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Edited Transcript of RFP earnings conference call or presentation 30-Jan-20 2:00pm GMT

Q4 2019 Resolute Forest Products Inc Earnings Call

Montreal Feb 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Resolute Forest Products Inc earnings conference call or presentation Thursday, January 30, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Rémi G. Lalonde

Resolute Forest Products Inc. - Senior VP & CFO

* Yves Laflamme

Resolute Forest Products Inc. - President, CEO & Director

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Conference Call Participants

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* Sean Steuart

TD Securities Equity Research - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Resolute Forest Products Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions)

Please note that this call is being recorded today, January 30, 2020, at 9:00 a.m. Eastern Time.

I would now like to turn the meeting over to Mr. Rémi Lalonde, Senior Vice President and Chief Financial Officer. Please go ahead, Mr. Lalonde.

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Rémi G. Lalonde, Resolute Forest Products Inc. - Senior VP & CFO [2]

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Thank you. Good morning. Welcome to Resolute's fourth quarter earnings call. You can follow along with the slides for today's presentation by logging on to the webcast using the link in the Presentations and Webcasts page under the IR section of our website or you can download the slides.

Today's presentation will include non-GAAP financial information. Our press release and the appendix to the slides include a reconciliation 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 do. Please review the cautionary statement in our press release and on Slide 2 of today's presentation.

I will turn the call over to Yves Laflamme, President and Chief Executive Officer.

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Yves Laflamme, Resolute Forest Products Inc. - President, CEO & Director [3]

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Good morning. Thank you for joining us. We reported $4 million of adjusted EBITDA in the fourth quarter compared to $23 million in the third quarter. This reflects the combination of bottom of the cycle, condition in market pulp, ongoing pricing pressures in paper grades and the slow pricing recovery in lumber.

On the positive side, manufacturing costs improved as a result of lower maintenance costs. We're also pleased with the quarterly increase in tissue business EBITDA and the progress with our initiatives around sales growth and productivity gains. In the quarter, we took the difficult decision to indefinitely idle our newsprint mill in Augusta, Georgia. With its cost position, the mill was especially exposed to the ongoing structural decline in North American newsprint consumption. While difficult, the decision allows us to focus production in our more competitive mills and to eliminate substantial fixed costs associated with the surplus capacity.

By segment, we reported quarterly adjusted EBITDA of negative $12 million in market pulp, down by $7 million from the third quarter; $4 million for tissue, up by $3 million; wood products was unchanged at $4 million; newsprint, $7 million, a reduction of $4 million; and $10 million in specialty papers, down by $5 million from the previous quarter.

For the whole year, adjusted EBITDA was $213 million compared to $574 million in 2018. After the highs of 2018, some of the headwinds to EBITDA include a significant drop in pricing, especially in lumber and market pulp, higher manufacturing costs, loss contribution following last year's sales of Catawba and Fairmont and lower overall shipments. The pending acquisition of 3 sawmills in the U.S. South, on which we expect to close in the coming days, is an important step in our transformation strategy. With combined production capacity of 550 million board feet, the transaction will give us a major scale in an attractive region with quality assets in a rich fiber basket close to growing end markets.

It gives us an opportunity to create value by developing our operational expertise in sawmilling, with a focus on reliability, productivity and safety. With our financial strength, we will bring the support necessary to complete the capital investments started under Conifex to meet the appropriate working capital, especially fiber and upgrade maintenance practices. We will further refine our plan for capital investment and operating schedules once we take control of the assets after the imminent closing of the transaction. We currently expect, however, to invest approximately $20 million at the idle El Dorado facility over a gradual ramp-up period with a target start-up in 2021.

We don't see any major capital requirement for plain wood [across city] at this time. Our target for 2020 is to produce 265 million board feet of lumber with these assets on an annualized business and to gradually increase to full production by the end of 2022. We have not publicly set a specific target for synergies in the transaction, but we fully expect to leverage our scale to create value in fiber supply optimization, corporate procurement and other corporate functions.

Let's review our individual segments, beginning with market pulp. Global demand for chemical pulp in 2019 posted a 2% increase through November against 2018. Softwood increased by 6% and hardwood was flat, but this reflects a late year surge in demand for both grades, mostly from China, and it suggests a reversal of the inventory cycle that started with significant destocking in 2018.

