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Resolute Forest Products, Inc. (NYSE:RFP)

Q4 2013 Earnings Conference Call

February 06, 2014, 09:00 AM ET

Executives

Rémi Lalonde - Vice President, Investor Relations and Senior Legal Counsel, Securities

Richard Garneau - President and Chief Executive Officer

Jo-Ann Longworth - Senior Vice President and Chief Financial Officer

Analysts

Bill Hoffmann - RBC Capital Markets

Tariq Hamid - JPMorgan

Paul Quinn - RBC Capital Markets

Sean Steuart - T.D. Securities

Operator

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products' fourth quarter 2013 earnings call. I would now like to turn the meeting over to Mr. Rémi Lalonde, Vice President for Investor Relations. Please go ahead, Mr. Lalonde.

Rémi Lalonde

Thanks, Paul. Good morning, everyone, and welcome to Resolute's fourth quarter earnings call. Today, we'll hear from Richard Garneau, President and Chief Executive Officer; and Jo-Ann Longworth, 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 IR section of our website or you can download the slides. We provide additional financial and statistical information, including a reconciliation of non-GAAP financial measures in our press release and in the slides.

As always, certain subjects we will cover today involve forward-looking information. Our statements are based on our current assumptions, beliefs and expectations, all of which involve a number of business risks and uncertainties and accordingly can change as conditions due. Richard?

Richard Garneau

Good morning and thank you for joining us today. We generated $110 million of adjusted EBITDA in the fourth quarter, about 6% more than the third quarter and 13% higher than the same period last year. For all of 2013, adjusted EBITDA was $377 million, down 4%. It was $93 million higher in market pulp and $17 million more in wood products, but it fell by $56 million in newsprint and $56 million in specialty papers.

We lowered our overall manufacturing cost by over $30 million in 2013, with asset optimization and mill restructuring initiatives, and increased external power sales from cogeneration facility, which are now fully operational. That was despite headwinds from higher than expected maitainance cost, higher overall fiber cost and increased fuel cost, mostly natural gas pricing.

In the fourth quarter, we generated adjusted EBITDA of $38 million in newsprint, so it's up $7 million from the third quarter; $31 million in specialty, down $2 million; $29 million in pulp, down $5 million; and $18 million in wood product, up $9 million from the previous quarter.

The total North American demand for newsprint was by down 9% in 2013, with a 10% reduction in demand from newspaper publishers and 6% from other users. Globally, demand was down by 5%. Western Europe was down by 6%, and Latin America was down by 7%, but demand was up 7% in India.

The 11% increase in exports, helped North American producers, ship only 4% less overall than last year, with a 31% increase in shipments to Asia and 2% to Latin America. Accordingly, the shipment-to-capacity ratio in North America remain at 92% for the year compared to the global average of 90%.

Pursuing opportunities for higher margin tons, we grew North American shipment in the fourth quarter, reducing to 41% of the portion of total shipment to export markets, where the market recovery has been sporadic. Nevertheless, our export sales were about 44% of total sales in 2013 compared to 41% in 2012.

After running the network at near-capacity in the fourth quarter, we expect to maintain our newsprint volume into the first quarter, despite seasonal lows. With our scale, financial strength and lower cost operating platform, we are confident in our ability to be a long-term reliable supplier to our customers.

North American demand for uncoated mechanical papers rose by 3% in 2013 with a 14% increase in demand for high-gloss, as customers switched away from coated grades. Demand was down by 3% for standard grade. The industry shipment-to-capacity ratio was 92% for the year 2013.

Coated mechanical demand was down 7% in the year, after being considerably higher through three quarters, imports fell significantly in the fourth quarter, finishing the year down 11% overall. The industry shipment-to-capacity ratios were up four percentage points during the year to 89%.

We expect to see lighter, but seasonally consistent shipment volumes for our specialty papers, with supercalender grades backing up their fourth quarter seasonal high, and coated papers under continued pressure from lower demand and also grade switching.

The chemical pulp market grew by overall 1.5 million tons in 2013, up 3%. Recently, North American demand was up 5%, China 9% up, while Western Europe was down 1%. Softwood mill operated at the strong 94% ratio in 2013 compared to the end of the third quarter, Resolute's finished goods inventory fell by 21% or about five days of supply.

