If the euro continue to and stay at that level that’s firmly going to provide North American producers some relief and I think that we could potentially see more shipments on overseas markets, especially in the countries where it’s US denominated.

Sean Stewart - TD Newcrest Securities

On the specialty papers side you’ve noted the price weakness we’ve started to see in super calendar grades. I know that’s not as big a segment for your product, can you speak to any price weakness you’ve seen in other encoded gram with grades in early 2013?

Richard Garneau

I think that especially on HCE that we see a more pressure, but I think that has (inaudible) all of us, so you could switch from a (inaudible) to the other one. I think that we are going certainly to see a pressure also on [SCD] and (inaudible) and what I would add, I think we certainly made a decision to strengthen our machines that are making this [effort] to bring our cost as down as low as possible and basically we are going to be able to compete with our lower cost network.

Sean Stewart - TD Newcrest Securities

Okay, and then last question and then I will jump back in the queue. The $400 million board feet of incremental lumber supply, you are expecting through the restarts and I guess that was through mid-2014. Can you give an indication of how you expect that supply to ramp up through the year and I guess what I'm trying to gauge is your ability to increase shipment volumes in the near-term to take advantage of the very strong pricing we have right now for lumber?

Richard Garneau

Well, the lift off with on the [lease swap] and the improvement being done so and I think that that we already started to see the benefit and we are going to be in a ramp up phase and in this we are going to start as soon as the snow is gone to build the accounts in the mill so I think the production is probably not going to really we are going to start the saw mill full year of this year to build the inventory and we should be able to early in the first quarter of 2014 we should see also additional production, production at Ignace; and Atikokan while its going to take probably 12 months, so I don't expect, we don't expect to see any production before April or May of 2014.

Operator

The following question is from Bill Hoffman from RBC Capital Markets. Please go ahead.

Bill Hoffman - RBC Capital Markets

So just you talked a little bit more about the Specialty business sort of where your operating rates are right now and what you see as likely the goal you have to shed additional capacity in the near-term?

Richard Garneau

Well it’s a good question and it’s difficult to answer, but I think that obviously with the restart of a large machine (inaudible) tons that's only going to, it puts a lot of pressure on the market and I think that we expect to see lower reduction in demand in 2013. I think that when you look at quarters in 2012 went down by 16% or 20% and like a lot, so we don't expect to see that segment can decline in 2013. But again, I think that the market is certainly over supplied and it’s the reason why we have decided to close our higher cost machine and run what we consider our lower cost very competitive assets to be able to compete in this segment.

Bill Hoffman - RBC Capital Markets

And where would Dolbeau be operating at this point in time in its ramp up?

Richard Garneau

So where we want to be in January, so we are running at all expected level and we had an event where we lost the wheel of board for a month, all the repairs are done, the power are sold in the grid so now this mill is back to normal production with 130 employees.

Bill Hoffman - RBC Capital Markets

And the second question just slightly more on the coated side of the business, I mean obviously coated was challenged also by some of the disruption on coated grades, what's your thought about capability of holding on to the price increase you went through in the fourth quarter as you go through the weak season first half of the year?

Richard Garneau

Well, on coated I think that the decline in demand was only 2.3% in 2012 and I think that when you look at this market there's always a risk of grade switching, but I think the capacity and demand is moving down and I think that we’re certainly confident with the changes we made at Catawba; it’s taking longer than we thought, but I think we are confident on the coated market that by 2013 that we're going to see more stability on the demand side.

Bill Hoffman - RBC Capital Markets

Do you think you’ll get some relief here again just given that move in Europe?

Richard Garneau

Well, you know, how key the exchange rate is, obviously with a stronger euro it’s certainly more challenging, lets put it this way for the European to export to the US and I think that as long as the euro remains strong, we're going to probably see less coated from Europe to North America.

Operator

The following question is from Stephen Atkinson from BMO Capital Markets. Please go ahead.

Stephen Atkinson - BMO Capital Markets

Under the previous time management, the recycle mills were running at annualized EBITDA of minus $22 million last year; I was wondering if you could talk about the changes you’ve made?

Richard Garneau

Well, I think that you have to -- we decided to adjust our production with customer demand and basically, I would just point out, by pushing production too high we were just pushing the SOP, the sorted office paper to the roof and it was just not the right strategy. So, I think that the adjustments, this strategic adjustment to basically bring the production down has helped also brought the SOP down to a level but now its profitable. So I think it’s just a question of trying something different here when trying some thing and having the same results I think that doesn’t work well, we just decided to try something different with lost of features lead to profitable returns and it has been -- we are very happy with the turnaround in profitability and all that we are going to be able to maintain it.

