Resolute Forest Products' (RFP) Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Resolute Forest (RFP)

Resolute Forest Products, Inc. (NYSE:RFP)

Q2 2014 Earnings Conference Call

August 01, 2014 09:00 AM ET

Executives

Remi Lalonde - VP of IR

Richard Garneau - President and CEO

Jo-Ann Longworth - SVP and CFO

Analyst

Sean Steuart - TD Securities

Stephen Atkinson - Dundee Capital

Paul Quinn - RBC Capital Markets

Operator

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Second Quarter 2014 Earnings Call.

I would now like to turn the meeting over to Mr. Remi Lalonde, Vice President for Investor Relations. Please go ahead, Mr. Lalonde.

Remi Lalonde

Thank you. Good morning, everyone. Welcome to Resolute's second 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 Investor Relations section of our Web site 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 do. Richard?

Richard Garneau

Good morning, everyone, and thank you for joining us this morning. We had a good quarter; all of our segments did a good much stronger performance, as costs and margins normalized after the weather-affected first quarter. We generated $108 million of adjusted EBITDA, $60 million more than the previous quarter and $18 million more than in the same period last year.

In Newsprint, we generated $35 million of adjusted EBITDA up by of $32 million from the first quarter. $19 million in specialty papers, up by $21 million; $27 million in market pulp, and it’s up by $16 million; and $23 million in wood products, up by $3 million. These result closed the door on the disappointing outcome of the first quarter when the winter’s extreme cold caused a material increase in energy cost, production disruptions, equipment failures and also distribution constraints. They also showed a resilience of our business.

Thanks, in part, to our capacity initiatives, lumber shipment were very strong compared to recent history, although we continued to experience carrier equipment shortage. Despite the secular demand trends, we increased paper shipments and preserved margin as a result of on-going initiatives to a lower cost and optimize our asset base. Our average transaction price in the market pulp rose by 4% this quarter but letting in part a disciplined approach to mark up in the face of slowing North American demand and our unit cost not only normalized but that were lower, in line with the consistent downward trend of the last few years.

Although our specialty paper segment continue to deal with the challenges of lower industry operating rates particularly in coded mechanical grates, our newsprint hope and lumber margins our higher than their 2013 average. This is Resolute's business model, our competitive advantage rest on our cost-focus strategy and diversified asset base which together provide us the tool to maximize earnings power in this challenging industry. Let's review the market condition and segment performance.

Total North American newsprint demand was 7% lower through June, though demand from newspaper publisher was down by 9% we continue to see demand growth from other users, and the demand was up 3%. Global, demand was down also by 7% through May, including a 9% decline in Latin America and 8% in Asia, led by a significant drop in China. Western Europe was down 3%. Shipments rose by 32,000 metric tons this quarter compared to the last, almost all in North America. Accordingly, we grew our domestic shipments to 60% of total newsprint sales compared to 58% in the previous quarter and 56% in all of 2013.

With our scale, financial strength and lower cost operating platform, we’ve positioned ourselves as long-term reliable suppliers for our customers and the segment has responded well especially in the domestic market. But we’re not expecting much improvement in the export market for the remainder of the year based on slowing international demand.

The industries North American shipment-to-capacity ratio was 92% for the first six months of the year, unchanged from the year ago period. Recent industry conversion in the shipments suggests balanced conditions for the remainder of the year. Through the six months, Western Europe capacity was at about 91%. Our average transaction price has been essentially unchanged compared to the first quarter, but so far this year this is about $24 a ton lower than the average in the same period in 2013. Despite that, thanks in part to the weaker Canadian dollars our cost focused strategy we made a $57 of EBITDA potential in the quarter.

North American demand for our uncoated mechanical papers was unchanged through the first six months of the year. Demand for our supercalender grades which represented 25% of our specialty shipments increased by 3% and there was no change in demand for standard grades. Within standard grades however we saw 20% dropping demand for our lightweight grades in which we have only a small presence and a 5% increase in demand for super bright and high bright grades which represent about one third of our specialty shipments.

