Resolute Forest Products Inc, (NYSE:RFP) Q1 2021 Earnings Conference Call April 29, 2021 9:00 AM ET
Marianne Limoges - Treasurer and Vice President, Investor Relations
Remi Lalonde - President and Chief Executive Officer
Sylvain Girard - Senior Vice President and Chief Financial Officer
Conference Call Participants
Neil Patel - CIDP, capital markets
Sean Steuart - TD security
Paul Quinn - RBC capital markets
Good morning and thank you for standing by. Welcome to Resolute Forest’s First Quarter Earnings Call. [Operator Instructions] I would now like to hand the conference over to Marianne Limoges, Treasurer and Vice President, Investor Relations. Thank you, please. Go ahead.
Good morning. Welcome to Resolute’s First Quarter Earnings Call today. We'll hear from Remi Lalonde, President and Chief Executive Officer and Sylvain A. Girard, Senior Vice President and Chief Financial Officer. [Operator Instructions] Today's presentation will include non-U.S. GAAP financial information. Our press release and yet pending included conciliation of non- GAAP information to U.S. GAAP financial measures. 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. You please review the precautionary statements in our press-release and on-slide two of today's presentation.
I will turn the call over to Remi.
Hey good morning and thank you for joining us. Today we have reported $221 million of adjusted EBITDA for the first quarter compared to $129 million in the fourth quarter. This has been a very good quarter for a strong and growing wood products business. As the lumber tailwind continues, the segment delivered $232 million of EBITDA and increase of $93 million from before.
For the other segments, we reported adjusted EBITDA of $10 million in market pulp up by $8 million, $3 million for tissue up by $1 million and minus $9 million for paper down by $8 million. We strengthened the balance sheet and made our business more competitive with the timely refinancing and de-leveraging of our senior notes and the refresh of our senior secured credit facility as Sylvain will speak to in a few minutes.
Looking further ahead, we expect to benefit from about $30 million of annual free cash-flow improvement. Once the implementation guidance from the recent U.S. pension relief measures take effect. We worked to generate concrete value for shareholders on the yield of our strong cash generation by re-purchasing $8.07 million shares of common stock in the last 10 months or 10% of the outstanding, including $1.7 million shares in the first quarter.
Our average repurchase price for the $8.7 million shares is $5 33. Let's talk about our individual businesses starting with wood products. Despite a weather related setback in February Q1, U.S. housing starts were at $1.6 million on a seasonally adjusted basis up by 2% from the previous quarter, reflecting strong fundamentals and accommodative interest rate environment.
Lumber consumption for home improvement projects is expected to continue to grow this year, after a 12% year-over-year increase in 2020. Benchmark lumber prices attained record highs in March and as a result, our average transaction price increased sharply in Q1 to $874 per thousand board feet, an increase of $266 per thousand board feet or 44% compared to the previous quarter.
Our shipments however were $50 million board feet lower because of a seasonal shortage in rail cars and trucks, which, which pushed finished goods inventory up by $46 million board feet to $143 million in-line with last year at the same time. We're making good progress with the ramp up at our Eldorado and Ignatius sawmills, both of which are running on two shifts as of this week.
The saw mills have an annualized capacity of $295 million board feet, but the volume impact will be incremental in Q2. While benchmark prices hit record levels during the quarter, the momentum carried into Q2 giving us a strong order book at very attractive prices. World demand for chemical pulse through February declined by 4%, but producer inventories were within normal ranges and benchmark list prices rose sharply on the back of rapidly improving supply demand dynamics.
In the quarter, our average transaction price rose by $51 per metric ton or 9% with gains in each Virgin grade. Shipments slipped by 12,000 metric tons, mostly due to the plan annual outage, that is [indiscernible] but finished goods inventory also dropped by 7,000 metric times to a very low level of 46,000 metric times. The pace of price recovery from the pandemics impact picked up in the first quarter and we expect that momentum to carry into the second quarter with further price improvements against what are still historically soft margins for high quality Virgin pulse.
While analysts expect higher per capita at-home tissue consumption over pre-pandemic levels with more of the workforce working from home and a greater frequency of cleaning, we observed a drop in demand for at-home tissue products in March, as retailers now appear to be destocking inventories from what they built in the pandemic. The away from home space is still under pressure as results -- as a result of uneven recovery across the sub sectors, such as commercial office buildings, restaurants, entertainment, hotels, and cruise ships.
