Resolute Forest Products, Inc. (NYSE:RFP) Q3 2017 Earnings Conference Call November 2, 2017 9:00 AM ET
Alain Bourdages - Vice President
Richard Garneau - President and Chief Executive Officer
Jo-Ann Longworth - Senior Vice President and Chief Financial Officer
Hamir Patel - CIBC Capital Markets
Sean Steuart - TD Securities
Paul Quinn - RBC Capital Markets
Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Third Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded today, Thursday, November 2, 2017 at 9 AM Eastern Time.
I would now like to turn the meeting over to Mr. Alain Bourdages, Vice President. Please go ahead, Mr. Bourdages.
Thank you, and good morning. Welcome to Resolute's third 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 2 of today's presentation.
Good morning and thank you for joining us. So, we generated adjusted EBITDA of $118 million for the quarter, compared to $83 million in the second quarter. Year-to-date our EBITDA is now $262 million, $62 million higher than the same period last year. Our results were supported by a combination of stronger pricing, higher shipments in our wood product and market pulp segments, as well as general input cost improvements and savings be arrived from the closure of the high cost machine in our specialty papers segment.
By segment, we generated adjusted EBITDA of $73 million in the wood products, up by $21 million. $27 million in market pulp, an improvement of $3 million against the previous quarter, well negative [ph] $1 million from our tissue operation, $10 million in newsprint unchanged from last quarter and $18 million in specialty papers, up by $14 million.
Markets for wood products remain favorable as far as fire in British Columbia effected supply resulting in higher than expected pricing. Hurricane impacted our tissue operation negatively as operation in Florida were affected for approximately 10 days to allow employees and their families to safely prepare for the arrival of hurricane Irma.
Pulp market showed strength during the quarter with pricing continuing to rise and further wide spread increase announcements across all major grades in September. In paper, we saw the positive impacts of difficult capacity curtailment decisions and the general restricting of our operation at Catawba. This led to reductions in our overall cost procession, which is illustrated on Slide 4 of this presentation.
Let’s review our individual segments starting with wood products. Average seasonally adjusted U.S. housing starts were essentially unchanged from the second quarter and increased only slightly compared to the same period in 2016. However, on the positive side, more lumber intensive single family starts rose by 2.6% on average compared to Q2, which may result in wood consumption in the U.S.
Even with small growth in housing demand during the quarter and the temporary suspension of preliminary contributing duties at the end of August. Market prices continue to rise supported by uncertainties associated with the ongoing trade dispute, forest fires in British Columbia, and hurricanes in the Southern U.S. This had a positive impact on our realized pricing, which rose by approximately 7% when compared to the second quarter reaching $413 per thousand board feet.
Shipments remain strong for the quarter arising to $531 million board feet. Higher volume led to a reduction in our benefit cost of $8 per thousand board feet that to $291 per thousand board feet. This combination of higher pricing lower cost and higher volume push EBITDA up to $73 million for the quarter, an increase of $21 million from Q2. World shipments of chemical pulp grew by 3.1% in the quarter, compared to the same period in 2016. Shipments to North America and China rose by 3.8% and 4% respectively, while Western Europe was essentially unchanged.
Specifically, for softwood kraft, shipments increased by 4.5% globally, with North America rising 4.8%, China 5.2%, and Western Europe 1.1%. For hardwood grades, global shipments grew by 1.4%, mostly due to China, which recorded an increase of 2.4% during the quarter, compared to Q3 of 2016. Shipments to North America rose by 1.9% over the same period, where Western Europe declined by less than 1%.
Given this sustained uptrend in market demand, as well as production disruption worldwide, our overall realized pricing for the segment rose again this quarter reaching $650 per metric ton and an increase of 3% from Q2. We had only one annual maintenance outage compared to three in Q2, which led to an additional 12,000 metric tons of shipments and an increase of $14 million in market pulp sales for the third quarter.
The delivered cost rose by $12 per metric ton reaching $595 per metric ton. This was mostly the result of the relative strengthening of the Canadian dollar and a lower contribution from our cogeneration operation, due to the annual outage at the Saint-Felicien in September. In the third quarter, total tissue consumption in the United States increased 1.3% against the same period last year.