The industry shipment capacity ratio was 91%, down 1% from the first half of 2013. Demand for coated mechanical papers was down by 7% through June and the industry shipment to capacity ratio was at 88% unchanged from the first quarter but down by 4% from the same period last year. Average transaction price for the segment was unchanged in the quarter. Our white paper price rose by about $12 per short ton but its effect was offset by weakness in coated and supercalender grades. Shipment rose by 8% during the quarter led by stronger shipments of white papers but also including improvements in coated and supercalender grades.

We expect to see a seasonal improvement in shipment volumes next quarter but the pricing is more uncertain given the pressure of lower industry operating rates and coated papers and supercalender grade. Global demand for market pulp grew by 1% through June requesting strong demand from China especially in the second quarter despite 2% drop in each of Western Europe and North America. Global demand for softwood pulp was flat but up by 2% for hardwood grades. In North America, however, demand for softwood pulp was down by 6% compared to a 3% increase in hardwood demand.

We saw a stronger realized pricing in the quarter up by an average of $29 per metric ton with improvements in all the grades but most of all in fluff. Our shipment, however, did not improve to expectations following the effects of weather related production disruption and distribution constraint in the first quarter in part because we consumed the equivalent of an additional 15,000 metric tons of hardwood internally. Inventory levels also pushed up slightly as a result of our disciplined approach to markets in the face of slowing demand in North America particularly for softwood and recycle grades. And a conservative position in the first half of the year as labour negotiation contingency.

We will work this inventory down in the coming quarters but we will do so in a disciplined manner. As some major hardwood pulp capacity increases are coming on line the balance of the year remain somewhat uncertain for pulp. We are also concerned about the impact on our customers of continued activist intimidation and their inaccurate description of Resolute.

U.S. housing start have improved so far this year but slowly. They average about 980,000 starts on a seasonally adjusted basis in the second quarter or 13% better than the same quarter last year. The index price for stud lumber grade was higher in the quarter but lower for random length grades. Accordingly our realized price was marginally up by $300 per 1000 board feet. Despite continued distribution constraints for lack of carrier equipment availability, a problem carried over from the first quarter shipment reached 420 million board feet, up 19%.

This reflects our efforts to reduce inventory accumulated in the first quarter due to the softer demand from the abnormally cold weather. With inventory closer to normal levels we expect shipments to normalize to a lower this quarter despite the on-going slow recovery in the U.S. housing starts price of eastern grades are holding up through July.

We’ve seen recently a growing outbreak of spruce budworm in Quebec arboreal forests, with visible devaluation expanding from 2.2 million hectors in September of 2012 and now -- September of 2013 the last day that we have (that and) [ph] are now up to 3.2 million hectors. The potential government has responded by retroacting some harvesting activities to affected areas which could result in an oversupply of certain species in the near term.

It is too early to quantify the long-term effects. But it could potentially limit fiber availability and harvestable areas in the next several years. I'd like to take a moment to highlight some important developments in the quarter. After the overwhelming approval of our U.S. labor agreement in February, we’re happy to have received the strong support of our Canadian unionized employees for the renewal of labor agreements at 11 Canadian facilities.

I want to thank the unionized employees and their union leaders for working with us toward the shared goals of Resolute’s long-term success and to help preserve our position as a financially strong and reliable suppliers for our customers.

We announced a research and development biomaterial joint venture with Mercer International, with the goal of developing commercial application for cellulose filaments, a new source of sustainable biomaterial made from wood fiber. These filaments can be used to improve the strength and durability of many commercial and consumer products.

This initiative highlights the efforts we are making as an industry to drive innovation for the future. We are also pleased to have been named to the 2014 Best 50 Best Corporate Citizens List by Corporate Knights, a globally recognized organization for the transparent and objective approach to measuring corporate sustainability performance. This recognition speaks to our ongoing effort to be a sustainable supplier of choice for our customers, and a strong civic partner out in the communities where we live and work.