While our average transaction price in the fourth quarter didn't reflect recent industry price announcements, mostly on account of grade mix, we expect that the improving market conditions will be more apparent in the first quarter, particularly in softwood and recycled grades. But the timing of worldwide capacity increases, mostly in hardwood grades, makes the second half of 2014 uncertain.

2013 housing starts were 18% higher in the U.S., which positively affected our realized price, up $37 per 1,000 board feet with shipments also improving by 3% to 1.5 billion board feet. With the U.S. housing start expected to continues to improve, we believe lumber pricing and shipments will certainly hold in near fourth quarter levels. But cost will remain under pressure, because of the comprehensive modification to the province of Québec forest tenure system.

We made significant progress this year, including strengthening our financial position, enhancing the efficiency of our operations and improving our performance on safety and sustainability. We strengthened our financial position in three key ways. The first one, we reached an agreement in principle with company's stakeholders in Québec and Ontario, to replace corrective measures mechanism on the existing funding relief regulations in favor of stable, predictable and balanced pension funding for our Canadian plants, which represent the bulk of the obligation.

Secondly, our balance sheet, net pension and OPEB liabilities were down by $672 million. I want to emphasize that we have not wavered from our commitment to be 100% of retirement benefits. And third, we refinance on a very timely basis all of our outstanding secured debt with $600 million of unsecured notes at 5.878%, reducing our cash interest burden by $16 million annually and adding five more years to maturity.

Since 2012, we optimized our newsprint capacity by idling two machines and restarting the Gatineau mill for a net reduction of about 285,000 metric tons on an annualized basis. In specialty, we idled three machines and restart the Dolbeau mill for a net reduction of about 220,000 metric tons on an annualized basis.

Secondly, we also restructured manning at two more sites this year, eliminating 170 positions, without reducing operating capacity. This alone represents a saving of about $17 million per year. Compared to 2012, our asset optimization and mill restructuring initiative together reduced our cost by $42 million.

We've grown also our pulp capacity by almost 70% with our 2012 acquisition of Fibrek. And by the time Atikokan and Ignace begin production in early 2015, along with other capacity initiatives we are working on, we expect our annualized sawmills capacity to be around 1.9 billion board feet, which represent a 30% increase. Also our new power generation assets are not online. The external sales of power reduce our cost by about $45 million this year.

Finally, we've restructured and significantly improved the performance of the three pulp mills we acquired in 2012. After a difficult start, because of the expensive catch-up maintenance and environmental work required at the Saint-Félicien mill, we have made the three mills more competitive than under the previous management.

It's worth noting that with capital project, environmental upgrades, the dredging of many years of accumulated sludge in the lagoons and costly repairs to the electrostatic precipitator, we've invested about $25 million at the Saint-Félicien alone. We also achieved an OSHA incident rate of 1.02 in 2013. We are striving to have zero injuries, but our 2013 safety performance is considered world-class.

We are closing in ahead of schedule on the goal we set, as a member of the WWF Climate Savers program, to reduce our absolute green gas emissions by 65% by 2015 compared to the 2000 level. We also fell short on our internal commitment to reduce environmental incidents by 10% in 2013 compared to 2012. But we have developed an action plan to address GAAP and improve performance. For 2014, we have set a goal of reducing the number of mill environmental incident by 10% compared to 2013.

Finally, we have taken action to stop certain environmental activists from spreading malicious falsehoods about us, not only to protect our own reputation and that of our employees, but also to protect the reputation of our valued customers and business partners.

This year, we generated 45% of our adjusted EBITDA from market pulp and wood products businesses with a long-term growth potential. This is our strategy in action to retreat profitably from certain paper grades and build on our growing businesses. But our paper segment continues to play an important role.

First, the diversify and complimentary nature of our asset base, after the dual benefits of more stable earnings from multiple products and the fiber management advantage of integration. And secondly, especially with our initiative to maximize asset utilization and improved margins, paper generates significant EBITDA, which we use to finance our growth.

We've made a great deal of progress in these last few years and improved our competitive advantage. Increasingly, we are seeing our newsprint and specialty paper customer proud, whether it's the reliability and their supply chains, an advantage we offer because of our scale, financial strength and lower cost operating platform.