Away-from-home shipments increased 3%, well at-home grew 1.3%. This quarter performance in tissue was adversely impacted by infrastructure damage, as well as production disruption from hurricane Irma, which negatively negated improvements in profitability for the segment when compared to the previous quarter. The delivered cost rose by $160 per short ton, when compared to Q2. Nevertheless, we were able to maintain shipments when compared to the second quarter with sales of inventory compensating for loss production.
Our [indiscernible] also shifted slightly with gains in retail volume, which helped maintain overall realized pricing when compared to the second quarter. At Calhoun, our sales ramp-up continues, but is challenged by long betting cycles. On new tissue, senior management team is taking action to improve our market access and introducing changes to branding and leveraging our integrated pulp to offer competitive products in an environment of rising market pulp price.
North American demand for newsprint fell by 8.6% in the third quarter, compared to the same period in 2016. Exports declined 3.5% over the same period as global demand went down 11.2%. Our shipments add up well in the third quarter falling by 2% or 9,000 metric tons, mostly due to downtime at Baie-Comeau and Augusta. The relative strengthening of the Canadian dollars push our realized price up slightly.
On the other hand, the strength in the Canadian dollars negatively impacted our cost procession, lower maintenance cost, and our higher contribution from our co-generation operations due to outages in the previous quarter neutralize the impact leaving our overall delivered cost roughly unchanged from Q2.
North American demand for uncoated mechanical paper was down by 7.7% in the quarter, compared to the same period last year. Markets for supercalendered papers led this decline dropping by 13%. Market conditions in coated mechanical grades continue to be challenging, while North American demand fell 7.9% during the quarter compared to the same period last year, production and import fell by 12.7% and 4.3% respectively.
Despite continued declines in demand, and the closure of a coated paper machine in Catawba at the end of second quarter, shipments of specialty papers fell by only 16,000 short tons in the Q3. However, price increases and optimization of our sales mix positively impacted sales and coated rates where realized prices increased by $17 per short ton.
Pricing gains at [indiscernible] specialty paper portfolio were $8 per short ton. The segments delivered cost decreased by $34 per short ton. This was mostly driven by the elimination of $11 million in cost associated with the restructuring of Catawba.
I will now let Jo-Ann discuss our financial performance before I conclude with our priorities and outlook.
Good morning, everyone. Today, we reported net income of $31 million for the third quarter or $0.34 per share, excluding special items. This compares to a net loss, excluding special items of $3 million in the previous quarter; and net income, excluding special items of 15 million for the same period last year. Special items included closure costs, impairments, and other related charges of $10 million, and $11 million of inventory write-downs both associated primarily with the machine closures at Calhoun at the end of September.
A foreign currency translation gain of $7 million and non-operating pension and OPEB credits of $4 million. Total sales in the third quarter were $885 million, or $27 million higher than the second quarter. Overall pricing positively impacted the results by $22 million, primarily in wood products were prices rose by $27 per thousand board feet, and market pulp where we made gains of $18 per metric ton.
While tissue pricing was unchanged, realized prices in specialty paper and newsprint also rose by $8 per short ton and $2 per metric ton respectively. Shipments of wood products reached new heights in the third quarter rising to 531 million board feet. Benefiting from favorable market dynamics and only one annual outage during the quarter, pulp shipments also increased by 12,000 metric tons.
While tissue shipments were impeded by disruptions owing to hurricane Irma, they remain flat. Paper segment saw declines of 9,000 metric tons and 16,000 short tons for newsprint and specialty papers, respectively. Excluding impact from foreign currency, volume, and machine closure, our cost of goods sold fell by $19 million when compared to the second quarter.
Major items included $4 million in chemical savings related to changes in product mix, a similar amount associated with better prices and usage of wood and recycled materials, and a further $4 million from lower maintenance cost, notably in our newsprint segment. Market pulp all in delivered cost was up by $12 per metric ton, largely due to the relative strengthening of the Canadian dollar, and a lower contribution from cogeneration due to the timing of outages, which were partially offset by lower purchase energy cost.
