Resolute Forest Products Inc.'s (RFP) CEO Richard Garneau on Q4 2017 Results - Earnings Call Transcript

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Resolute Forest Products Inc. (NYSE:RFP) Q4 2017 Results Earnings Conference Call February 2, 2017 9:00 AM ET

Executives

Alain Bourdages - VP

Richard Garneau - President and CEO

Jo-Ann Longworth - Senior Vice President and CFO

Analysts

Roger Stitz - Bank of America

Paul Quinn - RBC Capital Markets

Kasia Trzaski - TD Securities

Hamir Patel - CIBC Capital Markets

Kevin Cohen - Imperial Capital

Operator

Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Fourth Quarter and Year-End 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, Thursday, February 2, 2017 at 9:00 AM Eastern Time.

I would now like to turn the meeting over to Mr. Alain Bourdages, Vice President. Please go ahead, Mr. Bourdages.

Alain Bourdages

Good morning 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 Investor Relations section of our website or you can also download the slides.

Today's presentation will include certain non-U.S. GAAP financial information. A reconciliation of those non-GAAP numbers to U.S. GAAP financial measures is included in our press release and in the appendix to the slides.

We will also make forward-looking statements, forward-looking information is based on our current assumptions, beliefs and expectations, all of which involve a number of business risks and uncertainties, and can change as conditions do. Please review the cautionary statements in our press release and on slide number two of today's presentation.

Richard Garneau

Good morning and thank you for joining us. We generated adjusted EBITDA of $67 million for the quarter compared to our $58 million in the third. Our results were supported by increase overall volumes, lower chemicals and SG&A costs, as well as favorable foreign exchange. On the other hand, reduction in pricing across all our business segments as well as higher costs related to fiber and energy negatively impacted our financial performance.

By segment, we generated adjusted EBITDA of $15 million in Market Pulp unchanged from the third quarter. Marginally positive EBITDA from our Tissue operation, an improvement of $3 million; $25 million in Wood Product compared to $43 million in the previous quarter; $19 Newsprint, up by $10 million; and $15 million in Specialty Papers, up by $6 million.

We are pleased to report that we have made progress in addressing operational issues experience in prior quarters, particularly in all Tissue segments. Our targeted initiatives to improve reliability and efficiency are showing results, including Atlas. The performance of continues digester at Calhoun showed strong improvement in the quarter, reflecting corrections to peripheral equipment.

Our Wood Product segment delivered solid result even a seasonally higher cost impacted margin. In Paper Market, structural demand declines combined with weakening global currencies continued to present challenges in both Newsprint and Specialty Paper segment. Nevertheless, we lowered our costs from the third quarter and our EBITDA improved significantly.

Let's discuss our individual segments, starting with Market Pulp. World demand for chemical pulp grew by 5.6% in the quarter compared to the same period of 2015. Chinese demand rose by 21.1%, while North America and Western Europe fell by 2.5% and 3.8% respectively. World capacity grew by nearly 700,000 metric tons over the same period.

World demand for softwood was up by 2.5% in the quarter. This mostly reflected the 15.57 increase in shipment to China. North America and Western Europe demand fell by 1.7% and 3.4% respectively.

In the same [Technical Difficulty] demand for hardwood was up by 7.3% and shipment to China up by 24%, while North America and Western Europe were down by 4.8% and 4.3% respectively. Our overall pricing for the Pulp segment fell by $18 per metric ton. As anticipated supply addition particularly in other wood grade maintain that pricing pressure through the fourth quarter.

Our operating performance was improved compared to the third quarter. Previously discussed challenges with turf oil equipment and continuous digester at Calhoun were largely resolved and output increase during the quarter.

Supported by incremental production at Calhoun and better operating efficiencies of Saint-Felicien and Thunder Bay shipments rose by 45,000 metric tons when compared to the third quarter. Certain global market dynamics evolve in the recent weeks. Capacity addition were delayed and stronger than anticipated Chinese demand led to a tightening of market condition. As a result that we announced price increases key pulp product in January and February of this year.

Despite these positive developments we continue to believe that incremental supply expected in the coming quarters will lead to pricing pressure in the latter part of 2017 and into next year. But we continue to believe that long-term prospect for the pulp market favorable.

In this quarter, total Tissue consumption in the United States grew by 4.2% against the same period last year. Away from home shipments increased by 3.4% over the same period, while at home volume by 1.6%. Our overall pricing declined by $28 per short ton this quarter due to change in our customer mix as well as declining prices for current rolls. Shipments declined by 3,000 short tons mostly away from home product.

