Resolute Forest Products Inc (RFP) Q4 2018 Earnings Conference Call Transcript
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Resolute Forest Products Inc (NYSE: RFP)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 9:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning ladies and gentlemen. Welcome to the Resolute Forest Products Fourth Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the presentation we will conduct a question-and-answer session. (Operator Instructions) Please note that this call is being recorded today January 31st, 2019, at 9:00 a.m. Eastern Time.
I'd now like to turn the meeting over to, Ms. Silvana Travaglini, Treasurer and Vice President of Investor Relations. Please go ahead.
Silvana Travaglini -- Treasurer, and Vice President, Investor Relations
Good morning. Welcome to Resolute's Fourth Quarter Earnings Call. Today, we'll hear from Yves Laflamme, President and Chief Executive Officer; and Remi Lalonde, President and Chief Financial Officer. You can follow along with the slides for today's presentation by logging onto 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 US 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 cautionary statements in our press release in the slide two of today's presentation.
I would now turn the call over to Yves.
Yves Laflamme -- President and Chief Executive Officer
Good morning. Thank you for joining us today. We generated $105 million of EBITDA in the fourth quarter, down from $189 million in the third quarter. While prices continued to be strong for market pulp and paper grades, the effect was more than offset by the $110 per thousand board feet drop in lumber prices, as well as production restrictions, plant maintenance, seasonally higher energy expenses and higher wood costs, due to extremely wet weather mainly in the US Southeast.
By segment, we reported quarterly adjusted EBITDA of $46 million in Market Pulp down $18 million; Tissue was unchanged at minus $5 million; Wood Products generated $1 million, down $52 million; Newsprint $45 million, down $3 million; and $28 million in Specialty Papers, a decrease of $10 million against the previous quarter. For the year, our adjusted EBITDA rose by $210 million to $574 million. With the positive pricing momentum for pulp and paper grades, as well as for lumber during the first half of the year, we generated $435 million of cash from operations, a year-over-year increase of over $275 million.
In the fourth quarter, we completed the sale of our Catawba and Fairmont facilities for over $360 million, maximizing the value generation of these assets. Without Catawba, we estimate that EBITDA would have been about $35 million lower in 2018, but the transaction allowed us to achieve attractive valuation for conversion-ready assets. With the Fairmont divestiture, we can optimize recycled pulp production at our Menominee Mill and improve our overall profitability.
The asset sales and our solid operating results enabled us to return $136 million to shareholders through a special dividend and further reduced our leverage by $225 million shortly after year-end.
With the strong balance sheet, we are well positioned to fuel growth in our business. Let's review our individual segments, starting with Market Pulp. World shipments of chemical pulp grew 1% in 2018 compared to the prior year. Shipments to China were up 2% for the year, but were down 11% in the fourth quarter when compared to the third quarter. Western Europe shipments were also up 2% for the year, while shipments to North America fell by 5%.
Softwood pulp shipments were 3% lower during the same period, while world shipments of hardwood rose 4%. Softwood mills ran at 88% shipments-to-capacity ratio and hardwood mills were at 89%, largely reflecting industry production disruptions, as well as recent softening in Chinese buying activity.
Pulp markets remained strong in the fourth quarter leading to further reported price increases in October and November across all our pulp grades. Our realized price rose to $809 per metric ton in the quarter, up $123 year-over-year. Shipments were lower, however, largely due to scheduled maintenance downtime at Coosa Pines soft pulp mill and our Thunder Bay kraft mill and the reduction in recycled pulp capacity following the sales of the Fairmont facility.
Our production was also negatively impacted by wood shortages in Calhoun due to extremely wet weather, as well as (inaudible) issue at the same mill. Weather-related fiber shortages continued to be a headwind going into the first quarter.
Total tissue consumption in the US grew by 2.7% through November compared to the same period last year. Converted product shipments increased 2.1%, led by away-from-home sales of 3.3%, while at-home improved 1.5%. Our sales growth has been on target this year, reflecting a refocus on our market entry and growing Resolute Tissue brand awareness in the marketplace.
While the ramp up with our Calhoun Tissue project has not been as rapid as we had originally expected, we have been seeing again an encouraging progress in the fourth quarter to improve quality and productivity. We therefore expect Calhoun Tissue to become profitable in the first half of 2019.
Housing starts in US were 5% higher on a seasonally adjusted basis through November compared to 2017, averaging 1,264,000 units, which reflects an 8% increase in multi-family starts and a 3% decrease in single-family starts, but in the quarter lumber prices dropped to multi-year lows. Our average transaction price fell to $347 per thousand board feet, it's lowest level in two years, essentially reducing our EBITDA to breakeven.