However, increases in both volumes and pricing were more than sufficient to offset these elements and EBITDA rose from $71 to $78 per metric ton. With disruptions to our tissue business impacting cost, EBITDA for the segment was minus $1 million. In wood products, the delivered cost fell by $8 per thousand board feet, due largely to higher volume. With prices increasing $27 per thousand board feet and shipments rising by 22 million board feet EBITDA increased by 34% to $137 per thousand board feet.
Newsprint delivered cost remain largely unchanged at $526 per metric ton as lower maintenance cost and higher contributions from cogeneration were almost entirely offset by the strengthening of the Canadian dollar. With pricing up and volumes only slightly lower EBITDA per metric ton remains stable at $26. In specialty paper, the delivered cost fell by $34 per short ton, primarily driven by the elimination of cost resulting from the Catawba restructuring.
Prices rose by $8 per short ton and EBITDA increased from $11 to $54 per short ton despite lower volume. We spent $20 million on capital expenditures in the quarter, $7 million was spent on the Calhoun tissue project. With CapEx totaling $136 million year-to-date, we expect to finish the year at or below our 2017 target of $185 million. Despite expected higher net pension and OPEB contribution due to timing, as well as the seasonal increase in working capital, which were $37 million and $28 million, respectively, the company repaid an additional $7 million on its revolving credit facilities.
We repaid a further $30 million since the end of the third quarter. Due mainly to additional letters of credit required in connection with trade disputes, our total liquidity declined by $14 million and stood at $400 million at the end of September. As mentioned last quarter, the company is recording lumber and supercalendered duty deposits in other assets on the consolidated balance sheet. Consequently, EBITDA as reported for the wood product and specialty paper segment do not include any amounts related to duty.
Total countervailing duty and anti-dumping duty deposits of $19 million were recorded on our balance sheet during the third quarter, of which $5 million were related to supercalendered paper and $14 million to softwood lumber. The total cumulative deposits of $62 million are recorded in other assets on the balance sheet. We made defined benefit pension and OPEB contributions totaling $39 million in the quarter.
The net pension and OPEB liability on the balance sheet increased by $5 billion. This was the result of foreign exchange losses totaling $33 million and an $18 million charge in large part due to the reevaluation of our US plans following the closure of our paper machine at Catawba.
As you will see, on Slide 15, the important steps we have taken in the last year to optimize our pension contributions are producing results. Total actual contributions for the quarter were $26 million lower than the same period in 2016. We also expect contributions for the fourth quarter to be lower by approximately $17 million compared to Q3.
I will now turn it over to Richard Garneau for concluding remarks.
Thank you, Jo-Ann. In the involvement of rising pulp prices, we believe are current issue, pulp integration strengthens our competitive position in the marketplace. Operational improvement efforts are also clear in our quarterly results, particularly in the specialty paper segment where we restructure the Catawba operations closing capacity that was not profitable. The impact of additional capacity closures at Calhoun at the end of September is expected to produce incremental benefits starting in Q4.
In term of financial flexibility, we are going to meet our CapEx targets for 2017 and have repaid $48 million of borrowings under our credit facilities since the first quarter. Despite making duty deposit of $35 million for the first nine months of the year. As a result of favorable lumber market, and a lower average preliminary duty rate and other Canadian producers the cash contribution of our pulp wood products group strengthen through the year.
I believed in the importance in value of free trade is unchanged and we continue to defend possession. The preliminary duties effectively ignore the regulatory changes made in Quebec Forestry System in 2013 making it market base and also the 2005 NAFTA panel ruling confirming the absence of sub cities in Ontario residual system. Our market outlook is broadly unchanged from last quarter. In pulp, market dynamics evolved more favorably than we expected and we anticipate that further price realizations in the fourth quarter.