The average transaction price increased by $21 per short time or 1% in the quarter but for the reasons they just mentioned pricing and volume will be under more pressure in the second quarter. North American demand for newsprint South by 25% in Q1 over 2020, indicating that demand has yet to recover from the impacts of the pandemic. We reduced our capacity accordingly. Having recently confirmed the indefinite idling of our Baie-Comeau and Amos newsprint mills, which were temporarily idled, since the spring of 2020.
A difficult as the decisions may be, and they are our four remaining newsprint mills with less than $1 million tons of capacity are very strong mills with structural advantages, such as internal power generation and favorable market access, which will allow us to compete for a bigger piece of the shrinking pie.
Along the same lines, demand for un-coded mechanical papers fell by 14% in the quarter. Having said that operating rates have been tightening for all of our paper grades, including new sprints, the average transaction price in the paper segment increased by $13 per metric ton during the first quarter or 2%, shipments slipped by 16,000 metric, tons of fuel to the seasonally higher demand in the fourth quarter and inventory decreased by another 9%.
With the improving order book, we expect paper to return to positive EBITDA in the second quarter.
Now have Sylvain discuss our financial performance.
Thank you, Tammy we reported net income of $119 million in the first quarter or a dollar 45 per diluted share excluding special items. This compares to net income, excluding special items, $45 million or $0.55 per diluted share in the previous quarter and a net loss, excluding special items of $29 million or $0.33 per share in the same period last year. Especial items in the first quarter included $37 million in losses related to lumber hedging contracts, including $14 million in unrealized losses, foreign currency translations off at $5 million for net monetary liabilities and $3 million enclosure related charges for the indefinite idling of the Baie-Comeau and Amos newsprint mills.
Total sales in the quarter were $873 million up by $104 million compared to the fourth quarter due to higher realized market prices in all segments. Most importantly, in wood products would a $100 million increase this quarter. Manufacturing costs rose by $5 million in the quarter after removing the impact of volume and foreign exchange and includes a $12 million expense related to a process improvement program at our Catalonia operations compared to the fourth quarter, the all-in delivered costs for the wood product segment rose by $49 per thousand board feet or 13%.
Reflecting, an increased variable compensation provision, higher fiber usage and the Canadian emergency wage subsidy credit received in the previous quarter. EBITDA and the segment improved by $93 million to $232 million. In the market pulp segment delivered costs increased by $22 or 4% per metric ton, mainly due to higher weather related energy and freight costs in the segment improved by $8 million to $10 million.
The delivered cost and tissue decreased by $28 per short ton or 1% and EBITDA for the segment was $3 million papers delivered costs increased by $31 per metric ton or 5% due to increase weather related energy and freight costs as well as the Canadian emergency wage subsidy credit received in the previous quarter. And been off of the segment, came in at negative $9 million.
In the quarter, we closed on a private offering of $300 million unsecured senior note due 2026 with a foreign seven 8% coupon issued at 100% of par value. We use the proceeds and cash on hand to redeem at par all of the $375 million. Aggregate principal amounts and outstanding of our 5.78% senior notes due 2023, which resulted in a net debt reimbursement of $75 million. We generated $74 million cash from operating activities in the quarter, which represents an increase of $123 million compared to Q1 last year.
The cash from operating activities also includes an increase of $99 million in working capital, half of which reflects the seasonal buildup of logs ahead of the spring breakup. And the other half is related to growth in revenues across our segments, translating into more receivables, with a net debt at $449 million at quarter end. Our net debt till the last 12 months adjusted EBITDA fell to 0.9 times excluding pension.
We made $14 million in capital expenditures during the quarter, despite the relatively low spending in the quarter, we planned to make about a $100 million dollars in net capital expenditures in 2021, including the level setting investments around the U S sawmills we acquired last year. And in light of the encouraging fundamental indicators around building materials, In addition to the ramp up of our El Dorado (Arkansas) and Ignace (Ontario) sawmills, we're looking at other potential opportunities to drive more growth in our wood product business, including incremental organic growth.
We made $32 million in soft wood lumber duty deposits in the quarter bringing our total deposits did $275 million, which is Recorded in other assets on the balance sheet. At quarter end, we amended our existing $360 million facility on substantially similar terms as the previous amendment while extending the maturity date from 2025 to 2027 and reducing the spread of our term loan facility by up to 10 basis points. At closing, we repaid the term loan with $155 million from drawings under the revolver facility and $25 million from cash on hand.