This means that we will likely be able to run our pulp and paper network at nearly full capacity in the first quarter, despite the seasonal low period. And we expect to continue improving our margins through disciplined operation and inventory levels, but using only what our customers order. But the road ahead is not without its challenges.

First, a number of our collective bargaining agreements are up for a renewal this year. As a company, we believe in succeeding together, where every member's contribution is important to reach our collective goals and ensure our long-term success. We are optimistic that we can work with our union partners, who will remain a competitive employer, but also one that maintain its competitive edge.

Secondly, wood cost in Québec will remain under pressure, because of lower overall wood allocation and the comprehensive modification of Québec's forest tenure system.

Of the $26 per 1,000 board feet increase in wood product this year, about two-third is attributable to higher wood cost in that province. This includes the effect of the changes through the tenure system, and we're concerned that we haven't seen its full impact, which could push our cost even higher in 2014.

We have to keep our focus on costs. Our pulp and paper unit operating cost are bound because of asset optimization and mill restructuring initiatives and the effects of external power sales from our new cogeneration facility. This shows in our newsprint margins, which are back about 10%, close to where they were before the significant price drop in 2013.

Now, Jo-Ann will review our financial performance.

Jo-Ann Longworth

Thank you, Richard, and good morning, everyone. Today we reported 2013 net income of $107 million or $1.13 per share, excluding special items. Earnings were up 24% from 2012 on sales of $4.5 billion that were unchanged. Net income in the fourth quarter was $32 million or $0.34 per share, excluding special items, up 13% from the fourth quarter of 2012.

GAAP net loss was $639 million in 2013, reflecting a $604 million non-recurring non-cash income tax charge taken largely in the third quarter to reduce the value of deferred income taxes on our balance sheet. This reduction in no way affects our underlying tax attributes, including $1.8 billion of U.S. net operating loss carry forwards. And it does not hinder our ability to use these NOLs to shield future earnings. We continue to expect that we will not have to pay cash income taxes over the medium term, neither in the U.S. nor in Canada.

Other 2013 special items, net of tax included a $59 million charge related to asset impairment and closure costs; a $38 million net charge related to the refinancing of our now retired senior secured notes in the second quarter; a $26 million non-cash loss on the translation of Canadian dollar net monetary assets and $23 million of mill start-up cost.

GAAP net loss was $3 million in the fourth quarter. Special items included a $24 million charge related to asset impairment and closure costs, mostly from extended market outage at our Fort Frances mill and the write-down of our U.S. recycling assets, a $17 million non-cash loss on the translation of Canadian dollar net monetary assets and a $15 million credit to the non-cash income tax charge taken in the third quarter.

In the fourth quarter, we combined the results from our coated paper assets with a specialty paper segment. This better reflects management's internal analysis given the increasingly high degree of substitution with supercalender grades and the diminishing percentage coated papers represent in our product portfolio.

Total sales in the fourth quarter were $1.2 billion, up 2% from the third quarter. We shipped 5% more market pulp and $3 more specialty papers, mainly supercalender grades. Wood product shipments were down 9% from the unusually high level in the third quarter.

Overall pricing had a $14 million positive impact on sales in the fourth quarter, mainly to a 7% increase in average transaction price for wood products or $26 per 1,000 board feet, which were covered for the third quarter low.

Fourth quarter cost of sales was up $17 million or 2% due to the higher volumes, higher fuel energy costs, mostly of seasonal usage, maintenance costs including lost cogeneration production and write-down of spare parts inventory of $6 million with the extended market downtime at Fort Frances and higher wood cost including the effect of wet weather in the U.S. southeast. These higher costs were partially offset by a favorable power adjustment and the weaker Canadian dollar.

Newsprint delivered cost was $579 per metric ton in the fourth quarter, down $10 or 2% from the previous quarter. We benefited from seasonally lower electricity cost in the U.S. southeast, higher production from power cogeneration assets as well as a favorable power adjustment, despite an increase in fuel energy consumption due to the cold weather at Canadian mills.

The delivered cost of specialty papers rose 1% to $718 per short ton because of seasonally higher fuel energy usage in Québec, the higher wood costs in the U.S. southeast and maintenance related cost, despite a drop in electricity, coating and clays costs.