Given challenging market conditions, combined with extremely wet weather affecting transportation and log cost, we temporarily curtailed 10% of our production capacity during the quarter. Despite the lower production, sales volume improved slightly compared to the previous quarter.
North American newsprint demand fell by 11% in 2018 compared to last year, reflecting a 14% drop in demand from newspaper publishers and a 7% reduction from commercial printers. The North American shipments-to-capacity ratio remained strong at 94%, unchanged from 2017.
Global demand for newsprint was down 8% through November compared to the same period last year, with Western Europe down 11%, North America 9% and Asia 8%. The world newsprint shipment-to-capacity ratio was 90%. Out sales continued to decrease in the quarter, with realized pricing reaching $634 per metric ton. Shipments were seasonally higher and also reflected higher international sales, largely timing related.
North American demand for uncoated mechanical paper was down 6% in 2018 compared to the prior year. Lower demand for standard grades drove this decline, decreasing 9%, while the demand for supercalendered grades was down only 1%. Compared to 2017, the shipment-to-capacity ratio improved from 90% to 92%.
Coated mechanical demand was down 8% in 2018 compared to the prior year. The industry shipment-to-capacity ratio was 95%, unchanged from 2017. With the sale of Catawba, we have exited coated mechanical grades. Average transaction price rose by $19 per short ton compared to the previous quarter, supported by the continued implementation of previously announced price increases across all grades and a further price increase announced for supercalendered papers in the quarter. Shipment remains relatively unchanged as higher seasonal demand for supercalendered paper was offset by production downtime, largely at our Catawba mill.
As we look at the whole year, I'm proud to report that, in 2018, not only did we deliver strong financial performance, but our employees also improved on our excellent 2017 safety performance by achieving a world-class OSHA incident rate of 0.46. We also managed to reduce environmental incidence by a further 10% in addition to the significant reduction in 2017. In 2018, our overall business and sustainability leadership has received significant recognition with over 35 awards and distinction on a regional, North American and global business.
I will now have Remi discuss our financial performance, before I conclude with our (inaudible) and outlook for 2019.
Remi Lalonde -- Senior Vice President and Chief Financial Officer
Thank you, Yves, and good morning everyone. Today, we reported net income of $4 million in the fourth quarter, or $0.04 per share, excluding special items. This compares to net income of $14 million, or $0.15 per share, in the fourth quarter of 2017, and $96 million, or $1.03 per share, in the third quarter.
Special items in the fourth quarter include: non-operating pension and OPEB credits of $12 million; gains on the sale of Catawba and Fairmont facilities for $141 million; and non-cash impairment charge of $120 million against the goodwill and long-lived assets originally recorded with the 2015 acquisition of Atlas Paper Holdings. Despite helping to pave our entry into the tissue business and making significant safety and operational improvements, this acquisition has not lived up to our expectations.
Our total sales in the fourth quarter were $932 million, down by $42 million from the third quarter. While we realized higher prices in the pulp and paper segment, the real story was the $110 per thousand board feet, or $49 million drop in lumber prices. Overall volume was also lower as a result of a 25,000 metric ton drop in pulp shipments.
After removing the effects of volume and foreign exchange, manufacturing costs increased by $45 million from the third quarter, including higher costs associated with scheduled outages and production disruptions, including a turbine failure in Thunder Bay, and the recovery boiler outage in Calhoun, seasonal increase in energy pricing and consumption aggravated by the national gas distribution interruption in Calhoun, and higher wood costs in US Southeast due to weather-related fiber shortages.
Compared to the third quarter, market pulp's all-in cash cost increased by $64 to $673 per metric ton, largely due to scheduled outages, production disruptions, as well as higher weather-related wood costs and an increase in energy cost. Pricing in this segment rose by $25 per metric ton, but the impact was not enough to make up for the higher costs, driving EBITDA down by $18 million to $46 million, or $136 per metric ton.
Cash costs in our tissue segment were unchanged and elevated as we continue with the ramp up of Calhoun. EBITDA was unchanged at minus $5 million in the quarter. In wood products, the cash costs increased by $9 per thousand board feet to $346, reflecting higher maintenance and log costs. Combined with the 24% drop in pricing, EBITDA dropped by $52 million to $1 million this quarter.
Newsprints' cash costs increased by $19 per metric ton to $518 in the quarter, largely due to the lower contribution from Thunder Bay co-generation assets following a turbine failure. Despite the 6% rise in sales, EBITDA declined slightly from $48 million to $45 million, or $116 per metric ton. The cash costs in specialty papers rose by $57 per short ton to $661. Higher costs due to operational disruptions, the annual maintenance of the Dolbeau co-generation assets, as well as higher wood and energy costs more than outweighed the $19 per short ton price increase in the quarter.