On the other hand, we made progress in the implementation of all action plan. The resulting impact has been a reduction of $3 million in cost in the fourth quarter compared to the previous quarter. This translated into a significant reduction in the average cost per short ton which fell by more than 25% when compared to the third quarter.

Despite remaining challenges in revenue growth, the segment generated slightly positive EBITDA in Q4, a $3 million improvement when compared to the previous quarter. Our target of $8 million to $12 million in annual EBITDA in 2017 is unchanged.

2017 will be a better year for our Tissue segment. We are looking forward to starting up our new tissue machine at Calhoun and we believe that we are finally turning the corner with Atlas. We expect to close off the Calhoun project spending around the originally budgeted amount of $270 million. The converting lines are operating and we will now setting finished product with that purchase current pulp.

The housing market in the United States continue to strengthen during the fourth quarter. While seasonally adjusted the housing starts in the U.S. rose by 6.2% with single-family starts increasing by 9.5% on average when compared to the third quarter. Following seasonally weaker demand, our overall pricing in the segment slipped $4 per thousand board feet during the quarter.

Sustained productivity gains across our network as well as added production from our newly acquired sawmill in Senneterre translated into shipments of 503 million board feet very closed the third quarter. Our overall cost was impacted negatively by higher fiber usage and operating cost made worse by winter condition in North. Overall, the EBITDA was $25 million for the quarter compared to $43 million in the third quarter.

While all of 2016 Wood Product segment saw shipments in excess of 1.8 billion board feet of lumber, the highest levels in 2011 and generated EBITDA of $100 million. The lumber tree dispute between Canada and the United States unfolded as we anticipated. We have been selected as one of the mandatory respondents in both anti-dumping and conserving beauty investigation.

We continue to believe that the result of the Department of Commerce investigation could be favorable to Resolute. However, if the Department of Commerce were to determine that unfair trade practices exist with respect to all export of lumber to the United States that determination could represent risk to the company overall liquidity.

North American demand for Newsprint fell by 6.7% in 2016. Export declined by 177,000 metric tons compared to the same period last year as global demand went by 5.5% through November when compared to 2015.

Even as North American demand continues its structural declining, the industry operating rates remained at 92% in 2016. Our Newsprint volume rose by 23,000 metric tons when compared to the third quarter. These gains were almost entirely realized in North America and made possible by higher production become more internally.

Pricing slipped by $3 per metric tons during the quarter, the consequence of weakening global currencies due mostly to the higher volume, mainly in domestic market. Our delivered cost fell by $19 per metric ton to $512. Consequently, the EBITDA rose by $10 million when compared to the previous quarter reaching $19 million.

This year we expect continue decline in demand for Newsprint, particularly in export market where customers purchase [Technical Difficulty] remain a challenge. In North America, we believe that supply and demand will remain balanced as a result of one machine conversion out of Newsprint in the first quarter.

North American demand for uncoated mechanical papers was down by 6.2% in 2016 compared to the previous year. Markets for supercalendered papers led this decline dropping by 9.6% for the year, while other uncoated fell by 2.9%. Industry production fell by 6.3% for the year in line with market demand. This led to an operating rate that was unchanged from last year at 90%.

Although, decelerating in the last quarter, the decline of North American demand for coated mechanical grades reach 6.2% in 2016. After retreating in the first half of the year, imports rose significantly in the latter part of 2016, pushed by weaker global currencies compared to the U.S. dollars and declining demand in Western Europe.

North American production declined by 8.4% for the year, resulting in a shipment to capacity ratio of 93%. Given structural declines and lower seasonal demand, our overall pricing for the Specialty Papers segment fell by $7 per short ton in the fourth quarter to $665 per short ton. Shipments also declined by 209,000 short tons.

On the other hand, we have reduced our delivered cost by $23 to $654 per short ton, mostly due to lower chemical costs. Resulting EBITDA for the quarter was $15 million, $6 million higher than the third quarter.

Supply and demand in Specialty Papers will continue to be challenged by declines in market demand. Weakening global currencies will also encourage imports into the United States. We had established four priority areas for 2016 and our action in those areas have delivered important benefits.

In Newsprint, we successfully implemented price increases in our domestic market. However, economic conditions in the falling market and global currency weakness against the U.S. dollars had a negative impact on pricing.

On our Tissue initiatives, our focus on improving the performance of Atlas is starting to show result and we are only weeks away from starting up the new tissue machine at Calhoun. Following correction to the peripheral equipment the pulp mill at Calhoun delivered its strongest operating performance 2016 in the fourth quarter and is on track to reach its full potential in 2017.

Finally, the combined value generated by our Atikokan and Ignace sawmill has increased as production, sales and EBITDA all significantly improved in 2016. Following a challenging year in 2016 we are entering 2017 with cautious optimism.

