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Edited Transcript of RFP earnings conference call or presentation 1-Aug-19 1:00pm GMT

Q2 2019 Resolute Forest Products Inc Earnings Call

Montreal Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Resolute Forest Products Inc earnings conference call or presentation Thursday, August 1, 2019 at 1:00:00pm 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

* Silvana Travaglini

Resolute Forest Products Inc. - VP of IR & Treasurer

* Yves Laflamme

Resolute Forest Products Inc. - President, CEO & Director

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Conference Call Participants

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* Hamir Patel

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst

* 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 Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this call is being recorded today, August 1, 2019, at 9 a.m. Eastern Time.

I would now like to turn the meeting over to Ms. Silvana Travaglini, Treasurer and Vice President, Investor Relations. Please go ahead.

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Silvana Travaglini, Resolute Forest Products Inc. - VP of IR & Treasurer [2]

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Good morning. Welcome to Resolute's Second Quarter Earnings Call. Today, we'll hear from Yves Laflamme, President and Chief Executive Officer; and Rémi Lalonde, 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 presentation 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.

I will now turn the call over to Yves.

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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. Today, we reported $82 million of adjusted EBITDA for the second quarter, $22 million lower than $104 million reported in the first quarter. The decrease in profitability is due to lower selling prices following the highs of 2018. A notable exception was tissue, which benefited from higher pricing and also better productivity. This allowed us to deliver on our commitment, generating incrementally positive EBITDA this quarter. The overall unfavorable pricing impact was only partially offset by a reduction in cost, mostly seasonally lower energy expense and improved productivity.

By segment, we reported quarterly adjusted EBITDA of $32 million in market pulp, down $15 million from the first quarter. A slight positive for tissue, a $3 million improvement. Wood product was at $6 million, down $8 million. Newsprint, $25 million, a reduction of $10 million and $26 million in specialty paper, relatively unchanged from the previous quarter.

Despite the pricing challenges, with our actions and the strength of our network, we delivered solid margin in the pulp and paper businesses, which helped to mitigate cyclical headwinds in lumber as our tissue business gains momentum.

I would also like to add that our year-to-date results reflect better operating performance across most of our segments. In the quarter, we took advantage of our stock price underperformance to repurchase shares.

Our strong balance sheet gives us the flexibility to return value to shareholders and to continue to fund growth opportunities for the long term.

Let's review our individual segment, beginning with market pulp. World shipments to chemical pulp declined by 3% in the first 5 months of the year compared to the year ago period. Shipments to North America rose by 11%, but they fell by 11% and 4% to Western Europe and China, respectively. World shipments of hardwood were down 6%, but softwood pulp shipments were 1% higher during the same period. Global softwood mill ran at 91% shipments to capacity ratio, while hardwood mills were at 80%, reflecting significant producer inventory accumulation, particularly in Latin America.

The softening global markets weighed on our pulp sales, which dropped by 18% this quarter. Our average realized transaction price was down across all grades and shipments declined by 10%, leading to an increase in finished goods inventory at quarter end.

While production interruptions due to scheduled outages were moderately higher this quarter, it was more than offset by better operating efficiency, contributing to a strong EBITDA margin of 17%.

Total U.S. tissue consumption grew by 2.6% through June compared to the same period last year. Converted product shipments increased by 2.3%, including an improvement of 3.3% in away-from-home sales and 1.8% in at-home sales.

Our sales revenue was up again this quarter as we maintained a positive trend with increases in converted product volumes and prices for away-from-home products. Combined with productivity gains at our Calhoun tissue facility, the segment generated a marginally positive EBITDA.

We have made significant progress to address some of the challenges from the longer startup, and we are confident that the business will continue to gain momentum.

Housing starts in the U.S. were 4% lower on a seasonally adjusted basis in the first half of the year compared to 2018 averaging 1,238,000 units, which reflects a 5% decrease in single-family home and 2% decrease in multi-family homes. Weaker market condition pulled lumber prices down to cyclical throughout of Q4 2018, falling by $26 per thousand board feet compared to the first quarter and more than $160 since the same quarter of 2018.

On the other hand, our shipments were higher due to improved railcar availability and a modest increase in U.S. lumber consumption compared to the first quarter.