Finally we continue to progress on our wood product capacity enhancement. We expect the Thunder Bay pellet plant to come online early in the fourth quarter, located at the Thunder Bay saw mills; it will convert to residual material into a reliable source of renewable energy. Our 10 year agreement to supply Ontario Power generation with 45,000 metric tons of pellets annually will help contribute to the province’s goals to reduce its use of fossil fuel to generate electricity.

The Atikokan and Ignace saw mills in northwestern Ontario are progressing according to schedule, and are expected to start production in early 2015. When they’re up and running, they will boost our total operational capacity by about 265 million board feet, with margins like we have had in last 18 months. This represents potential additional EBITDA of at least 15 million annually.

Let me finish by noting that we generated 50% of our adjusted EBITDA from our wood products and market pulp businesses in the last 12 months, businesses with long-term growth potential. This fits with our strategy to retrieve profitability from certain paper grades and build on our growth businesses, but it’s worth repeating that our paper segments continue to play an important role.

First, the diversified and complementary nature of our asset base offers the dual benefit of more stable earnings from multiple products and the fiber management advantage of integration, and second, especially with our initiatives to optimize asset utilization and improve margins, paper generates significant EBITDA, which can be used to finance our growth.

Jo-Ann will now review our financial performance.

Jo-Ann Longworth

Thank you, Richard, and good morning everyone. Today we reported a net income of $ 19 million for the second quarter, or $0.20 per share, excluding special items. GAAP net loss was $2 million. The special items include on a pre-tax basis $52 million of accelerated depreciation and other closure related cost and $ 17 million non-cash gain on the translation of Canadian dollar net monitory assets.

Total sales were up 1.1 billion, up by 7% from the first quarter. In the first quarter of this year we were adversely affected by weather related production disruptions and distribution constraints, as well as operational issues and seasonality. This quarter our shipments increased by 6% in newsprint, 8% in specialty papers, and 19% in wood products.

Shipments of market pulp were unchanged and did not meet our higher expectations. This is the result of more internal consumption of hardwood craft and a more conservative approach to markets in the face of slowing demand in North America; particularly for softwood and recycle grades.

Overall, pricing had an $8 million favorable impact on sales, with an increase of 4% in market pulp. Pricing was essentially unchanged in newsprint, specialty papers and wood products.

Second quarter cost of sales was down by $9 million or 1%, excluding the unfavorable effect of higher shipment volumes, 36 million and the stronger Canadian dollar 5 million our cost of sales fell by 50 million in the quarter. If you remember the first quarter included 40 million of cost associated with the abnormally cold winter and 7 million of additional cost related to operational difficulties.

Distribution cost increased by 14 million mostly because of the higher shipment volumes as well as increased transport and warehousing cost some of which were carried over from the first quarter but also because of the higher inventory level. Selling, general and administrative costs increased by 5 million, mainly as a result of expense timing. Our cogeneration assets which we used to sell power to the market improved our EBITDA in the quarter by $14 million.

Newsprint delivered cost out to $568 per metric ton down $55 or 9% from the previous quarter. Excluding the $40 per metric ton effect of the severe cold in the first quarter costs were $15 per metric ton lower or 2% mostly because of lower maintenance and repair costs. The delivered cost in specialty paper fail by $51 per short ton or 7% operating cost dropped by $18 per ton after removing the first quarter weather effects. This was partly as a result of our first quarter restart of the idle paper machine number five at Calhoun to produce mechanical grades in place of the Fort Frances mill which we closed earlier this year.

Market pulp delivered cost failed by $22 per metric ton or 3%. They actually rose by 1% after excluding a $27 per ton effect of the cold winter, as a result of higher freight and warehousing cost. Delivered cost in our wood product segment also rose 1% to $350 per 1000 board feet. The first quarter included a one-time reversal of certain export duties. Closure cost and related charges were $52 million, up from $10 million in the previous quarter. The second quarter included mostly accelerated depreciation related to the permanent closure of an idled coated machine at our Catawba mill.