Our top right priorities for this year will be; first, we will successfully ramp up our Calhoun Tissue operation and together with Atlas develop a solid customer base through quality of our product offering. Second, we will focus even more on improving operating performance and lowering cost.

Third, we will lower our capital expenditure by opportunities to reduce net debt with the goal of decreasing our leverage. And finally, we will continue to deploy every effort to mitigate definitive trade actions on export of lumber to the U.S. and that should duty deposit we put in place our financial flexibility as I mentioned would be affected.

Jo-Ann will now review our financial performance.

Jo-Ann Longworth

Good morning. Today we reported a net loss of $3 million for the fourth quarter or $0.03 per share, excluding special items. This compared to net income excluding special items of $90 million in the previous quarter and a net loss excluding special items of $26 million for the same period last year.

Special items included $25 million of closure cost, impairment and other related charges of which $24 million related to recycled Newsprint assets. $10 million of foreign currency translation loss, non-operating pension and other postemployment benefit cost of $6 million and start up cost of $3 million associated with Calhoun Tissue operation.

Total sales in the third quarter were $889 million, essentially unchanged compared to the third quarter. Pricing for our products declined in all of our segments. Pulp fell by $18 per metric ton, Tissue by $28 per short ton, Wood Product by $4 per thousand board feet, Newsprint by $3 per metric ton and Specialty Papers by $7 per short ton.

The other hand volumes increased overall when compared to the third quarter. This rise was primarily driven by our Pulp segment where shipments increased by 45,000 metric tons and in Newsprint where shipments rose by 23,000 metric volumes. Volumes in Wood Products remain strong at 503 million board feet.

Specialty Paper volume however fell by 29,000 short tons, owing primarily to seasonality and unfavorable market conditions. As for Tissue, shipments declined by 3,000 short tons.

Excluding foreign currency and volume impact, our costs of goods sold increased by $8 million for the quarter compared to Q3. The key changes were as follows; A $10 million increase in recycled fiber prices and wood cost, a $5 million increase in purchased energy resulting from higher seasonal steam consumption and rising natural gas prices, and $5 million increase in maintenance costs which were partially offset by a $7 million reduction in chemical costs, originating mostly from normal operations of our line count and a change in great disc [ph].

Market pulp all-in delivered cost was down by $17 per metric ton, largely from the higher volume as well as lower chemical cost, which was partially offset by rising prices of recycled fiber. These improvements were not sufficient to offset pricing decline and as a result EBITDA fell by $5 to $41 per metric ton.

Following a positive adjustment the amortization expense of $2 million and progress on our action plan, cost in our Tissue segment improved in the fourth quarter. EBITDA rose by $3 million and was marginally positive for the quarter.

In Wood Products the delivered cost rose by $29 per thousand board feet do largely higher fiber usage and operating cost exacerbated by winter conditions. As a result EBITDA was $50 per thousand board feet versus $85 in Q3.

Newsprint delivered cost also fell this quarter by $19 to $512 per metric ton. This was mostly explained by higher volumes. EBITDA per metric ton rose by $19 to $39 in the quarter. In Specialty Papers, the delivered cost fell to $654 per short ton, mostly driven by lower chemical costs. EBITDA per short ton rose from $23 to $42.

During the quarter we generated $30 million of cash from operations and increased our net borrowing by $35 million in order to support our capital expenditures. Fourth quarter CapEx was $72 million, $35 million of which was dedicated to the Calhoun issue project. We expect the total project cost to be to about $270 million. Approximately $90 million will be required to complete the project in 2017, the majority of which will be spent in the first quarter. Total capital expenditures for 2016 were $249 million.

With the additional $35 million drawn on our revolver -- revolving credit facility during the fourth quarter, our net borrowing in 2016 were $171 million and resulted in total debt of $762 million as of December 31. Our cash position was $35 million at the end of the year which combined with the availability under our revolving credit facility resulted in liquidity of $468 million.

The net pension and OPEB liability on our balance sheet increased by $184 million since the end of the third quarter, reaching $1.3 billion at year-end. This is mostly explained by a reduction in the applicable discount rate, partially offset by regular contributions.

In December following our negotiations with Ontario and an amendment to a special funding relief regulation, the company voluntarily exited Québec funding relief regulation. As such beginning on January 1, 2017, the company's Québec pension plan will be subject to the provinces Supplemental Pension Plans Act which provides for funding pension deficit on a going concern basis rather than on the solvency basis. This new legislation is expected to lessen the impact of short-term market fluctuations and reduce the amount of annual pension contributions.