Market pulp delivered cost rose by 3% to $639 per metric ton, mostly because of higher maintenance related costs including lost cogeneration production, fuel energy consumption at Canadian mill and wood costs at U.S. mills due to the wet weather.

In wood products, delivered costs per unit remained relatively stable at $353 per 1,000 board feet. I will add here, that generally speaking seasonality has a strong influence on costs. And this winter, it looks like it will be a particularly difficult one. We expect to see seasonal cost pressure in the first quarter, not just in terms of energy, but also because of weather-related constraints in our distribution network in both Canada and the U.S., in addition to product production disruption as mills facing unusually harsh weather conditions, such as in the U.S. southeast.

Not including improved operating efficiencies such as labor, our cogeneration asset reduced our cost by $10 million in the fourth quarter, $2 million less than in the previous quarter. The drop is due to loss production because of maintenance outages, including one cogeneration and one pulp mill in the fourth quarter versus only one pulp mill in the third quarter.

Closure costs and related charges were $29 million higher in the fourth quarter to $33 million mostly from the extended market outage at our Fort Frances mill and the write-down of our U.S. recycling asset.

Turning to the balance sheet and cash flow items. Cash and cash equivalents increased by $51 million in the quarter to $322 million. Net cash provided by operating activities was $96 million, $34 million higher than the last quarter and $206 million for the year. Balance sheet working capital decreased by $122 million in the quarter to $675 million, due in part to $41 million reduction in trade accounts receivable with a two day improvement in collections, but also in line with seasonally lower December sales. The collection of $33 million of road-building credits for prior years and a $44 million reduction in the current portion of deferred income tax asset.

Capital expenditures were $37 million in the fourth quarter in line with the previous quarter. At $161 million for the year, we came in slightly above the range of our earlier guidance, because of the timing of certain projects.

For 2014, we expect spending on compliance and maintenance of business to be between 55% and 65% of depreciation and amortization. And we also expect spending on value-creating projects including many carry-forwards carried over from 2013 to be between $75 million and a $125 million. Availability under our ABL credit facility at yearend was $561 million for total liquidity of $883 million.

Pension contributions were $57 million in the quarter against an $11 million expense. For the year, pension contributions were a $155 million compared to an expense of $44 million in line with our previous guidance. For 2014, we expect total pension contribution to be approximately $165 million, while expense is estimated at around $30 million.

With rising interest rates, favorable asset returns, 2013 contribution, favorable currency impact and amendments to other post-retirement benefit or OPEB plans, we eliminated $672 million of net pension and OPEB liabilities from our balance sheet, down by one-third compared to 2012, without wavering from our commitment to pay 100% of retirement benefits.

We anticipate that in the coming months Québec and Ontario will adopt regulations, consistent with the agreement in principle we reached with company's stakeholder in those provinces in 2013. These regulations will replace the corrective measure of mechanism with modest incremental contributions beyond basic funding, providing us with stable, predictable and balanced pension funding requirements.

Accordingly, we accelerated $30 million of contributions to our Canadian plans in the fourth quarter, representing the incremental funding under the regulations had they been adopted in 2013. By the time we filed our actuarial report, we expect that the solvency rate for our material Canadian pension plans will have increased by over 10%.

Rémi Lalonde

Thank you, Jo-Ann, thank you, Richard. Paul, let's open the call for questions please.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Bill Hoffmann from RBC Capital Markets.

Bill Hoffmann - RBC Capital Markets

Richard, I wonder if you could talk a little about your thoughts on the acquisitions in terms of going forward and then trying to grow out further the pulp and the wood products business.

Richard Garneau

Well, obviously, I have mentioned previously that we like these two segment pulp and lumber and we are going to continue to look for opportunities at the right price. So I think that it's where our mind is. And obviously, I think that it's very important that you don't at all repeat for any assets and we're going to continue to be on the lockout.

Bill Hoffmann - RBC Capital Markets

Do you expect that in 2014 to be able to find some assets that are worth acquiring at this point?

Richard Garneau

Well, I don't want to speculate. I would like to, certainly if we can identify opportunities we're going to look at them, but some time things happen unexpected and I feel that unexpected opportunities are going to present themselves in 2014.