Cash and cash equivalents increased by $23 million to 263 million. Balance sheet working capital was 695 million as of the end of the quarter, down 10 million, which reflects the significant seasonal decrease in log inventories offset by an increase in finished goods inventory.

Net cash provided by operating activities in the quarter was $63 million compared to net cash used of 41 million in the first quarter which reflect primarily the significant improvement to EBITDA and the seasonal build-up of log inventories in the first quarter which was more than reversed in the second.

Capital expenditures were 46 million, $10 million more than the first quarter as a result of project timing including a pickup related to our Atikokan and Ignace saw mill as well as the Calhoun continuous digester project. For all of 2014, we expect to spend approximately 230 million of CapEx on the lower side of our previous guidance including approximately 160 million on value creating projects such as the Ontario saw mills and the Calhoun project.

Availability under our ABL credit facility at the end of the second quarter was 567 million for total liquidity of 830 million. Pension contributions were 41 million in the quarter against the $6 million expense consistent with the first quarter. For 2014 we continue to expect total pension contributions to be approximately 160 million of which an expense estimated at 25 million will be included in our operating income. This year we modified our U.S. other post retirements benefits plans to encourage greater participation in a Medicare exchange program available under the U.S. Affordable Care Act.

In addition to securing high quality healthcare for participants, this modification, along with similar initiatives undertaken since mid-2013 help to reduce our U.S. OPEB liability on the balance sheet from 250 million as of March 2013 to 83 million as of June 30, 2014, the annual expense has also dropped by $16 million.

Remi Lalonde

Great. Thanks Jo-Ann. Kenny, let’s open the call for questions please. Operator could we open the call for questions please.

Question-And-Answer Session

Operator

(Operator Instructions) The first question is from Sean Steuart from TD Securities; please go ahead.

Sean Steuart - TD Securities

A few questions. Richard, I'm wondering if you can go into more detail on specialty paper pricing. You touched on, I guess, some recent weakness for coated and supercalendared prices. Wondering if you can give us some context on what you're seeing for the super-brites and high-brites? I would imagine you saw some positive momentum in tandem with better free sheet pricing. Has that abated, and are you seeing any weakness for those grades?

Richard Garneau

No. I think that it’s only high-brite and super-brite. We had a pretty second quarter and we are certainly optimistic for the balance of the year. I think that as you pointed out, the improvement in pricing into uncoated free sheet is certainly helping these grades and I think that the pressure is more on the quarter and mechanical and I think that when you look at the data of coated mechanical, the demand year-to-date is down 7.4% and the shipment to capacity is only 88%. So obviously we don’t see it improving for the next quarter, and probably not in the fourth quarter. And I think that we're certainly expecting to see more pricing pressure. Obviously, on supercalendared there is also some pressure in this segment too. I think that there was some indication that some of the commercial printers are moving back from some newsprint to SC, so I think that we’re expecting certainly seasonally a better quarter in the third and also in fourth.

And obviously our newsprint, the last one, you didn't ask the question, but the machines -- the newsprint machines are going to be closed and modified to produce other grades is going to keep a reasonable balance, and certainly when you look at capacity, shipment-to-capacity, it is 92% year-to-date. So with these, basically machines, it’s moving away from the newsprint even though we have demand. That’s well, year-to-date our newsprint’s, it’s lower than last year. Last year if you remember it was 9.4%, this year it is 6.6%. So I think that certainly the shipment-to-capacity should be maintained to the 91% to 92% range and obviously it should keep the pricing is about the same level. So we were flat in the second quarter compared to the first quarter and expect that it’s going to remain the same in the third quarter.