With producer inventories at the end of November back within normal range, 45 days for hardwood and 33 days for softwood, operating rates for the year averaged 93% for softwood and 86% for hardwood and improving. Weaker pricing for fluff pulp and RBK pulled down our average transaction price by $24 per metric ton in the quarter, even as our realized softwood price started to improve from the third quarter. This supports our view that the cyclical downturn reached its low in the quarter. Our shipments were also 27,000 metric tons lower, which is the result of the scheduled annual outage at our Saint-Félicien mill as well as production disruptions in Calhoun. Finished goods inventory dropped to its lowest level since 2012 at 68,000 metric tons. Total U.S. tissue consumption grew by 3% through November compared to the same period last year. Converted product shipments increased by 2%, including an improvement of 3% in away-from-home and 2% in at-home. Our average transaction price for tissue was dropped slightly in the quarter, and volume was a bit lower. But when compared to the same quarter in 2018, the average transaction price was up by 12%, which reflects higher prices across the business as well as an improvement in our product mix with the percentage of converted products up to 83% from 74%.

With a strong finish to the year, there were nearly 1.3 million housing starts in the U.S. in 2019, up by 3% compared to 2018, which reflects a 1% increase in single-family starts and a 7% increase in multi-family starts. Although we realized a $22 per thousand board feet increase in the average transaction price for lumber in the quarter on the back of a gradually improving pricing environment, shipments were down by 39 million board feet. This is because of the seasonally slower fourth quarter and lingering uncertainty around the strength of the recovery, which now appears to be dissipating. Consistent with the third quarter, we took 70 million board feet of downtime in the quarter, which brings us to 240 million board feet for the year.

North American newsprint demand fell by 14% in 2019 compared to 2018. Demand from newsprint publishers fell by 17%, while demand from commercial printers by 9%. Even with the slower pace of demand decline in the fourth quarter, the North American shipment-to-capacity ratio dropped to 84%. Global demand for newsprint was down by 13% through November compared to the same period last year, and the world newsprint shipment-to-capacity ratio was 81%. As a result, the average transaction price slipped by $30 per metric ton in the quarter, reflecting continued weakness in offshore market, especially in Asia, and building pressure in North America. Nevertheless, overall shipments were unchanged in the quarter. Domestic shipments were 65% of total shipments compared to 61% in the same period last year.

North American demand for uncoated mechanical papers contracted by 16% in 2019 compared to last year, reflecting a 21% drop in standard grades and 11% for supercalendered grades. Compared to 2018, the shipment-to-capacity ratio for all uncoated mechanical papers decreased from 92% to 82%. The average transaction price slipped by $30 per short ton in the quarter, reflecting mostly weakness in the white paper market. Our quarter-over-quarter shipments, however, rose by 12,000 short tons due to seasonality and inventory dropped to a new low of 40,000 short tons.

I will now have Rémi discuss our financial performance before I conclude with our priorities and outlook for 2020.

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Rémi G. Lalonde, Resolute Forest Products Inc. - Senior VP & CFO [4]

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Thank you, Yves. We reported a net loss of $53 million in the fourth quarter or $0.59 per share, excluding special items. This compares to a net loss, excluding special items, of $34 million or $0.37 per share in the previous quarter and net income, excluding special items, of $4 million or $0.04 per diluted share in the same period last year. Special items in the fourth quarter include $31 million of costs associated with the indefinite idling of the Augusta mill and nonoperating pension and OPEB credit of $11 million. Our total sales in the fourth quarter were $668 million, down by $37 million from the third quarter. The price of lumber rose by over 6%, but its effect was more than offset by a 5% reduction in newsprint, 4% in market pulp and 4% in specialty papers. While specialty paper shipments were higher, overall sales volume was down due to lumber and pulp.

Our manufacturing costs decreased by $8 million in the quarter after removing the impact of volume, foreign exchange and also the write-down of inventory in Augusta. Compared to the third quarter, the all-in delivered cost for market pulp was unchanged as the impact of lower maintenance costs was offset by the lower shipments. Combined with the reduction in average transaction price, EBITDA decreased to minus $12 million.