Bill Hoffmann - RBC Capital Markets

And then, just looking at the newsprint business and also the coated business, just from a pricing environment, the newsprint business obviously continues to be challenged from a demand standpoint, but the market is reasonably balanced. Do you expect to be able to get prices back up to the prior levels or is that an initiative that makes sense in the newsprint business this year?

Richard Garneau

Well, again, I don't want to speculate on it. When you look at 2013, the demand went down in North America by 9% and world down by 5%. It's always a question of supply and demand. Presumably, the market seems to be balanced, but the operating rates at 91%, 92%, normally means that pricing is going to remain stable.

So obviously, if you want to see the holding rates above that level, well, it would probably means an opportunity to look at it. But I think as we speak and as we monitor the market, and I know that there is some conversion that is taking place. But I think that it's suddenly just balancing the supply and demand. And again, we monitor very closely the operating rates, and that's still at a level where that just allows the environment to remain stable, the pricing environment to remain stable.

Bill Hoffmann - RBC Capital Markets

And then just last question. With regards to your specialty system, any thoughts on additional capacity closers to keep those market tight as well?

Richard Garneau

Well, I think that we have done a lot in the last three years. So if you look at the machines that we closed and that we remove capacity. So I think that now we're at that point where the mills with their machines are running well and we have optimized the mill manning and adjusted our power consumption. And basically we're able to take advantage of Fibrek that now travel in the shorter distance, so I think that our network is well balanced. We have mills that are all cost competitive and I don't see any closure in 2014.

Operator

The next question is from Tariq Hamid from JPMorgan.

Tariq Hamid - JPMorgan

Could you talk a little bit about some of the substitution that you've been seeing between some of the coated grades and some of the uncoated grades in your specialty papers? Have you seen that accelerate in the last quarter or is that sort of just a continuation of ongoing trend?

Richard Garneau

Well, it's really difficult to -- I think that the switching that we saw was restored. And as volume availability on SCA I think that in my view and it's only my view, I think the most of the switching from coated to SCA has taken place. So I think that 2014, we should not see the wide swing that we saw last year. But again, it's a question of demand and how much demand is going to come down, but I think that we should see more stability, and I insist on this should.

Tariq Hamid - JPMorgan

And then just on the M&A front, acknowledging that kind of wood products and pulp are certainly, what seem to be longer-term more attractive, there is obviously a large acquisition or merger going on in coated paper as we speak and there are potential divestures from that? Would you guys look at potential divestures of a coated paper mill in the U.S. or would you sort of tend to shy away from that?

Richard Garneau

Well, I think that it's difficult to comment on that. So it would be speculation on my part. I believe that that initially we're just going to monitor the situation, and I guess that it's probably fair to say that we'll advise depending on how the situation will evolve in 2014, and I mean overall.

Tariq Hamid - JPMorgan

And then just finally from me. You made some comments about the winter weather, and obviously it's been pretty horrendous this year. As you think about the cost impact that in the first quarter, is there any way you can help us kind of frame it? Is it sort of double the normal impact across the business seasonally or something less than that or something more than that?

Richard Garneau

Well, I think that what we had, what they call is vortex, artic vortex, has well never been seen at least. Our management in our U.S. south mill, they didn't see the weather as cold as that. So we had to basically take the production down. We had a [indiscernible] that was frozen, controls equipment breakdown and obviously it's going to have a significant impact. We also had mills that we were curtailed on gas, and also power were at very high level.

So I cannot give you at this point, the impact, but it is going to be material. And I think that we're not the only one in this situation and our mills, especially the one in the U.S. southeast, all of that. Well, unlike the Gatineau mill, they are not well in winter. Québec is the same way for winter.

But even in Canada, we also had some very significant challenge in Ontario and Thunder Bay, we had unusual cold and the same thing also in Québec, where we had to take a machine down, because we didn't have the trucks or the real-time availability. So obviously, it's first time that I see it in 40 years. So I hope that we're over with it, because it's quite difficult to manage. But I think that we're going certainly to have the opportunity at the end of the first quarter to talk about it, but it is not insignificant.

Operator

The next question is from Paul Quinn from RBC Capital Markets.

Paul Quinn - RBC Capital Markets

Just a couple of questions. One, just looking at this pension funding like to guidance of $165 million in '14, under your agreements is that kept at that level for a number of years going forward?