Sean Steuart - TD Securities

Okay. And then, curious on the M&A environment for pulp and/or lumber assets. I know you're not going to tell us exactly what you might be looking at, but I guess I'm curious on what the opportunity set looks like now? Are you guys actively pursuing growth initiatives? Or do you just take it on an opportunistic basis as opportunities come along?

Richard Garneau

I would describe that certainly we're very attentive on the opportunities that could present themselves. We’re looking certainly trying to keep on top of what could become available, so I think that hasn’t changed. We just want to make sure that if you do make an acquisition that it's going to be at the right price that we're going to have the synergies and potential for cost reductions, so that has not changed. And on the sawmill side again there are certainly opportunities that we haven’t seen any for the time being that would make sense. So we’re focused on building our capacity, the two sawmills in North Western Ontario that are going to start up in the first quarter of next year. But as well be made an investment in our sawmills in Québec to increase our productivity where we started the Maniwaki sawmill.

And I think that we have also have identified some other project that on the stated wood in our sawmills to improve our recovery. And we have this big project at Calhoun on replacing the eight batch digesters by one continuous digester that is going to bring our cost down and also leave with more capacity now with the restarting machine in place on high-brite and super high-brite so we are using more of the full capacity so this project is going to make more pulp available and I think that the advantage of Calhoun is I think as mentioned that previously that’s the wood supply is very good and there is a good infrastructure. So we’re looking forward for the completion of this project and as we speak we are a bit ahead of schedule so it’s good news for a project of that magnitude that’s although knowing that we’re going to spend on it but it’s really going well on the execution of this project.

Operator

Thank you. The next question is from Stephen Atkinson from Dundee Capital. Please go ahead.

Stephen Atkinson - Dundee Capital

Thanks very much. Good morning. Congratulations on a really good quarter. Starting off, in terms of the spruce budworm, can you give me some colour on it? Are you able to use the timber? Where is it located, response from the government?

Richard Garneau

So it will be insufficient obviously when you look at the number of efforts has grown quiet significantly between 2012 and ’13. What is and I wanted really to flag this information that this budworm is affecting basically mostly the balsam fir and also the white spruce. And if you look in Lac St-Jean or [indiscernible] the two area now that are the most affected, what is also worth noting is that the black spruce is affected by the budworm but contrary to white spruce and balsam does not die I think that it’s and I just want to give you some colours in Lac St-Jean the black spruce percentage is about 80% and there is about 10% of the wood that is going to be affected so that is balsam that is normally balsam die quite quickly and it’s what the government have decided to do is to harvest these factors as quickly as possible.

On the north shore Quebec, north shore the balsam there is some higher proportion, it’s about 25% of the wood profile so I think that again seems that in the next two, three, four years depending of the expansion of this [indiscernible] so the focus will be on balsam fir and that’s not a fiber that is as strong as black spruce when you produce mechanical grade. So I think that we’ll have to figure out a way to keep the right balance between black spruce and balsam that is the species that we’re going to focus on.

But the government is working on it, it’s going to have an impact we don’t yet the extent of it but I think that it’s for the time being it’s manageable so we’re going to keep you informed on how it’s going to this anticipation is going to basically spread.

Stephen Atkinson - Dundee Capital

I see. Are you able to make lumber or use it for lumber, as well, meaning the infected, like the white spruce?

Richard Garneau

Well, you can make lumber presently before it gets too dry one the deferral balance on the stock to they led to die it’s elude so you can make a lumber but you lose on the recovery because you have more operating than you have more going forward. So it’s going to certainly do have an impact on at least the saw mill. So the one saw mills that we have on the north shore I don’t think that it’s going to be that significant in Lac St-Jean where we have most of our capacity.

Stephen Atkinson - Dundee Capital

Okay. The other thing is that my understanding is that Greenpeace took pictures of storm-damaged wood and basically attributed it to Resolute. Can you give me some colour as to that situation?