As previously disclosed, we temporarily curtailed lumber production in the quarter for a total of approximately 95 million board feet in the first half of the year. With sales exceeding production in Q2, we reduced our lumber inventory to more normal levels by quarter end.

North American newsprint demand fell by 16% in the first half of 2019 compared to the same period in 2018. Despite the pace of decline easing in June, demand from newsprint publishers fell by 20% through the first 6 months of the year, reflecting in part continued consumer inventory destocking, while demand from commercial printers declined 8%. The North American shipment-to-capacity ratio dropped to 84% compared to 96% in the year ago period.

Global demand for newsprint was down 8% through May compared to the same period last year, and the world newsprint shipment-to-capacity ratio was 85%.

Our overall average realized pricing fell to $597 per metric ton this quarter with a more significant drop in export sales.

During the quarter, we undertook steps to reduce our finished goods inventory with temporary downtime, production of short slowdown and by advancing maintenance outages.

Combined with an increase in export shipments, we reduced our newsprint inventory closer to the same levels at quarter end.

Despite the continuous structural demand decline, we delivered a solid 12% EBITDA margin in December. We are confident that we have the right assets to compete in these conditions and defend margin. North American demand for uncoated mechanical papers contracted 14% in the first half of 2019 compared to the year ago period. Lower consumption and some consumer inventory destocking led to a 20% decline in demand for standard grades, while demand for supercalendered grades dropped 7%. Compared to the first half of 2018, the shipment-to-capacity ratio for all uncoated mechanical papers decreased from 92% to 83%.

Even as the drop in North American demand accelerated in the second quarter, our sales volume remained relatively unchanged, decreasing by 3% compared to the first quarter.

Despite the decline in the average transaction price this quarter, our realized pricing remained $52 per short-term higher compared to the same quarter last year. As a result, our specialty papers segment continued to generate a solid 18% EBITDA margin.

I will now have Rémi discuss our financial performance before I conclude with our outlook.

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

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Thank you, Yves. Good morning, everyone. Today, we reported net income of $11 million in the second quarter or $0.12 per share, excluding special items.

This compares to net income excluding special items of $30 million or $0.32 per share in the previous quarter and $66 million or $0.71 per share in the same period last year.

Special items in the second quarter include nonoperating pension and OPEB credits of $12 million. Our total sales in the second quarter were $755 million, down by $40 million from the first quarter due to lower pricing across our segments with the exception of tissue. Overall, volumes were favorable as higher shipments in wood products and newsprint more than compensated for lower market pulp volume. The market pulp segment accounts for almost all of the reduction in sales, down by $42 million compared to the previous quarter.

Manufacturing costs improved by $19 million after removing the impact of volume and foreign exchange, reflecting seasonally lower energy costs, a reduction in recovered paper prices and better operating performance.

Compared to the first quarter, market pulp all-in cash cost decreased by $36 to $610 per metric ton, largely due to improved productivity and lower energy and fiber costs. But these lower costs were not enough to offset the $69 per metric ton drop in the average transaction price and the decline in shipments.

As a result, EBITDA decreased to $129 per metric ton, reflecting a 17% margin. Cash cost in our tissue segment fell by $100 per short ton, owing to productivity gains and lower maintenance costs.

Combined with continued sales growth, EBITDA was marginally positive this quarter, a $3 million improvement compared to the first quarter. Despite stable cash costs of $336 per 1,000 board feet and higher shipments, wood products' EBITDA decreased to $6 million in the quarter compared to $14 million in the previous quarter due to weaker pricing. Newsprint cash cost remained relatively unchanged this quarter at $525 per metric ton as higher maintenance expenses, mostly planned, were largely offset by lower energy costs.

Pricing, however, declined by $37 per metric ton, decreasing EBITDA to $25 million for the quarter or $72 per metric ton.

The cash cost in specialty papers improved by $24 per ton to $619, even as wood costs in the U.S. Southeast remained high.

Lower energy and maintenance expense compensated for lower sales and EBITDA remained relatively unchanged at $26 million or $134 per short ton. The EBITDA margin improved to 18%. We ended the quarter with $98 million of cash, with total liquidity at a strong $590 million.