When compared to the baseline contributions of 2016, we estimate that pension contributions will drop by approximately $127 million between 2017 and 2020. While Ontario funding calculations remain solvency based, the required contributions for our U.S. plan are computed using a 25-year average interest rate. And as mentioned previously Québec uses a going concern basis.

Given these parameters our funding deficit including a stabilization provision required under the Québec legislation is lower than our accounting deficit by approximately $500 million.

Alain Bourdages

This includes our former presentation. Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Roger Stitz with Bank of America. Your line is open.

Roger Stitz

Thank you. Good morning. Can you speak with -- about the tempo of the Calhoun ramp-up in terms of the volumes and EBITDA as you go through the quarters of 2017?

Richard Garneau

I think that what I -- [Technical Difficulty]

Roger Stitz

I'm sorry, can you speak -- I beg your pardon very much, could you please speak a little closer to the mic, I can barely hear you?

Richard Garneau

So, well as we already announced we're going to start the machine in the next few weeks. We already are in the process of commissioning and that thing. So -- and the three converting lines are in operation. We said that we are considering the product with purchased roles.

So, I think that before we see the ramp-up of this machine, I think that is probably too early to mention any target or demand EBITDA. So, I think that the expectation what we previously indicated in term of profitability was to believe that it’s a target that is achievable.

So, next quarter we're going to be in a production to report on the startup itself and the ramp-up and to better determine the machine productivity and product acceptance into the market.

Roger Stitz

And can you discuss your marketing strategy for 2017 with the converted tissue? Do you expect to -- have you presold some? Is it to strategic customers? Is it to tissue distributors? Anything you care to tell us about that?

Richard Garneau

Well, we already have some firm volume from large retailers and we continue to reaching out to large retailers, but we don't have. Again the product that we're going to have with our machine is put into production. So, I think that some of the important one are waiting to see the final quality of the product.

But even -- what is very encouraging, even with the parental [ph] -- purchase control that we converted on our tree line, so there is a large retailers that as I started to pass on their shelf the product and the reaction has been very positive. So, I think that the -- at the end of the first quarter, when we have product, we're going to -- because it's a premium quality that we're going to have on that tissues and towels, so I think that by then we're going to be able to give you -- to give the investors and show a better indication of the traction of the -- well the acceptance and the progress also on longer term commitment with the retailers.

Roger Stitz

Thank you. Can for you provide CapEx for 2017 and 2018?

Richard Garneau

Well, I'm just going to give you a range on CapEx on the 2017. I think that the -- we should normally go back to the level that we had in 2015 that -- and if you look at our financial statement, it was around the $185 million, so I would give you a range of between $170 million to $185 million is the expectation on CapEx in 2017.

I don't have a number yet for 2018, but if you look at our CapEx this year, we're $249 million. So, if we go back to the 2016 -- 2015 level, its $66 million, $65 million reduction is what we expect for next year.

Roger Stitz

So, the $170 million to $185 million includes the $90 million for the Calhoun, that's mostly in Q1 is that correct?

Richard Garneau

Yes. It includes the completion of Calhoun.

Roger Stitz

Thank you very much.

Richard Garneau

You're welcome.

Operator

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

Paul Quinn

Yeah, thanks very much and good morning.

Richard Garneau

Good morning.

Jo-Ann Longworth

Good morning, Paul.

Paul Quinn

Just a couple of questions. Just I agree with you in a short term run on pulp, looks like you -- you are going to see some higher prices. Just wondering how bad you think the back half of 2017 and into 2018 is going to be with the significant capacity increases on both the softwood and hardwood side?

Richard Garneau

You know, Paul, I think that when you look at the demand in China we were surprised to see the increase in demand of 21%. We just don't know when our salespeople don’t know if it is sustainable, but it seems that we are consuming a lot more pulp. So I think that if this trend continues I believe that -- well certainly continue to have pressure on price because the capacity addition is significant, but that could be tampered and somewhat by this significant demand increase in China with the softwood and hardwood.

Paul Quinn

Okay. Fair enough. Just on the Tissue side, we saw December operating rates down to 90%. We have got some capacity adds again in this segment in 2017, 2018. I know you got a new machine, but do you expect some significant headwinds there well?

Richard Garneau

Well, I think the positive on the Tissue is that the demand is growing. So it’s true there was capacity addition, but I think that when I look at review report there is room for at least machine or even two-year so -- and I think that it is what has been announced, so I think that still very positive on the side. And I think when you look at also at the -- because we are always relate to the housing start and what you have, you have that more household formation so going also to consume probably more tissue and wood also.