Delivered cost in tissue fell by $116 per short ton in the quarter, or 6%, as a result of lower internal pulp costs, leading to a $3 million improvement in EBITDA to $4 million. In the wood products segment, the delivered cost rose by $26 per thousand board feet due to higher costs related to roadbuilding, log transportation and stumpage fees as well as the lower shipments. But the impact was largely offset by the higher average transaction price, leaving EBITDA unchanged at $4 million for the quarter.

Newsprint's delivered cost was $15 per metric ton lower in the quarter, reflecting the cost benefit of idling Augusta, which only operated for less than 2 weeks in the quarter. But with the lower average transaction price, EBITDA fell to $7 million for the quarter. The delivered cost in specialty papers was essentially unchanged despite production disruptions in Calhoun as overall shipments rose. But EBITDA slipped to $10 million due to the decrease in realized pricing.

We used $35 million of cash in operating activities in the quarter, which reflects lower profitability and also a payment of $14 million following an unfavorable court decision, which we're appealing, in the Fibrek case. There was only a $2 million cash impact out of the $31 million of idling-relating costs for Augusta, although we expect another outflow of up to $5 million this quarter.

Consistent with our updated guidance, we spent $31 million for capital expenditures in the quarter, bringing our net annual spend to $113 million. For 2020, we expect to spend about the same amount on our existing asset base, not including spending on the 3 U.S. sawmills. We paid $13 million in softwood lumber duty deposits in the quarter, bringing our total deposits to $162 million, which is recorded in other assets on the balance sheet.

We recently completed the Board-approved share repurchase program, with the repurchase of 3 million shares for $12 million. For the year, we've spent $24 million on 5 million shares, over 5% of the total outstanding, as part of our initiatives to return capital to shareholders. By quarter end, we had drawn $25 million from our revolving credit facilities to support working capital needs, and, accordingly, we ended the quarter with $3 million of cash on the balance sheet. Our liquidity, though, remains strong at $583 million at quarter end, which includes the recently extended and upsized $360 million senior secured facility.

Finally, we contributed $24 million to pension plans in the quarter and made OPEB payments of $2 million, with a combined expense of $8 million included in adjusted EBITDA. Consistent with our earlier indication, in 2019, we made $99 million of pension contributions and $12 million of OPEB payments, with an associated expense of $33 million in adjusted EBITDA. As a result of the significant drop of 80 basis points in applicable discount rates, our debt pension and OPEB liability increased by $203 million compared to the 2018 year-end. Due to lower discount rates and the ongoing phaseout of MAP-21 in the U.S. and to late year rule changes in the province of Québec, we expect our corresponding funding obligation to increase by over $10 million in 2020 to more than $110 million in pension contributions and $13 million of OPEB.

I will now turn it back to Yves for concluding remarks.

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Yves Laflamme, Resolute Forest Products Inc. - President, CEO & Director [5]

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Thank you, Rémi. Our key business priorities in 2020 are as follows: first and foremost, we will continue to build on our world-class safety performance. 2019 was our second consecutive year below an OSHA of total incident rate of 0.5 and a 6-year below 1, which is the result of the coordinated efforts of our thousands of employees. We will also continue with our initiatives around workforce attraction and retention. Secondly, I talked about the acquisition of 3 U.S. sawmills as an important step in our transformation strategy. As a team, we are focused on integrating the assets quickly and efficiently. Our goal is to repeat our previous successes with sawmill integrations. Third, in the tissue business, we will continue to build on our 2019 improvement by focusing on customer portfolio optimization to improve margins and closing the converting gap to sell more converted products and to reduce the roughly 20% of parent rolls in the business. Fourth, especially in the challenging conditions we currently face in paper, we must continue to focus on maximizing operational performance and avoiding production disruptions across our network. We will also look to maximize the value generation from our existing assets, reduce cost and further strengthen our competitiveness such as our project to modernize the paper machine at Kénogami to produce high-grade SCA+ supercalendered paper. Finally, we will maintain our focus on acquisition and organic opportunities to further our business transformation. This includes initiatives such as our recently announced plans to grow in biomaterial with the construction of a cellulose filament plant in Kénogami, which highlights the added value we can bring to fiber through our role in this transformation as we look to build the forest products industry for the future.