Richard Garneau

Well, you asking me know some details of how we’ve dealt with I think I -- well certainly we’re concerned about that as I said the impact on our customers of this continued intimidation and the [indiscernible] disruption of Resolute so I think that these allegation certainly with the sustainability record that we have and the force with practice that the log in place and Quebec and Ontario and I like to remind everyone on the call that Yale University did the study worldwide, on the forest practices and their conclusion is that the practices in Canada are among the most stringent in the world so and then Quebec and Ontario did get very good mark on that. There is another group also from Finland and so they did the same study and came with the same conclusion.

So I think that the people just forget how strict the provincial governments and Ministry of Natural Resources or how much control that they have on the operation, on the prices and I think that with the harvesting techniques that we have now that they help. And I think that we have pictures in our presentation that shows that what we do help regeneration. We're surprised and disappointed by this attack, but I think that we will continue to defend ourselves and we certainly appreciate the support of the communities and the First Nation and all their stakeholders that basically make a living of working in the arboreal forest. They know what it is. And I think that hopefully the -- free speech doesn’t mean that you can slander and defame. So you have to -- it has to be based on facts and the interference with economic relations is not free speech. And it’s the reason why we feel so strongly about defending our reputation, but not only our reputation, it’s also the reputation of the industry and is the reputation of the government in Québec and Ontario, whereby we always would. They have very-very stringent control, and again that we have basically all the harvest in Québec is, we have to meet the ISO14005. So it's another layer of control that we have -- that the government has put in place and so we feel really-really, and I feel very strongly that we have everything in place to make sure that we practice sustainable forestry.

Stephen Atkinson - Dundee Capital

So that -- is there a support from the government or from the provincial governments on this?

Richard Garneau

Yes, well certainly. The Québec and Ontario provincial government now have decided to defend basically their practices. They are going to be present at industry meetings and so I think that you’re certainly going to see more of Québec and Ontario in the next few months defending their records because what the activists are doing, they are attacking the practices or they are attacking basically the provincial government; because we were dedicated where to harvest, and we’re dictated how to harvest it, so we are dictated how to use it. So I think that the strategy to basically target Resolute is certainly they have the wrong target. And we feel really strongly about what we do.

Stephen Atkinson - Dundee Capital

So, on Calhoun, when do you expect the continuous digester to start up?

Richard Garneau

I think it was planned to start up in the second quarter of next year. But I think that we should be able probably to start it up by the end of the first quarter of next year. So we may be ahead by a quarter of two on the project.

Stephen Atkinson - Dundee Capital

Great. And I assume there's a significant energy savings?

Richard Garneau

Well, energy saving, but most of all it’s going to be chemical. We’re going to use less chemical energy. Maintenance, there is eight batch digesters now, that we are using. And we are using it by only one is going to make a significant difference and the other one, the other benefit is the increase in production, in capacity. Now we’re limited. With the restart of machine number five on high-brite and super-high-brite, we don't have enough slush pulp to supply the dryer or the pulp machines. So with the improvement into the pulp mill, we’ll be able to use all the capacity and we’re going to have some excess. So we haven’t determined yet what we’re going to do with that. But I think that certainly, there is opportunity here when this project comes online, that we will have to identify to take the full benefit of that.

Stephen Atkinson - Dundee Capital

So, are you buying any market pulp now to run the machine, or is it just you're limited by the amount of slush pulp you have?

Richard Garneau

Yes, we’re just limited. So it’s the reason, it's one of the reasons why our shipments of pulp in the second quarter compared to the last year, is one of the reason why we are down; because we used about 15,000 internally, but we don’t buy. It’s all slush going to the machine number five.

Stephen Atkinson - Dundee Capital

So, are you able to tell me what the increase in pulp supply would be?

Richard Garneau

It’s about 90,000 tons; that it’s going to provide. So, it's not insignificant.

Stephen Atkinson - Dundee Capital

Yes, it is significant.

Richard Garneau

Yes, it’s not insignificant, and you can imagine the impact on fixed cost.

Stephen Atkinson - Dundee Capital

On the pension, are you able to give me a guideline for next year, or should I use $160 million?