Jo-Ann Longworth

It will kept at that level going forward. It's basically like we said we had the $50 million of basic contribution originally and now we're adding that $30 million, which we paid already for 2013. So we'll have the same payment again in 2014 and in years going forward. And later years, our potential adjustments, again if we are not on target, but so far so good.

Paul Quinn - RBC Capital Markets

And then, just over I guess on the pulp side. You mentioned a flat price season, despite higher list prices in favorable currency. I'm just trying to reconcile that. And you mentioned mix, but I am not really seeing the mix. Maybe you could just give us a little bit more detail on that and why it's flat?

Richard Garneau

Well, Jo-Ann is going to add a look at the mix impact that I mention.

Jo-Ann Longworth

Some of it was just in terms of hardwood versus softwood pulp and as well we had some more spot pricing in some of our U.S. mill. So that's why you didn't see necessarily the price increase you thought that you would see.

Paul Quinn - RBC Capital Markets

And just if you could give us an idea of 2014 maintenance schedule on the pulp side?

Richard Garneau

Well, I think that it's going to be the Catawba. We have Catawba, we're going to have also Saint-Félicien, some of the older mills are going to have that. But I don't have in terms of the schedule, but as you know we changed the way that we account for, so it's going basically when we do the all maintenance outage, so it's spread on the balance of the remaining period until the next one. So it's not going to have the same really swing that we use to have in the past, what the either change that was implemented I think two quarters ago.

Paul Quinn - RBC Capital Markets

So it will be pretty consistent throughout the year on a seasonal basis?

Richard Garneau

Yes.

Paul Quinn - RBC Capital Markets

And then, just on the newsprint side, it seems like you've done a great job on the cost side. But we still got demand falling a good 9%. You're guiding for maintaining volume in Q1 and we've got this weaker Canadian dollar which sort of helps I guess your Canadian competitors. Where do you see that future direction of demand and pricing in this environment?

Richard Garneau

Well, as I said, I think that when we look at supply and demand and the operating rate for time being is flat. I don't see any change of direction. Obviously, the exchange rate is for the Canadian mills that's certainly a benefit. So we all know it about that, what's the decline in demand. So I think that what's going to happen on this side, I don't know.

There is also, as you know, some machines that are now being converted to lightweight paperboard, one in the Southeast and one in the Pacific Northwest. So obviously it helps on the supply and demand side. And there is also from what we hear, from the analyst, a lot of potential conversion that could also be added.

So I think that it's the reason why we see that newsprint for 2014. And we're certainly optimistic that we are going to find a balance here of it. And obviously, with stable price assuming that the supply and demand balance does not change, it is very important that we continue to focus on our cost, what we have done in the last three years.

But as you probably imagine, at the end it's becoming more difficult to find opportunities to bring out balance on, especially with our capacity in Québec and the major significant modification made to the tenure set, and I think that our wood cost is certainly going to be under pressure. So it may effect as well as the other producer in the province, the wood cost going forward. But again, it's in balance for now and we are going to monitor the situation.

We still believe that the export market is still a very good opportunity, so a market of 25 million tons and it's profitable. It's certainly a segment that is going to help us to grow on the sawmill side. The investment in Ignace and Atikokan are also the project that we had to increase the capacity at Thunder Bay and a project that we had that is now completed to increase the capacity at our Gatineau mills in the northwestern Québec.

Paul Quinn - RBC Capital Markets

Last question, just on the potential conversion, and it's something that your company tried in the past to grow the containerboard route. Since that time we've seen containerboard prices move up over a $100 a ton. Is that something that you guys are still considering at some of your operations?

Richard Garneau

No.

Operator

Next question is from Sean Steuart from TD Securities.

Sean Steuart - T.D. Securities

Few questions. With respect to your specialty paper segment, I'm wondering if you can maybe just break down some of the price trends across the grade spectrum there on the uncoated ground wood side. And I guess specifically, what I'm wondering is, if you guys proposed follow-on price hikes for some of the I guess the high-break grades that would compete against the uncoated free-sheet market for March?

Richard Garneau

Well, certainly one grade that is going to benefit from the uncoated free-sheet price increase is of high grades made at the Alma and also Calhoun. I think that there will be certainly an opportunity or potential here to see improvement on this side. We haven't decided that what to do at this point.