After a $200 per metric ton drop in average transaction price in market pulp from its peak in the first quarter, we think the cycle reached bottom in the fourth quarter. We see stronger operating rates, especially for softwood pulp as an indicator of long-term demand growth for quality market pulp. Together with recent capacity constraints, we believe that this report -- the recently reported steps the industry has taken toward pricing recovery, partly to offset widening the discounts expected in the first quarter. As I indicated a moment ago, we expect, in 2020, to build on the recent improvement around sales and productivity gains to realize progressive earnings growth in the tissue business.

For paper, our objective continues to be maximize the earnings power and cash generation, although we have modest expectation when it comes to this year's earnings as there are limited catalysts to support a material improvement in the near term. On the other hand, we're encouraged with the momentum that appears to be building in the lumber market, based on housing starts data and the improving pricing environment. We believe that we achieve an attractive valuation with our pending acquisition, but the upside will come with a turnaround plan we have for the assets as well as market condition lifting from the soft levels of 2019.

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Rémi G. Lalonde, Resolute Forest Products Inc. - Senior VP & CFO [6]

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This concludes our formal presentation. Operator, we'll open the call for questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Sean Steuart.

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Sean Steuart, TD Securities Equity Research - Research Analyst [2]

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Few questions on CapEx plans. First, just wondering if you can go into some more detail on the initiatives at Kénogami, connect the dots potentially on expected returns on the investments. And maybe if you can provide a little more detail for follow-on investments for cellulose filaments and the growth potential for that business.

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Yves Laflamme, Resolute Forest Products Inc. - President, CEO & Director [3]

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First, if I go with the investment on the paper machine in Kénogami, we saw -- as you know, we have 2 SC mills, which is Dolbeau and Kénogami. They are located in the same region, so -- and any other paper business, the SCB consumption is going down. And we saw potential by the move from higher quality paper, moving to a little more demand on the SCA+. So without that -- by this investment that we could have a quick payback on both sides, the first one being that getting more under on the SCA+ and the better return and extending the life of that paper machine, at the same time having the possibility to move more SCB to have a better, let's say, other 5 at the Dolbeau mill. So it's kind of synergies between the 2 paper mills. And so far, we feel pretty good about it.

The other thing is that by investing in Kénogami, the relation between the 2 with the CF project, having a solid paper machine with the capacity to produce a better paper in Kénogami with the SCA+ and SCA++, then we can take the time to build a project on the CF. And as far as the CF, as you know, it's a pretty innovative product and with the JV we have with Mercer to -- on the marketing and development of those markets, we're pretty hopeful that the time it's going to take to do better on the SCA with the paper machine, we can have, I would say, an okay market for CF, and even though we can use a little of it in our own operation. So -- and also, it's a little synergy with the pulp kraft and kraft pulp from Saint-Félicien. So it's all located in the same region. So we're pretty optimistic about being successful with the SCA+, moving SCB to Dolbeau, some kraft to the CF. And hopefully, as we go, the first step is to run the CF on one shift, which is a little volume. And if it goes well, hopefully, we can run 7 days on that project.

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Sean Steuart, TD Securities Equity Research - Research Analyst [4]

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That's great detail. How should we think about the CapEx there and, I guess, at El Dorado? How does that fit into the broader CapEx plan for 2020? Do you have a total dollar figure you're comfortable going with for guidance?

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Yves Laflamme, Resolute Forest Products Inc. - President, CEO & Director [5]

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Yes. I believe, as Rémi mentioned in his presentation, we expect pretty much the same CapEx in our current asset as we have and as we did in 2019. So -- and that was -- it's a current asset that excludes what we feel which we're going to do with the acquisition of the sawmill. So when we said that about $20 million in El Dorado, I think, is giving you a pretty good ballpark.

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Operator [6]

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(Operator Instructions) There are no further questions at this time. I turn the call back over to the presenters.

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Rémi G. Lalonde, Resolute Forest Products Inc. - Senior VP & CFO [7]

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Okay. Thank you, everybody, for joining us today. Have a good day.

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Operator [8]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.