District financing allows us to continue borrowing at very competitive rates while providing additional flexibility for more debt repayments in the future. Finally, we contributed $27 million to pension plans in the quarter and made OPEC payments of $3 million. During the quarter, we announced the indifferent Eileen they come out and ammos newsprint mills, this event triggered a reduction of $30 million in pension liabilities with the offset, recognize and accumulated other comprehensive income.
The recently passed the American rescue plan act of 2021 includes provisions that allows for interest rates, moving affection funding deficits to minimize the impact of lower interest rates on liabilities, and also extends the amortization period for funding shortfalls to 15 years, rather than seven. On the previous rules, we expect this lot to provide approximately $30 in contribution relief per year for at least the next three years, which is anticipated to be implemented in 2021.
Once guidance is issued by the authorities, we previously provided a guidance of $120 million in pension contribution for 2021 when dissipate the number to be slightly lower. When the upcoming implementation of the U.S pension relief measures take effect in 2021. We expect to benefit from the full impact of the new law in 2022, considering the significant increase in thresher rates and the positive gains of the equity markets in the quarter, if the year what to add on March 31st, we would expect the funding ratio and an accounting basis and on a funding basis to have tightened, which would imply lower contributions in the future. But we will conduct that assessment only at year end in accordance with applicable accounting and pension funding rules.
Thank you, Sylvain. This has been an exceptional quarter for EBITDA generation, which underscores the strength and scale of our growing lumber business. As in any business, there will always be challenges. And in our case for now that includes trade barriers like softwood lumber duties, but the long-term defining feature for resolute comes down to fiber management infrastructure. We built deep roots in Quebec and Ontario to access high quality SPF fiber. And we developed a sophisticated infrastructure to manage fiber flows from harvesting through transformation, into a range of end products to maximize resource utilization and process efficiency.
As for near-term financial performance, we are optimistic that lumber will provide for another very strong quarter based on the market conditions and our healthy order book, while tissue should be more challenging in Q2 as a result of end market inventory rebalancing, we're looking for better contribution from pulp and paper as margins normalized toward trend out of the heaviest impacts of the pandemic.
There are a number of newer investors to the Resolute story, I want to underscore our recent announcement to set a 30% greenhouse gas emissions reduction target from 2015 levels by 2025. We were an early adopter of climate action as a cornerstone of our sustainability strategy. And I thought it was appropriate as one of my first actions as CEO to demonstrate our continued focus around this important issue. Today three quarters of our total energy needs come from renewable sources, such as Hydro Electricity and Carbon, Neutral Biomass. Our commitment to renewable energy is good for the environment and it's good for the bottom line.
It concludes our formal presentation. Open the call for questions
[Operator Instructions] Your first question comes from the line of Neil Patel of CIDP, capital markets. Please go ahead your line. Good morning.
Hi, Good Morning. Could you speak to, you know, what are the opportunities to debottleneck, the lumber platform and what sort of volume uplift, do you think you could, you could see over time?
Yeah. So one of the areas of focus for us, Amir has been in a saw mills. So we, we talked about some of the level setting investments that we announced when we acquired, acquired the mills, early last year and that is coming along pretty well there are additional, additional opportunities, that we think are, are pretty low hanging fruit that we're going to pursue in, in the coming borders. And we think the returns on those projects are very, very attractive, even at trend, lumber prices and we're talking just roughly, I'd say probably a $100 million board feet or so in, in the U S assets, but there's also some opportunities that we're considering, in Canada, in Quebec, in particular as a couple of things that we're looking at for more, incremental volume.
And then any thoughts you can share on maybe what the M&A environment for saw mills and we saw kind of a larger platform in Eastern Canada trade recently. you know, when you look at the potential opportunity sets, are there specific geographies that you're you're focused on?
Well, I think what we'd be focused on primarily Amir would be, synergies, synergy opportunities anything that would make sense within our network would be interesting, but you're correct. I think, prices are, are fairly elevated. We're aware of a couple of opportunities, but, we think about opportunities that may sense for us from a synergy perspective, a return perspective, and also make sure that we're paying a reasonable price, considering, trend levels.