Net debt-to-EBITDA remained very low at 0.7x. In the second quarter, we generated $72 million of cash from operations, $49 million more than in the first quarter. This reflects the seasonal reduction in log inventory as the drop in newsprint and lumber finished goods inventory offset lower EBITDA and the increase in market pulp inventory.

We spent $45 million in capital expenditures in the first half of the year. We expect to invest approximately $150 million for the full year, slightly lower than our previous estimate of $160 million.

Our 2019 CapEx includes the next phase of our organic expansion project at Saint-Félicien as well as a number of investments to improve costs and productivity at sawmills.

For the quarter, we paid $19 million in softwood lumber duty deposits, and we now have $136 million recorded on the balance sheet.

During the quarter, we took advantage of our strong financial position and attractive bank market conditions to renew our ABL credit facility for another 5 years, further strengthening our balance sheet and providing us with a competitive source of liquidity for the long term.

Given the recent stock price underperformance, we also returned $12 million of capital to our shareholders with the buyback of 1.8 million shares to date in 2019, representing approximately 2% of our total outstanding shares. There remains $12 million under the existing share repurchase program.

Finally, we contributed $23 million to pension plans in the quarter and made OPEB payments of $3 million with an expense of $7 million included in adjusted EBITDA.

We continue to expect to make $100 million of pension contribution and $15 million of OPEB payments in 2019 with an associated expense of $30 million in adjusted EBITDA.

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. We expect our recent market trends to continue to affect the results of most of our business segments in the third quarter.

For market pulp, global conditions are expected to remain weak, given high industry inventories and softer demand.

We believe pricing pressures will continue in the short term, further impacting our profitability in the third quarter.

Shipments, however, are expected to be higher. Our view of the market pulp fundamentals remains unchanged. We believe that limited supply additions and growing demand with super favorable market dynamics over the medium term.

The extended annual pulp outage at our Calhoun facility mentioned in our first quarter earnings call and scheduled outage at Thunder Bay led to 10,000 metric tons of lost production in the second quarter.

We expect that scheduled outages in the third quarter will impact pulp production by approximately 7,000 metric tons.

Our tissue segment remains a key focus as we continue to build on the encouraging improvements realized to date with further sales growth and productivity gains.

For lumber, we are cautious in our outlook in the short term as demand remains soft. While our near-term outlook is more uncertain, we believe in the growth prospects for lumber markets. Pricing headwind for our paper grades including protectionist measures in India are expected to continue to affect results in the second half of the year.

We will carefully manage our finished goods inventory to have offset the ongoing structural demand decline. Our competitive assets, diversified operating platform and financial strengths position us well to weather the current headwind and to pursue growth opportunity in our businesses.

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Silvana Travaglini, Resolute Forest Products Inc. - VP of IR & Treasurer [6]

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This concludes our formal presentation. Operator, we will now open the call for questions.

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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 Hamir Patel from CIBC Capital Markets.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [2]

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Yves, I was wondering if you could expand on your cautious near-term outlook for lumber markets. What's your sense as to where inventories are in the channel today?

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

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I think the inventory in the channel is certainly going down with the market. The demand has been pretty stable, not very high, but pretty stable. And as you can see, there is a lot of shutdown and also temporary curtailments like we did and our competitor did as well. We saw some more this morning, and it takes a time, as you know, going from the sawmills to the customers to kind of emptying the channels. But I'm confident that going forward, that's going to be balanced. And it's going to take probably a little while than a quarter to make sure that we see the impact of it. But I see that channel is going to be not that high. As I said, even us, what we did lately, we're pretty bad shape as far as inventory, so...

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [4]

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And have you announced any lumber curtailments for Q3 yet?

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

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Not yet, but we still have a couple of mills that are still down or reduce shifts, I would say so. We certainly have some volume that's going to be down in the third quarter, which is already on its way right now, which is mostly sawmill. So as you know, there is a significant difference between the two with random length. So this is what we're doing now, we're trying to focus running our random length mills and using the fiber we have to run maybe more random lengths now.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [6]

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Right. And then just turning to the newsprint segment. It looks like your realizations were down about $40 per ton quarter-over-quarter. For everything I've been reading suggest export prices have fallen a lot more than that.