I think that we have to figure that also went to into demand. And we are certainly assuming that the U.S. economy is going to continue to grow, so if the numbers that between 3% and 4% is certainly going to help tremendously on the tissue consumption or tissue demand.

Paul Quinn

I like your performance metric slide 14 here. Is Tissue something you are going to add to this once you get Calhoun ramped up?

Richard Garneau

Sure. We are just looking…

Jo-Ann Longworth

Yes.

Richard Garneau

Yeah.

Paul Quinn

Okay. Last question I had for you. Just seeing -- just in Newsprint just because it's been so bad for so long. I think at some point maybe is five, seven years ago we thought, you know, it might hit a base level and stop producing. But 2016, especially in North America was another significant down year. Do you see a base level that this is going to bottom I would add or is that still off in the distance?

Richard Garneau

It's very difficult question. What we have been expecting this low level seven years and we still don't see it. So I would -- I think if I would refrain to make any forecast of this one, but at some point we certainly expect that we are going to see a flow, but we just don't know when it's going to happen.

The other part also is really when we would look at export the currency weaknesses in the market where we sell all products, the Brazil or Mexico or Asia, so I think that had a very significant impact. So when we talk with our customers, they are paying in U.S. dollars and in some case with the currency that has depreciated by 50% that -- there was consequence to that, so that's probably generating or pushing the decline faster than it should have and if there is adjustment in currency, maybe there is some adjustment that we may see on the demand side.

Paul Quinn

All right. Thanks very much. Best of luck.

Richard Garneau

Thank you.

Operator

Your next question comes from the line of Kasia Trzaski with TD Securities. Your line is open.

Kasia Trzaski

Hi. Good morning everyone. This is Kasia filling for Sean. Just a few questions. Morning. Your average pulp transaction prices fell $18 per metric ton quarter-over-quarter and that now case decline in [indiscernible] prices that we track. Can you speak maybe the mix on your pulp shipments that may have helped the filling the gap?

Richard Garneau

I am just trying to get to the mix, I think we have sold more -- so when I look at the volume here, on sales price compared to the previous quarter, I think that hardwood that went down the mills and we had higher shipments on hardwood. So I think overall it's mix driven here, the hardwood has brought the pricing on softwood. We also experienced a decline in pricing, but it was significantly less. But overall we had a slight improvement on fluff and our RBT went up just slightly. So it’s really the mix on hardwood and the significant decline in hardwood with the new capacity announcement that -- the impact that we had in the fourth quarter.

Kasia Trzaski

Okay. That's helpful. And just coming back to what you said a second ago, I did notice in the press release that you had referenced, gains in fluff pulp prices were the benchmark that we track indicated very modest sequential pressure. Can you help me understand the discrepancy there?

Richard Garneau

Well, the pricing announcement on fluff is $25 in February. So I think that -- there is -- the demand is a bit better, so -- but I think that, albeit the product we have seen an announcement on northern bleached of twine engine [ph] 20 in February, so I think that it’s in line with -- also what has been announced on the southern bleached softwood also 20. I think the fluff only -- one announcement in February of 25. So I think that we feel it’s on slot, this price increase is more or likely than not be fully implemented.

Kasia Trzaski

Got it. It sounds like you guys didn’t see that pressure in Q4 than -- for you guys. Okay. And going to your wood products cost quarter-over-quarter spike was a bit sharper than normal and outside of the seasonal factors that you referenced, was there other elements affecting this or was it more of a return just to normalized cost level after exceptional Q3 results?

Richard Garneau

I think that we had the quite a difficult quarter weather-wise. We had lot of snow and impact on the wood delivery that had also on our cost. So it’s weather related than anything else. And I think that so far in the first quarter I think that we are seeing more, a more normal condition, but the snow we have obviously have been used the productivity on the machine and it was also cold in the fourth quarter compared to the third then there is always an impact on the wood yield, so when it’s frozen solid and when you depart just to you an idea what is going on to the sawmill there was fiber losses that has been basically reflected in our fourth quarter result.

The other impact also even though we ship at almost a record level during the holidays the Christmas and New Year, we also had -- well, already our reach that has also impacted our overall cost, the fixed cost then I have the volume. So when you think that -- this three items into account explained what happened and we should normally have more expect -- we will more normal condition then in the first quarter and going forward.

Kasia Trzaski

Okay. That's helpful. Thank you. And then last one here, looks like prices for coated ground wood improved in early 2017, but the uncoated grades hold back. Do you expect any more traction and implementation of default coated ground wood prices or any other color you can provide on current market conditions, would be great?