We also believe that 2018 will be better than originally expected given limited capacity addition forecasted to come online after Q2. Our short-term perspective in tissue remained the same as before. Our senior leadership team is deploying every effort to establish a solid foothold in the market and we will see result of those efforts in 2018. In wood product, we expect fundamentals continue to strengthen and anticipate had even without the resolution of the softwood lumber trade dispute the segment will continue to be a key contributor to our overall profitability next year.
A change in our outlook since last quarter is in our paper segment. Global capacity reductions so far in 2017 in both newsprint and specialty grades resulted in higher operating rates despite structural demand declines. Price increases have been announced in Q4 across our paper product offering, which will positively impact our results.
This concludes our formal presentation. Operator, we will now open the call for questions.
[Operator Instructions] Your first question comes from the line of Hamir Patel of CIBC Capital Markets. Please go ahead.
Hi, good morning. Richard there were reports, I think maybe two weeks ago in pulp and paper week suggesting that you are potentially exploring selling Catawba to a containerboard producer, is that sale process still proceeding and any update on the study for potential conversion at Thorold with Stone House?
With Catawba first, we are looking at all the options and there is opportunities as we all know that we had an excellent pulp mill and a lot of capacity. So, there is no decision and there is - at this point nothing has come up, we are also looking at optimizing the - following our restructuring optimizing the coated machines and also increasing the pulp production. So, I think that when you look at the market dynamic on pulp, we’ve been able to prank the production on the [indiscernible] slight modification to better use the pulp mill capacity.
Regarding Thorold, with sale looking at different options here, we haven’t proceeded with Mr. [indiscernible] will look at this point, but it is still looking at other options to be able to maintain this site and we have nothing to announce at this point, but within that - a couple of months or three months we are doing trials on different opportunities now and we will be able to report on it later on at the end of the first quarter next year.
Great. Thanks. It’s helpful. And just on the newsprint trade case, are you expecting any potential duties when they are announced to be retroactive 90 days like they were for the lumber case.
Well on newsprint I think that the comments has not proceeded with the [indiscernible] so we have completed the questionnaire and we’re waiting for the next step. I don't know what is going to happen. I think that it’s difficult with commerce because based on the decision that we had on that sheet, I am going to use this one, we knew that commerce may get [indiscernible]. So, I don't want to guess what is going to happen on paper at this point.
Fair enough and just for sure, on the tissue side, obviously there is clearly a ramp up curve as you are waiting for some of those contracts to come up for bid, but what’s your view on the study state EBITDA potential of Calhoun once that machine is eventually fully ramped up and do you sort of position the order book appropriately?
Well, listen, I think this one - before I make any commitment on what the EBITDA is going to be, we’re working very urgently with all of FEMA [ph] with [indiscernible] tissue business and it is making progress to work with potential customers and hopefully we are going, we are now starting to see IO shipments and when we have a better indication on how much volume that we are going to be able to gain, we would be in a better position to give you an indication on how this machine is going to contribute.
And as I said, during the call, I think that with the pulp price that is going, obviously this machine is going to be in a better possession because it is coming directly from the pulp mill and as you are aware we are close to machines. There is plenty of disposal and we expect that our cost also at Calhoun should also be lowered and that will benefit our competitive possession. So, I think that I would like to wait another quarter or two and see how this, if the shipments are going to evolve and how many businesses we are going to hopefully - that we are going to be successful with them, but I’m still very hopeful if this is going to be a success long term.
Fair enough. Thanks, Richard. That's all I had.
[Operator Instructions] Your next question comes from the line of Sean Steuart TD. Please go ahead.
Thanks. Good morning everyone. Few questions. In the waterfall slide showing the quarter-to-quarter progression and EBITDA, the cost release bucket, separate from the Catawba restructuring benefits showed about $15 million quarter-over-quarter improvement, can you give us a bit of detail on the, I guess the cost buckets that you saw the most relief on a sequential basis front?
Hi Sean. We had about $4 million from reductions in chemical cost largely because of mix, we had about the same amount due to lower maintenance and also the same about $4 million from reduced usage and prices for both wood, as well as recycled paper during the quarter.