Jo-Ann Longworth

We had $10 million of EBITDA from those mills since we (inaudible).

Stephen Atkinson - BMO Capital Markets

Okay. So I guess about a $62 million improvement and alike; in terms of the pension, was there an impact by closing Mersey?

Jo-Ann Longworth

Yes there was; we benefited by about $30 million net by closing Mersey.

Stephen Atkinson - BMO Capital Markets

Okay. And in terms of like I know you have $65 million in additional annualized, as it were co-gen funds, not Saguenay, by other new opportunities, other opportunities or anything at Gatineau that you can do?

Richard Garneau

Well, Gatineau was, as you’re probably aware has also seven or eight megawatt of power and the program that is offered to all the users to sell green energy on the grid; we are also going to take advantage of it, but Gatineau is when where we start the mill. So the agreement has been signed with Hydro-Québec and now we are in the process to get the mill ready. And as you know, it’s like although, so we are going to also have low costs team to the machines and based on what you see it’s going to be a very low cost managed mill, and very well located to serve the market.

Operator

Thank you. The following question is from Tarek Hamid from JP Morgan. Please go ahead.

Tarek Hamid - JP Morgan

A little bit about some of the equipment issues in the coated business in particular this quarter, just given that great price performance its looks like good cost (inaudible) away from the specific equipment issues just interesting here what's going on?

Richard Garneau

Yeah, we had many electrical issues, there also was crock in the (inaudible) itself and we lost that covers on the plus and I think that, the way that we look at it obviously with 154 people left and less management that we have, you have to retrain and make sure that all the people know their responsibilities and I think that has been part of the failures that we have is certainly due to the level of millage that we all (inaudible) staff and I now I think that we have, January we had a pretty good month production wise, so I think that I would say that it's behind us now that we should start to see some improvement but with the changes as significant as that it's not, we needed this action on purpose to repossession the mill, it’s going to work but I think that the difficulties that we encountered was certainly a bigger of the quite to good [safe] than what we had anticipated.

Tarek Hamid - JP Morgan

i know (inaudible) touched on this a little bit, but seasonality in coated has been really, really hard to model and do you think, you are seeing kind of nominal seasonal price declines in that coated business this year or is underlying demand operating rate is good enough to keep pricing up?

Richard Garneau

Well I think that in the first quarter there's always a slow quarter. So and I think that when you look at our other product so far that it is certainly at an acceptable level. So that I think it’s too early in the quarter really to have a strong idea of where it’s going. So I think that as far as January is concerned, it’s acceptable and I think that I have to wait to see what's going to happen for the two remaining months.

Tarek Hamid - JP Morgan

And just finally on Fort Frances you maybe just talk a little bit about the decision to idle the mill versus sort of long-term other conversion options or other great options you might have with the asset?

Richard Garneau

Well the decision to idle the pulp mill and one machine basically we lost the one large customer just across the river and we are limited and this mill was the dryer. So it’s a flash dryer and we cannot dry more than 240 tonnes per day, 250 to 240 to 250 on a capacity of 560. So obviously with that in hand, we were not able to continue using. What we are doing now we are looking at the possession of the mill, so and investigation on the way and what kind of grade that we could use so I think that within a couple of months two or three, four months we should be in a possession to determine what the future of the mill is going to look like.

We are certainly optimistic that we can repossession the mill that's good fibre based as you know there is a large --- 45 megawatt that now we are running at probably two-third of its capacity. So I think that there are some advantages of this mill that we can take big advantage of but we have to find the right niche and also find a way now to spend too much money to convert it.

Operator

The following question is from Paul Quinn from RBC Capital Markets. Please go ahead.

Paul Quinn - RBC Capital Markets

Couple of questions, just one on the newsprint side, you’ve talked about export markets just wondering domestically it looks like newsprint prices have cracked for the first time in over like 2.5 years now, what's the pricing direction that you see in 2013?

Richard Garneau

Well, I think that’s certainly with the supply situation newsprint price is going to be under pressure. So and I have, I don't know where that's going to go but I hope that we are going to be able to run and run profitably but its supply and demand and but with again, we are well located, when you look at the mills we have done everything that we can to bring our cost down to the lowest level and we are having discussion internally and I think that we may have to start to return (inaudible) again. So I think that certainly our strategy going forward and the export market as I said, again, that certainly with Europe gaining strength against the US, certainly what we've seen in January that the countries where that US dollar denominated. Now we have certainly the opportunity to redeem some of the market shares that we lost in 2012 with a strong, really strong US dollar.

Paul Quinn - RBC Capital Markets

Okay, and could you just update me on the domestic versus exports split in shipment in this spring? Is that still around 60-40 domestic?