Richard Garneau

Well, when we look at the operating rate, it's at 93% level. So normally at this level we can expect stability in pricing. I think that I would not -- I would -- certainly when you look at coated there is more import coming to U.S. with the currency and it's also true for supercalendered paper so -- and I think that certainly that headwind that we have on very strong U.S. dollars is making. Well, it's more difficult to deal with a market that is declining and that there is more offering coming from overseas. And the imports, if you look at the stats or coming in -- really going up and wood probably continue to come to the U.S. with the currency, if U.S. dollars continue to strengthen. So lately we have seen some pull back on the U.S. dollar so could -- so the overall work trade somewhat. But I think it is difficult to predict what is going to happen on this side.

Kasia Trzaski

Got it. Okay. That's it for me. Thank you very much.

Operator

And your next question comes from the line of [indiscernible]. Your line is open.

Unidentified Analyst

Hey, guys. Thanks for taking my question. The first one is regarding the trade dispute. You guys have noted a few times now that you expected it to sort of in a positive manner which would certainly help you guys. There could be some liquidity risk some other ways. Could you maybe help us quantify that or helps to understand what that liquidity risk is? And are you guys currently accruing for any potential trade, tariff issues, onto the balance sheet, right now? That's my first question.

Richard Garneau

Are you referring to the CVDE on supercalendered and lumber?

Unidentified Analyst

Yeah, exactly, the SOA exactly with…

Richard Garneau

Okay. Well, we have been selected as the respondent for Québec and Ontario and we are in the process to respond to all the questions that has been raised by Commerce. You probably not aware of it, but the Québec government has been really, really pushing hard to have their new -- well, it’s not new anymore, let's say 2013 forestry regime that the is that is that a copy of the U.S. forest service and many of the states that sell wood on the market, so 25% of the wood is sold through options and I think that the options are basically the basis for sitting the stumpage sales for all the volume into the province.

So -- and I think that the Québec government want to a great extend they have everything in the -- someone from the University of Pennsylvania to look and he is an expert in options, to look at our system and this report is going to be share with Commerce. And we are certainly opening and the Québec system is going to be recognized as market.

Obviously, the other part we also have operation in Ontario, the company that is going to report on it, but in 2005 Ontario has been the only province that benefited from Chapter 19, NAFTA Chapter 19 decision, a panel decision their forestry regime was market. So I think it is always difficult to predict what the Commerce is going to look at.

So we've had the -- a tough experience with supercalendered paper with -- this available and the items that they picked that were nor related at all to the product, but I think that we have to wait and again we are confident that we are going to be able to make a demonstration with both government in Ontario and Québec that both provinces have a forestry regime and that is how they have stumpage the trees at market like to the space and USD in the United States.

Unidentified Analyst

Right. I understand the process. I was just more wondering from -- you mentioned it could be negative liquidity event should go against you first and what that negative liquidity can look like, should it go against you guys?

Richard Garneau

But I just don't know what that's going to be. So it is going to be only to be 5% or 20%. So when we have an indication of the preliminary rate that's probably unlikely to come before May, and I know that the preliminary determination has been post on for few days. So I think that -- when we have that we are going to be able to quantify. We heard all kind of numbers, but you heard nice explanation on the system in Québec and Ontario. So I am certainly not going to expect 20%, not even 10%, so I think it is going to -- it may be a lot less than that. And I just don’t know what the impact is that we are going to have.

So we're going to wait until we have the determination and was going to share on the impact on our liquidity, but some time you always expect well planned -- expect for the better plan for the worse, but we have not this point yet.

Unidentified Analyst

Got it. I understand. It is still to be trade that -- thanks for that. I guess my next question is really on the CapEx side. It sound like you guys are still spending $90 million on Calhoun this year. Does that -- with that spend will you still be at your 270 because the numbers I have that'll be above the 270 and then what that imply for the rest of the business because I thought CapEx for this year will be lower than sort of the 170 to 180 range you are targeting?

And I guess the next implication for that is, it's a heavy 1Q, 2Q spend so, should we assume additional drawdowns on the revolver to help from the liquidity given some challenges operationally in the first half as well?

Jo-Ann Longworth

Hi. Jeff, this is Jo-Ann. In terms of the spending for Calhoun Tissue I will let Richard. answer the rest of the question. We spent $140 million in the year for 2016, okay? $40 million prior to that and we have $90 million left to go. So by my math that adds to $270 million.

Unidentified Analyst

Got it. Okay.

Richard Garneau

Okay. And to complete it the number that I mentioned between 170 and 185, I think that includes also the completion of the tissue project at Calhoun and the normal CapEx that we have to make -- to maintain our operation. And we also have in this amount the project that have a quick payback, so very good return, but I think that we are going to return to the same level, about the same level than 2015, including the completion of Calhoun.