Great. Last question from me, you know, it seems like there was, some lumber futures activity. I don't work the whole, you guys act as there in the past, is that maybe a shift in how you plan to kind of run that business and I didn't go forward basis, I will ask Sylvain, maybe to weigh in on this.
So I'm here. It's a good question. It's not a shift. I think this has been going on, at different times over the past years. I mean, it was basically a program that when lumber prices were reaching higher, we would get some futures. I mean, just to put it in perspective, we have about a thousand contracts outstanding at the end of March and that's coming down actually, at the moment. So as prices were rise, we would enter into those contracts to basically prolong, some of the benefit of high prices.
Now, the loss obviously comes from the fact that the price kept going in higher and higher and even continued after the end of March, to get a bit higher. So it's not a new thing, but, like I said, we, given, given that the order book is actually quite healthy, the benefit of those at this point is diminished. So, so we're not, so we're basically decreasing our position at this moment.
Great. Thanks for that. That says all I have.
Ma'am your next question comes from Sean Steuart of TD security. Please go ahead. Your line is open.
Thanks. Good morning. A couple of questions. Good morning. Remy, you referenced your strong lumber order book, into the second quarter. And I'm wondering if you could just provide some context around that, order file length now versus three months ago, particular areas of strength in what you're seeing and, and in any evidences of inventory building at all at any point in the supply chain from your perspective right now?
Yeah, no. Great, great question, Sean. you know, look at the order book, put, did you this way as, as strong as it's ever been, at this point it's about six to eight weeks out. So we're selling volume that, that we haven't saw it yet it's larger than the finished goods inventory that, that we have, the order book has been strong for the last several months, but it continues, to build.
So this is, this is a good thing for us we expect a price uptick in Q2 and average price uptick in Q2 versus Q1 based on that order book, and barring any unforeseen challenges, you know, we should be able to at least make up the volume that we put in inventory as a result of the logistics issues that we talked about in, in Q1 and pick that back up in, in Q2. So from a lumber perspective, things are pretty encouraging. Do we see signs of inventory building? I mean, I, don't, futures are, are healthy and, and rising is Sylvia was just talking. We've been a bit, victims of our success on price on the, on the hedging side but, as far as we can see now, it's, it's fairly, it's pretty encouraging what we see at least in the next, at least in the next quarter.
Thanks for that detail. the second question is the $12 million of costs at Calhoun Do a bit more detail on the process improvements you're undertaking there. And should we think of that as a recurring spend over the next few quarters, or was this a one and done event?
I know it's not a recurring spend at that level, Sean, I mean, Calhoun has not been, one of our best performing sites, in the last few years and in light of the difficult market conditions that we saw for its end products in 2018, 2019 and 2020, we wanted to try something different. So we worked with an outside firm to develop essentially, an improvement plan and turn around plan. And that plan includes, very specific milestones and some contingent payments. So, we recognized some contingent payments in that in the first quarter, that process is going to continue, but I expect that any expense that we recognize in the next few quarters will be, will be a much smaller than what we took in the first.
Okay. that's all I have for you. Thanks very much guys. Appreciate it. Thank you, Sean.
Your next question comes from Paul Quinn of RBC capital markets. Please go ahead your line.
Yeah, thanks very much morning. It just some wood products, It looks like shipments were a little bit less than we expected. Maybe you could just detail the rail car, truck availability issues you had in Q1 and whether that cleared up, right now?
Yeah, no, that's exactly it, Paul. So we saw about $50 million that we put inventory in, in inventory as a result of slow downs. And, you know, there was a cold snap, some snow in Arkansas and Texas, and that reverberated through the system in February and a couple of weeks thereafter. But, since then it has largely cleared up. So as I mentioned, you know, we think we will pick that volume back up in Q2 and it's, it's kind of a happy circumstance. That average transaction prices are higher in Q2 than they are, are they were in, in Q1.
So we're, we're pretty optimistic. Think one of the challenges that we see though is around the port of Montreal strike. so we don't think that'll be a material impact on us, but, any, hindrance to the logistics system could have, some impacts. We're not seeing, as I say, a material impact on us at this point, but we're watching it carefully and then noticing that you've got Eldorado and it needs up on two shifts now, and seasonally, Q2 production is higher than then. Q1, what kind of volume lift do you expect to quarter over quarter? So we're, we're looking for about 160 million board feet incremental to 2020 in 2021 sales in the first quarter were, were very, very low because the saw mills, we're just getting back, back in getting back up on their feet. So we had to build some inventory. We'll get a couple tens of thousands of board feet out in the second quarter, but for the year I'd be looking for about 160 million board feet out of those two mills.