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Yves Laflamme, Resolute Forest Products Inc. - President, CEO & Director [7]

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Yes.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [8]

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So how should we think about pricing in Q3? Is it just a lag and that's going to show up given your mix? How should we think about the sequential price drop-off into Q3?

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Yves Laflamme, Resolute Forest Products Inc. - President, CEO & Director [9]

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Well, I think that -- I think, as I said, we're going to have -- certainly feel more pressure on the third quarter as we did this quarter. I talk about the India tariff, that's going to have a certain impact for sure on the market. Certainly, on the mills, there is no impact on the shipments. And so it means that it's going to be a lot more maintenance going overseas or part of what we're doing and our competitors as well. So as far as the gap with the U.S., it depends on the inventory situation. And as we said, so far, I think that as a company, at least we've done a pretty good job to manage our inventories. So we're going to keep doing that so as needed.

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Operator [10]

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(Operator Instructions) Your next question comes from the line of Sean Steuart from TD Securities.

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Sean Steuart, TD Securities Equity Research - Research Analyst [11]

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Two questions. First of all, with respect to India, can you give us a sense of what percent of your offshore business would go to India right now?

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Yves Laflamme, Resolute Forest Products Inc. - President, CEO & Director [12]

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Yes, we will about, I would say -- I would say about what percentage of our exports going to India, I would say, we're exporting about 40% of our products and so. And India, as you know, not just for us, but for the newsprint industry, is a significant buyer of customers of the export newsprint sales.

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Sean Steuart, TD Securities Equity Research - Research Analyst [13]

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Got it. And Yves, with respect to the North American newsprint market, you referenced some of the volume pressure year-to-date being customers destocking inventory. Do you have a sense of how lean their inventories are at this point? Is there more destocking to go on the buyer front?

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Yves Laflamme, Resolute Forest Products Inc. - President, CEO & Director [14]

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No, I don't have the numbers for that for sure. But we expect that -- we can see going forward that we're talking about a 20% decrease at the beginning of the year and now we saw last month that it's significantly going down as far as the decrease. So this -- we can see the gap that is closing compared to last year. We're talking about 12%. Now overall, this year, we're talking probably about 14%. So there is probably 2% more, it means that if you take the 20% at the beginning of the year, and where we are today, I'm just feeling that the inventory is definitely going down, so...

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Sean Steuart, TD Securities Equity Research - Research Analyst [15]

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Understood. Last question, maybe for Rémi, can you give us a sense of how your 2020 CapEx budget is shaping up? And broader thoughts on capital allocation priorities given your robust liquidity position, I know you have a bit more on the buyback, but any broader thoughts on your priorities for capital allocation?

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Rémi G. Lalonde, Resolute Forest Products Inc. - Senior VP & CFO [16]

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So we've tended to trend, Sean, in the $140 million to $160 million range for CapEx. So absent any special projects, using $140 million to $160 million for next year is a pretty good number. As far as priorities going forward, obviously, in the last couple months, we've bought back some shares as far as capital allocation goes. So that's $12 million that we've returned to shareholders there. And then it's something that we continue to review in terms of projects that can generate the most amount of EBITDA. And as you know, earlier this year, we've also reduced our debt going forward. So yes, we do have quite a bit of flexibility owing to the work that we've done on the balance sheet in the last year or so. And we're setting our priorities now for some of the things that we're going to look into for next year. Clearly, in a market where pulp prices and lumber prices are low, that could open up some opportunities for us to look at some various opportunities.

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Operator [17]

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There are no further questions at this time. I turn the call back over to the presenters for closing remarks.

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Silvana Travaglini, Resolute Forest Products Inc. - VP of IR & Treasurer [18]

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Yes. So this concludes our conference call today. Thank you, everyone, for joining.

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Yves Laflamme, Resolute Forest Products Inc. - President, CEO & Director [19]

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Thank you.

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Rémi G. Lalonde, Resolute Forest Products Inc. - Senior VP & CFO [20]

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Thank you.

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Operator [21]

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This will conclude today's conference call. You may now disconnect.