Unidentified Analyst

Got it. Okay. And then I guess the second part of that question was it sound like it’s going to heavy spend especially from Calhoun first half, second half, and implications for liquidity, because it sounds like you need to stop on that given your current cash balance and sort of the challenge operation in first half in terms of EBITDA or whatnot. So should to expect additional draws?

Jo-Ann Longworth

Yeah, have your CapEx first half of the year, yes I would assume we would draw more and then hopefully reverse that out towards the end of the year.

Unidentified Analyst

Got it. And you said you spend $140 million of CapEx in Calhoun in 2016, so that imply the rest the business was sort of running at $110 million. That seems higher than your normal run rate of 90-ish or whatever for the business, outside of tissue? Or was that spent on and where should we see that in terms of improved productivity in the operations, because I guess I am having hard time seeing pick-ups in volume and whatnot so, for me that on the cost side.

Jo-Ann Longworth

Well, I think the next largest project that we have besides Calhoun Tissue is putting in a centralized and uniform SAP system across the board, so that's where a lot of the other savings coming from.

Unidentified Analyst

Is that done commercially or we have more to go on…

Jo-Ann Longworth

It will continue through 2017 for the project so far and the rollout and then we will take a look from there on in. But the biggest spend -- one of the biggest spend was in 2017 as we wrapped up most of our payroll implementation.

Richard Garneau

As we also announced previously we will be replacing two waterwheels at hydropower facility, and we are going to have the cost in 2017. So it’s already announced.

Unidentified Analyst

Do you quantify that SAP cost?

Richard Garneau

It’s about $7 million that within that and that's what we are going to spend on this two waterwheels.

Unidentified Analyst

Got it. Okay. And then I guess lastly, back on Tissue segment. I mean, it sounds like you are making a little bit of progress on the Atlas side? But I guess it's -- just trying to understand how are you going to get to 2017 EBITDA target there? And I know you are not giving specific guidance on Calhoun yet, but how is the mix of that business in terms of price and product and cost as well relative to your Atlas business? Is it a lower price point or higher and should the EBITDA generation at Calhoun at full rate, is that supposed to be higher than Atlas or how should we think about that?

Richard Garneau

Well, defiantly, so I think that when Calhoun is ramp up its capacity is going to be more profitable than Atlas. Don't forget that it’s dry creek. It's away from home. We have also some at home product, but Calhoun is premium product. And premium product sales for more than the away from home and it is going to be virgin. The Miami machines, we have two machines or recycle so I think that again recycle sells more or less you don’t have this employee. And we supply all the pulp from our Fairmont mill that has -- recycle mill has a very good quality, but the advantage is definitely going to be at Calhoun with this facility that we have only three lines, just to give you an example, three converting lines at Calhoun for 60,000 tons of production and we have -- in Florida. So you can just so well portrayed from the labor point of view at significantly less on Calhoun. So you have nature of difference here.

The other item also that you have to take into account Calhoun is flesh pulp that is going to be count directly to the machine, so there is no permission [ph] cost and I think it got advantage it’s the integration that we are going to have. So there is also -- when you look even further than that the steam cost, well, so you have the facilities, you have the models that oil running for the other products, all capacity, so all this is going to be to benefit to the issue in Calhoun and that's the rational that we view reset to build machine into an existing mill to take advantage of the synergies and benefit that we can get compared to non-integrated tissue facility.

Unidentified Analyst

Goy it. When do you think this is going to be running at capacity?

Richard Garneau

Well, let’s…

Unidentified Analyst

To be determined and sort of still…

Richard Garneau

Yeah, to be determined…

Jo-Ann Longworth

That's a good response.

Unidentified Analyst

What is the -- I guess what is inability to figure out when it can be ramped up or is it -- because you put the CapEx in place and this still a long lead time in terms of machinery to ramp up or I mean, is it like a year or is it a year and half, two years, what is it, because it's been a big spend for the last three years now so.

Richard Garneau

The experience is that it takes normally a year, but the -- again what I want to emphasize here the three converting lines are running, basically they has been commissioned and we had that done all the test. So now it's going to be focused on the machines and with the assistance of the manufacturers we have -- has been -- we have spend a lot of time with the employees on training, so they had visited here and they have worked alongside, people that are operating the machines is exactly the same. So it’s a start up and start up, it’s not like a new car, you put the key and then started, you have -- those many components and you have to basically do everything in the process to make it happen.

But again at the end of the first quarter we are going to have the indication and how we are going to be able to run this mission now, with the information that we are going to gain. By the end of this month we should start really do to see some product on the machine, but at the end of March we should have a better idea and be able to better answer the question that you have on this.