Jo-Ann Longworth

Hi Stephen, it is Jo-Ann. We haven’t finalized the numbers. Obviously we have to do our actuarial evaluations et cetera. But we don’t see the contributions changing significantly from this year at this point.

Stephen Atkinson - Dundee Capital

Okay. And finally, can you tell me about your deferred taxes? Like, what is your situation for the U.S. and Canada in terms of NOLs and so on, your NOL position?

Jo-Ann Longworth

Well, in the U.S. it’s mainly NOLs our deferred tax assets and as you know last year we took a full valuation against those assets for balance sheet purposes because of an accounting requirement those NOLs are still available for use even though we don’t have them on our balance sheet. So they are still available for use against earnings of future years. In Canada it’s a bit different because as you know in Canada you can chose to take or not take tax depreciation so a lot of the asset is more on the fixed asset side although they’re also NOLs carried forward in that case largely because of the improvements in wood obviously over the last couple of years as well as the Canadian dollar we’re more profitable in Canada so on for accounting purposes we are able to recognize all those deferred tax assets.

Stephen Atkinson - Dundee Capital

So, is it 1.8 billion U.S., is that the right number in U.S.?

Jo-Ann Longworth

1.8? No, the U.S. is about -- assets is about 600 million, 700 million. I guess we’ve taken a full valuation allowance.

Stephen Atkinson - Dundee Capital

Okay, and in terms of Canada?

Jo-Ann Longworth

With all the balance sheet now it’s almost all Canada that’s 1.3 billion.

Stephen Atkinson - Dundee Capital

Okay, great. Thanks so much.

Operator

Thank you. (Operator Instructions) The next question is from Paul Quinn from RBC Capital Markets. Please go ahead.

Paul Quinn - RBC Capital Markets

Yes, thanks very much and good morning. Just -- nice bounce-back after Q1. Just a question on newsprint. Maybe you could give us some details on export markets and performance of your Mokpo mill?

Richard Garneau

Well, the Mokpo mill we have in the -- an improvement on the paper machine so we had some cutting issues and by the end of the year we’re going to do a modification to the former and then after the announcement what is interesting after the announcement we were able to get an additional volume of 50,000 tons from the publisher of newspaper, publisher in the country so I think that it has been the year that proceed as a strong signal that we will be able to stay and obviously the mill net or the return on domestic shipments is way better than export so we’re very encouraged by that.

This mill is the new west mill and in South Korea so we feel that with this investment that we’re going to be very well positioned to continue to serve this market effectively and that it’s also going to improve our competitiveness in this area.

Paul Quinn - RBC Capital Markets

Okay, thanks for that. And just on the specialty paper side you said there is a seasonal uplift in demand. Seems like if I recall last couple of years we’ve been disappointed with that or you expecting this year to be any different?

Richard Garneau

Well, I think that uncoated I think that when you look at this segment it is certainly a challenge and we don’t think that it’s going to change the capacity, there is some excess capacity over demand and when you look at [indiscernible] numbers tell that the decline in demand this year is almost a percentage point higher and so I don’t see improvement for the time being optimistic on high-brite and super-brite. And I think that the high glass is when the restart of the mill in Eastern Canada there is also some pressure on that so I think that there is likely some over supply that we’ll have to be removed that if we want to see the market coming in the more balance. And on [indiscernible] and high glass the shipment capacity is only 88% so at this level 88% you have to expect continued pressure on pricing so it is a situation like we see up to now in the third quarter and the fourth quarter where its seasonally stronger but I think that the trend is not going to reverse and it is going to take certainly some different disclosure to bring the shipment capacity in the more favorable area, about 90%.

Operator

(Operator Instructions).

Remi Lalonde

It looks like there is nothing else, operator. So why don’t we leave there for today. Thank everybody for joining us.

Operator

Thank you, the conference is now ended. Please disconnect your line at this time. Thank you for your participation.

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