Okay. That's great. And then just, talking about a little bit about M&A, but in the past, you guys have studied Greenfield. Is that off the table now? Or are you still, still testing off those plans in terms of, lumbered particular ball?
Yes. In terms of, yeah, nothing, nothing on the drawing boards.
Okay and just last question. Well, I guess a couple, just we've seen a flurry of full price increases how, how material do you think this, this, the price rise between Q1 and Q2 will be? I E mean we've seen the price increases. Just wondering how your realizations are going a quarter to date?
yeah, so we did plus 51 in the first quarter and maybe for the benefit of everybody, there's, there's two factors to keep in mind versus, what's announced what are announced, our list pricing increases. So there's always going to be a lag of probably a month or two before we can turn that into realize prices. And Liz prices are not transaction prices. There's a discount factor that, that applies. So, the numbers were pretty significant. We took a plus 51, in the first quarter. My expectation is that realized realizations will be strong the supply demand dynamics for Polk have tightened significantly in the last couple of months Shanghai futures are, are encouraging and what we see as our own order book, and I'm encouraged by that. So I think Q2, we're talking about a plus, you know, we're going to see a stronger gain in Q2 than we saw in Q1.
Okay. And, just lastly with the, I guess the indefinite Eileen of Bay Coleman and Almas, w what are the plans for those mills and what are the ongoing costs? Well, so the, the largest piece of the cost that we were sustaining there, Paul was a heating costs in, in winter, which was about $2 million a month you may recall that I had committed to heat the mills over the course f this last winter to preserve our options and what we said was that we would see, how demand developed, as I mentioned, newsprint demand in Q1 was down 25% versus year and so we took the difficult decision that it was time to say that the mills were indefinitely, idle pay employees, their, their severance, and then turn to something else. So we're working with, local committees to think about options for, re-purposing or other alternatives, for the mill but as you know, when it comes to TMP, newsprint, mills, the inventory of potential options, isn't, isn't very, very long so where we're having discussions with local committees, but nothing on the immediate horizon.
Your next question comes from Timothy – a private investor, please go ahead. Your line is open. Good morning, everyone.
Q –Unidentified Analyst
Most of my questions were answered. Could you talk more specifically about capital allocation? I was pleased to see the company buy back $1.7 million shares in the quarter $17 million, meaning your average cost was $10. So that means you bought some shares for more than $10. A lumber prices are obviously up even further. does this speak broadly about capital allocation? If you can, does this company, it could be arguably debt-free by the end of the year, depending on lumber prices, you obviously don't want to go to zero debt. You could use a lot of money to buy back stock. You did a special dividend a few years ago of a $50 a share with lumber. You see what I'm getting at. Can you discuss, capital allocation beyond M&A?
Yeah, no. Fair enough, Tim. And thanks for your question. So, I mean, on the, on the near term, and the focus is really around, building cash, and use the opportunity that we have with these high lumber prices to continue to leverage the company you know, if we could bring ourselves down to $300 million, being the senior notes, I think that'd be a pretty good, pretty good level and we also want to make lasting changes to the competitiveness of the strongest parts of our business.
So in no particular order of priority, the things that we're looking at, or, firstly to normalize cap backs back to, what should be about a hundred million dollars this year, our spending in Q1 was low. So that's going to pick up over the course of the year the second thing would be internal growth opportunities I mentioned some low-hanging fruit in, in U.S sawmills and some Canadians sawmills, on debt reduction.
We've actually reduced a hundred million dollars of our debt this year, so may talked about the $75 million as senior notes, refinancing net, net reduction there. And then when we did the, the retread of the farm loans, we use cash on hand to the revolver balance to 155 and then, you know, we're going to be opportunistic about, about share buybacks and other opportunities to return cash to shareholders. And in the case of acquisitions, as I mentioned earlier we would look at acquisitions and, you know, we liked Paul. We liked lumber, but only at the right price, if it makes sense, for us.
There are no further questions at this time. I'll turn the call back over to Marianne Limoges for closing remarks.
Thank you for joining us. Have a great day.
And this concludes the conference call. Thank you. you may now disconnect.