So I think that we want to have a better idea on R&D, and demand is going to shake up with a very cold weather that we have. So I think that it's not only us that's having difficulties with all of that, but I think that there also -- it's slower on the business side, but we expect that it's going to improve when the weather have improved normally in February, it's the indication that we have a peer that's better. So I think that demand should also go in the same direction.

Sean Steuart - T.D. Securities

When you think about growth initiatives, whether its pulp, lumber or both, can you just speak again and maybe Jo-Ann you can add some context to it. How comfortable are you taking your leverage up? What sort of I guess base liquidity position you guys are comfortable with? And I guess, I'm getting out is, where do you see your capital structure gravitating to over time as you grow through acquisition?

Richard Garneau

Well, I think that it has to remain manageable. Certainly, I don't like too much debt. We've seen the damage of excessive leverage. So I think that that we have to keep that in mind. I think that you can have profitable growth, but you have to consider the long-term implication.

Now, if I were to know that the interest rate environment is going to be that low for 25 years, I think that would be probably a niche that hasn't delayed, but we know then -- I think that you have to be prudent, you have to manage the growth in a way that you can basically digest it. And ensure longer-term that you're going to increase shareholders value, and it's really what we have in mind, when we look at potential growth.

And I think that what we have done, the organic growth and the acquisition of Fibrek, I think that just show that. And the intention is going to continue to look at it the same way. But it always depend of the opportunities that we are going to have and I cannot speak on that because we just don't know.

Paul Quinn - RBC Capital Markets

But no target leverage ratios or liquidity level that you guys were focused on?

Richard Garneau

No.

Paul Quinn - RBC Capital Markets

And last question, wondering if you can give some context on what's happening in pricing for the recycle pulp grades, you guys acquired through Fibrek. Is it moving in lockstep with hardwood, any differentiation there?

Richard Garneau

Obviously, the price has been relatively stable and demand has been also steady on this grade. Obviously, that these two mills produce an excellent quality, and as we mentioned in previous calls that we have brought the productions down to about 425 tons, 450 tons per day.

And I think that basically we're focused on profitability, on margins. We really have the opportunity certainly with the -- and this is a question of supply and demand, I don't have in front of me the exact pricing, but still we haven't seen really the large variability that we saw in the past.

So the strategy that we have applied, we're pretty pleased with the results. And I think that we're confident that 2014, the environment is going to remain the same. There is obviously on tissue, we have many customers on tissues and away-from-home products are made mostly from recycled pulp that brings the stability into the market.

And when I look at price now, I was looking for notes, and I think that price has been quite stable. It went down a bit in the last couple of months, but not major difference. It's $5 or $6 per ton. In the second and third quarter we had $7 decline, and third and fourth another $5, so pretty stable in terms of a pricing environment.

Operator

The next question is from Bill Hoffmann from RBC Capital Markets.

Bill Hoffmann - RBC Capital Markets

Just one more question on the forest tenure system, did the cost increases? I wonder if you could just talk a little bit more about that whether there is any flexibility in that and whether you can also have any thoughts on how much the costs will go up? And also if you can comment on that within the context of your additional capacity you have coming on in 2015?

Richard Garneau

Most of the additional capacity is in Ontario, it's Northern Québec, and we have the small capacity increase at the Catawba, as I mentioned. I think that they're ready, that the newer system is being implemented. What we're seeing is certainly a significant increase on the operating costs, road maintenance, because now you cannot plan in advance on where you're going to get your woods and the timing of when the wood is offered for auction. Now, you have to plan for road construction, and a lot that became available in October, you know, October it's not really the right time to build road when it rains, and some places also going off.

So all of those factors, that's very difficult basically to predict, to forecast. But I think that we could see another increase of 5% or even more. And this year in 2014, we're going to have really a very good idea of what the future of this going to be with this newly implemented tenure system, but it has not been easy to deal with and we don't have the full knowledge yet of all the implication that it's going to have. So certainly it's an area of concern, but when there is difficulties, there're also opportunities and we are going to look at these opportunities.

Operator

There are now further questions registered at this time. I would now like to turn the meeting back to Mr. Lalonde.

Rémi Lalonde

Great, well, let's leave it at that. And thank you, everybody, for joining us today.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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