Richard Garneau

Yeah, it's about, its probably export is slightly below 40%. 37% I think those, 37% if my memory serves me well and the other thing, so it's 37%.

Paul Quinn - RBC Capital Markets

I suspected so. On the lumber side, you expect flat pricing, if you could update us on your mix there, sort of the percent random versus the….

Richard Garneau

Well, we're about 50-50. So we (inaudible) in Quebec with a small wood as you know we have many mills --- at and I think down by $28 to $23 and random was up. That’s the reason why it's flat.

Paul Quinn - RBC Capital Markets

Okay and how does that mix change with the CapEx projects that Thunder Bay, Ignace and Atikokan?

Richard Garneau

Well Atikokan is going to be random. So it's going to improve our mix on this side and the Ignace is an [import] mill.

Paul Quinn - RBC Capital Markets

Okay, just lastly, I am just trying to reconcile the guidance that you gave on pension which seems like you don’t expect an increase in pension unless you are compelled to do so, I am just trying to understand may be you could go into a little bit more depth on what the remediation could compel you to do and the size of the issue?

Jo-Ann Longworth

Under the funding release measures if we miss certain targets in the first five years of the program, we are required by law to sit down with the parties being the retirees, the unions and thus both are (inaudible) in Quebec and in Ontario to discuss corrective measures. It’s our view that under the original agreement we had with these administrative bodies that the company was meant to have foreseeable and sustainable pension contributions for at least or especially the first five years of the program. So those are discussions we are now having, we are coming to the end of those discussions and we are now closer to end of March beginning of the April exactly what that agreement will be.

Operator

Thank you. The following question is from Mike Riley from State Street Global Advisors. Please go ahead.

Mike Riley - State Street Global Advisors

Mr. Garneau with (inaudible) international briefly announced resumptions of it’s market campaign against Resolute based on what they had described as logging endangered species having that not (inaudible) after that Canaccord and other analysts publicly downgraded Resolute’s share as low. I was wondering could you speak the connection between these two what does it mean for Resolute’s future perceptions and…

Richard Garneau

I think when you look at the (inaudible) all the process has been except (inaudible) unstable where we continue to have discussion and try to identify what is needed for that (inaudible) and I think that if you look at the sustainability report that we’ve committed to sustainable development and sustainable development is protection, its social and its economic and discussion taking place at the table with the environment group and the company also (inaudible). So I think unfortunately there was one participant that’s decided to leave but we will continue.

Mike Riley - State Street Global Advisors

So given that context, a follow-up particular your organization’s influence on global markets is still [unreliable] in US markets, where should we expect Resolute investing its sales effort acquiring non-US customers?

Richard Garneau

Listen I think otherwise difficulty to you but I think let's look at what we had accomplished on sophistication, 65% are land based of the land that we manage is certify [FSC] and the customer that we sell to are on the (inaudible) market, they recognize that as I say as certification, it’s a platinum standard that we are basically that, we have decided to focus on. So, obviously I think there is some more effort and if you look at sustainability report again, our target is to achieve 85%. So I think that with the target of 65% to 85% FSC certification I think that our customers worldwide recognize that we manage just an ability in a very efficient way and we disclosed everything that in our report. So I think that we are pretty confident what the result that we have had in the last three years and we continue to work to make sure that (inaudible) of sustainability of that were in balance. So I think that our customers recognize that.

Operator

The following question is from [Robert Johnson] from UBS Securities.

Unidentified Analyst

It’s funny that my esteemed colleague asked the same question that I was going to ask. I am surprised that in your presentation and last quarterly report, there wasn't more emphasis on this, on RFPs stakeholder relations and you mentioned the Boreal agreement as one price where you are putting efforts. But you have organizations who have considerable influence, and I guess experience modifying the opinion of customers who are not in a good place with Resolute right now. How are you dealing with that or how are shifting your efforts to compensate for perhaps shorter term contracts with those customers or a loss of customers.

Richard Garneau

On this one its going be the same answer, we have only one and one organization that does not have (inaudible) in its 20s. All the other ones will see the same people and we are having discussions with them and whereas also on WWF's Climate Savers, I think that has continued. We have done everything that is possible to do to make sure that our customers are comfortable with the actions that we take on the environment and its sustainable developments. So I think that everything has been disclosed and that we are certainly looking forward to the implementation of this agreement and we have built, I think that we have, the customer, we met with the customer and they certainly understand our position on this.

Unidentified Analyst

And just one follow-up on a different note. I'm interested in hearing just your quick thoughts on India. This is a place where I think on a previous call you mentioned you are exploring, looking at shipments, particularly newsprint, any further developments that you want to share with us on India.