Okay. You're lumber price realizations improved a bit faster than we thought they would, given what looked to be pretty flat markets for stud lumber this quarter, can you speak to your mix and maybe it was an order filed timing issue, but some of the factors that contributed to get momentum on that front?
Well Jo-Ann is looking for the mix of …
[Indiscernible] it is difficult to explain why it’s not exactly following the same pattern, but we all know that the start has normally a lower value than random and demand was high operandum in this quarter. So, but normally should flat closure. So, I don't know exactly the reasons is important because we always have the same mix of 2x3 and 2x4, but we also have a volume that is also coming from the [indiscernible], but the internal quality is the same. So, I think that we're just going to call it and there is no real reason for the discrepancy between the two.
Okay. Last question from me, you know you referenced the continuing positive momentum in pulp markets into the fourth quarter, I think we have good transparency on what’s happening for softwood and hardwood grades, but can you speak to pricing initiatives that are on the table for your recycle grades in the fourth quarter?
Well the recycle grade that is certainly more challenging, so we are not running out to mills at full capacity, we’re taking also market downtime and I would not give you what the forecast is for the fourth quarter because I just don't know how the demand is going to be affected. I think that on - what I could see and it’s the only speculation on my part. So, the fact that the China has basically not been used, the permits to bring more recovered paper in China that is partly part of the explanation why we have better price on pulp. I think that it is what we see as a potential we see probably some opportunity here for the customers and maybe potential customers in China that wants to have recycled that we could take advantage of it because there is certainly a supply of the recovered paper in the US that used to be shipped to China and it’s not.
Okay. And that’s all I had, thank you very much.
Your next question comes from the line of Paul Quinn of RBC Capital Markets. Please go ahead.
Yes, thanks very much and good morning.
Just following up on Sean's question on pulp outlook, but just expanding it to 2018 and beyond, obviously 2017 was a lot better than most people expected, is your expectation for 2018 better than 2017 and what do you see beyond 2018?
Well, I think that, I am sure that you had [indiscernible] best one, but listen, I think it is final decision [ph] not to allow the same volume of regarding pulp paper into the country because as you are aware there is about 20, 25 million tons of recovered paper and when you look at the yield that is in the [indiscernible] it is a lot of material that is sent to landfill. So, I think that it is the science that’s for environmental reason to continue to restrain. I think that the market is growing, the fundamental could be really good and there is no new significant capacity for next year. So, I think it is probably not always to think that we may see other price increases next year if this situation continues to prevail.
Okay, and then just on the softwood lumber, I think I read some of you recently on [indiscernible] was commenting that there will be decision there within days, not weeks, do you see any moment on that negotiation front?
No, I don't think that there is much to be said on this one. I think as you are probably aware that commerce and the coalition or their demand to limit the volume to 28% is for all Canada is just not satiable [ph], so we cannot live with that and in any case, we know that the US cannot produce more than 67%, 68% of the US consumption. So, you need Canada, and I think that it seems that there was also a refusal to consider the market that would certainly have an impact on the import from other countries that would leave the Canadian producers, basically in the very difficult situation.
So, I think that - I don't think that there is anything that based on all I know and I don't know much because I am not at the negotiation table, but there is a lot of rumors rolling around, but I don't think that we are going to have a negotiated deal anytime soon. I think that we are expecting in the next few days to have the final determination. So; we will see how it is going to come for Resolute and Eastern Canada.
Okay and then just one clean up, just for, I think the first question you had asked is, was your potential to convert Catawba and I think you are looking at options that, but I did not understand your answer to that Thorold question, is that, are you still preceding with that conversion with…?
No, we are not proceeding with that conversion. So, we're looking at other options. And we’re going to have one of the options that we’re looking at. So, we’re going to have trials in November. So, we’re going to seek the kind of product that we can get and let’s say there was, it’s not going to be conversion of the machines as we previously discussed.
Okay, that’s helpful. Best of luck guys, thanks.
There are no further questions at this time. I will turn the call back over to the presenters.
Thank you very much everybody. This concludes the call. Have a good day.
This concludes today's conference call. You may now disconnect.