Unidentified Analyst

Got it. And then the last one for me and I will let someone else to hope in and I know I have taken some of your time. You guys seen -- guys came in to the tissue space, because I mean, some of you guys -- some of your competitors are obviously looking for is a growth and one being tissue relative to things like newsprint and coated and whatnot because we sort of look at and see to, it seems they are also targeting tissue. I mean, what do you think about sort of the initial capacity is coming into the industry and what that means for competition and pricing and then maybe growth as well? Because just seem like there is other guys coming into space so.

Richard Garneau

I think that when you look at newsprint, it's mechanical pulp base and you cannot make tissue with mechanical pulp. You need kraft mill to be able to supply pulp to the machine. So I think that you have, well, many newsprint manufacturers if you don’t have a pulp mill on site I think that, well, you are going to be insulated and you're going to buy your pulp on the market, the authorize pulp on the market. When you look at Calhoun, it’s one significant maybe that we have. We had all necessary. We had invested in new digester this is now running fairly well, so -- and when you look at the -- there is a few project just not integrated so we don’t have the benefit that we are going to have Calhoun.

And the location, I also would like to stress the location. If you look at Calhoun in Tennessee and you look at [Technical Difficulty] we can read to a significant number of household and normally it is in disarray that you have, you have more housing starts and more household formation, so we should also benefit from it.

Unidentified Analyst

Got it. Thank you guys. I will let someone else to get on. Thank you.

Richard Garneau

Thank you.

Operator

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

Hamir Patel

Hi. Good morning. I just have one question for Jo-Ann. The customer reports in December that Québec was thinking of offering loan guarantees to the lumber industry in the province when duties hit. Just curious how we should think about how that might impact Resolute's liquidity and are you expecting any sort of similar assistance from the Federal Government as well?

Richard Garneau

Well, I am going to take this one. So I think that the province because, you know, that in Québec there was many small independent companies and sawmills so -- and Premier as indicated that the is going to stand by sort of government does not do. I think that the -- well at least it's a source -- so it's a guarantee that they are going -- the government is going for likely because we don’t have any detail. The Premier has announced it, but without really stating what the intend is -- the intend that they have on the structure itself, but I think it’s just guarantee and the sawmills operator in the province will be able to go to their bank, going from the government and be able to finance the deposit, if we have the -- if we all -- or the primary determination basically said rate for the province.

Hamir Patel

Great. Okay. Thanks. That's all I have.

Richard Garneau

Operator, we will have time for one last question.

Operator

Certainly. The last question comes from the line of Kevin Cohen with Imperial Capital. Your line is open.

Kevin Cohen

Good morning and thanks for taking the question. I guess when you look at liquidity in the pacing during the year, there sort of a minimum liquidity target that company seek to maintain and in that context for the company explore potentially issuing equity or other equity like options to improve the liquidity.

Jo-Ann Longworth

We don't have a specific liquidity target. Obviously, the year coming has a lot in front of it in terms of completing the tissue project and wrapping that up. In term of whether we pay any duty CVDE, anti-dumping or otherwise, we also have a large amount on deposit for our and SC calendered or calendered paper which we are continuing to battle. A broad spectrum of we’re up against in 2017 our goal as we discussed and our priority is to continue to reduce CapEx and be disciplined in our CapEx spend, look at other opportunities to reduce net debt, so that we're able to keep our leverage where it is or lower. So that's one of our objectives for the year.

Kevin Cohen

Sure. And has the company articulated any sort of margin goals as it relates to that CapEx in terms of thinking about the incremental EBITDA on a run rate basis starting to flow through in the coming kind of 12 to 18 months out?

Jo-Ann Longworth

This is on the tissue project?

Kevin Cohen

Yes.

Jo-Ann Longworth

No, we have not announced yet what the return is or what our EBITDA expectations are. As Richard said we will have a better idea in terms of the ramp-up once we see the machine running by the end of this quarter and are able to show that product to customers to see how quickly it can be incorporated into the market.

Kevin Cohen

And then one last real quick question. Any easy to sell assets, anything sort of non-core when you look across the portfolio that would be easy source of liquidity, if need be just as a plan B?

Richard Garneau

Well, not at this point. So I think that with certainly sawmills and the pulp mill it is part of our core and tissue. And on the paper side, we have integrated with the sawmills in Québec and Ontario and obviously that many buyers that interested in uncoated paper or newsprint these days.

Kevin Cohen

That's very helpful. Thanks and best of luck.

Richard Garneau

Thank you.

Operator

And there are no further questions in queue.

Richard Garneau

So that concludes our call, operator. Thank you everybody.

Operator

This concludes today's conference call. You may now disconnect.

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