Richard Garneau

No India I mentioned in earlier calls, certainly it’s a large market. But we were challenged in India with the weak euro or the strong US dollar, but now that we have seen the euro gaining ground against the US, I think that we were able to regain some of the volume that we lost in previous quarter. So it’s a question of currency and we all know that currency could have a significant impact on trade patterns, but longer term its certainly because of the location of our mills on the [river] and close to [port] for the US mills that we're very well positioned to take advantage not only on the Indian market, but growing a market in the Middle East and also in Egypt.

Operator

The following question is from [Joseph Von Maister]. Please state your company name, followed by your question.

Unidentified Analyst

What is the 2013 contribution from these new power punch contracts compared to 2012? In other words, what's the incremental ramp in EBITDA we should expect from the startup of these myriad of projects and inclusion of those projects for a full-year?

Richard Garneau

I don't think that 2013 was going to have a significant contribution because we have to build it and that’s going to start. Okay I understood, Jo-Ann is going to answer on this one. She has all the numbers in her head.

Jo-Ann Longworth

Hi, Joe. Obviously, we’ve said we’ve already got Saint-Felicien and Dolbeau up and running as of December, so we’ll get a full year from them, but Thunder Bay is just starting to ramp up. What we said is on an annualized basis. So when they are running at full speed all three, we're talking about $65 million approximately of EBITDA.

Unidentified Analyst

And when will Thunder Bay be up and running?

Jo-Ann Longworth

We're expecting it in a matter of weeks and then we expect that it will wrap up slowly, but we expect it to be at top operation, sometime in the second quarter.

Unidentified Analyst

And you kind of dodged the bullet on the pension question. I think the corrective measures were advertised previously at 500 million. Is that still the number or is it 500 million plus some new number due to the further reduction in discount rate?

Jo-Ann Longworth

No. The special corrective measures the deficit that we are talking about is $500 million relating to the special corrective measures.

Unidentified Analyst

And over what period of time do you have to meet that?

Jo-Ann Longworth

That’s exactly what we are in discussion about Joe.

Richard Garneau

But again on this one if I may I (inaudible) is that we have an agreement with the government and its disagreement has led us to emerge in bankruptcy and we were suppose to have five years that we were, I think the contribution was 50 million minimum and another 15 of free cash flow up to 50 million. So 65 million assuming that we have the cash flow. So we are working under this understanding that it was the deal where it won charge and when the debt holders approved that plan. So we are still working with this and having discussion with the authorities on this assumption on this understanding.

Unidentified Analyst

And Richard what is from where you said what are you seeing in pulp?

Richard Garneau

Well pulp I think we are cautiously optimistic. So I think that so far that we have seen an improvement in certainly in China, and when you look at the numbers prior 2012 especially in the fourth quarter, I think that Europe and the US has shown some improvement and the demand was compared to the previous year was slightly 1% less or 0.8%. So I think that we estimate before 2013 the economy seems to be reviving certainly in Asia and certainly in the US. So with that I think that we are certainly going to benefit on volume and hopefully on pricing.

Operator

The following question is from Sean Stewart from TD Newcrest Securities. Please go ahead.

Sean Stewart - TD Newcrest Securities

Couple of quick follow ups. Jo-Ann, this quarter in your adjusted EBITDA number of a $104 million, you had a positive contribution from the corporate segment which is all little abnormal. Can you speak to what factored in there?

Jo-Ann Longworth

In the corporate segment?

Sean Stewart - TD Newcrest Securities

Yeah, I think it was $2 million positive this quarter?

Jo-Ann Longworth

That would be more, but that's probably we talked about that. We had recoveries for some receivables that we rolled up in prior periods, okay. Sometimes it doesn't all get reallocated to the other group.

Sean Stewart - TD Newcrest Securities

Just honing in the CapEx projections you gave this year, you talked about 55% to 65% of CapEx which would get you to $140 million, and then obviously you are spending a lot on discretionary high return projects. I mean given everything you have on deck on the sawmill side and I guess a little bit more on the power. Is 225 in the ballpark for the right CapEx number in 2013?

Jo-Ann Longworth

We’ve haven’t really disclosed that yet, we are still working on our capital program for 2013, but certainly we would expect that it is going to be higher than 159 of this year for sure. Given those project we talked about.

Operator

There are no following questions registered at this time. I would like to return the meeting to Mr. Lalonde.

Rémi Lalonde

Great, well thank you everyone for joining us today. Operator, that will be all for us today.

Operator

Thank you. That concludes today's conference call. Please disconnect.

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