EBITDA decreased to $28 million, or $95 per short ton compared to $38 million in the previous quarter. With our asset-based optimization over the years, we were able to deliver a strong performance in 2018, including generating $435 million of cash from operations in the year, and $84 million in the quarter. This helped to pave the way to return $136 million to shareholders with a special dividend in December.
Together with the $334 million of proceeds from asset sales in the quarter, our year-end cash position rose to $304 million. With liquidity improving to $821 million at year-end, we elected to repurchase $225 million of our senior notes, which we were able to execute at par. Accordingly, our net debt-to-EBITDA improved to 0. 6 times. We spent $61 million in capital expenditures in the quarter, $20 million more than in the previous quarter. At $155 million for the year, we came in slightly above the 2018 target of $150 million.
For 2019 we expect to invest $160 million in capital expenditures, including the next phase in our organic capacity growth project at Saint-Felicien, and a number of investments to improve productivity and yields at our sawmills.
For the quarter, we paid $15 million in softwood lumber duty deposits. We now have $103 million recorded on the balance sheet. For SC paper we have received substantially all of the $61 million cash deposits, including $35 million in the fourth quarter. For the uncoated groundwood case, we expect the $6 million of cash deposits to be refunded with interest.
We contributed $27 million to pension plans in the quarter, with an expense of $10 million included in adjusted EBITDA. For the year, consistent with our guidance, we made $121 million of pension contributions and $13 million of OPEB payments with an associated expense of $40 million in adjusted EBITDA.
In December, we elected to exit the special funding relief regulations in Ontario. As such, beginning on January 1st, 2019, our Ontario pension plans are subject to the Ontario Pension Benefits Act, which provides for funding pension deficits on a going concern basis rather than on a solvency basis. This essentially puts us in the same position as with our Quebec plan, where we exited from funding relief in December 2016. Considering the improved position of the Ontario plans, we are not required to make contributions in 2019, thus reducing our annual contribution by CAD9 million.
Accordingly, we expect to make total pension contribution of $100 million and OPEB payments of $15 million in 2019, with an associated expense of $30 million in adjusted EBITDA. This represents a decrease of $60 million in annual pension contributions compared to the 2016 baseline. Despite an increase in the applicable discount rate, the net pension and OPEB liability on our balance sheet increased by $182 million in the quarter to $1.3 billion. This largely reflects the negative equity market returns late in the year. Based on applicable funding regulations, our funding deficit stands at $586 million at the end of 2018, more than $530 million lower than the net accounting liability.
I will now turn it back to Yves for concluding remarks.
Yves Laflamme -- President and Chief Executive Officer
Thank you, Remi. Our key business priorities in 2019 are as follows: first, build on the late year momentum with the Calhoun Tissue operation to increase productivity and enhance product quality; second, improve operational efficiencies and limit production disruptions across our network to maximize the value generation from our existing assets, reduce costs and further strengthen our competitiveness; third, focus on acquisitions and organic opportunities to further our business transforming strategy; finally, we will continue to build on our world-class safety performance for our thousands of employees and support work force attraction and retention.
Following a year of positive market trends across most of our business segments, we enter 2019 with cautious optimism. Despite weaker lumber markets, favorable economic conditions and the recent production curtailments give us reason to believe that markets will gradually improve in 2019. Accordingly, our long-term view for lumber is unchanged. We believe in the underlying fundamentals and growth prospects for this market.
Even with the recent softening in Chinese buying activity, we expect the fundamentals for market pulp to remain positive given the limited capacity addition over the medium term. In 2019, pulp maintenance outages are scheduled at three of our mills, which will decrease our pulp production by approximately 25,000 metric tons. Given lower seasonal demand, as well as the continued structural decline, we expect lower paper shipments in the first quarter.
For tissue, we are very focused on improving productivity and quality at Calhoun as indicated earlier, as well as continuing to build our market presence with our attractive range of products. We are targeting positive earnings generation in the first half of 2019 and we remain optimistic about the long-term growth prospects for our tissue business.
Capitalizing on favorable market trends and value-added divestitures, we are entering 2019 with a strong balance sheet which provide us with significant financial flexibility and positions us well for future growth opportunities. We also announced today the appointment of Suzanne Blanchet to serve on Resolute's Board of Directors. Madam Blanchet has spent over 30 years with Cascades, including as Senior Vice President of Corporate Development from 2014 to 2017. From 1997 to 2014, she was President and Chief Executive Officer of Cascades Tissue Group and the only female President in Canada's paper industry. On behalf of Resolute's Board of Directors and executive team, I would like to formally welcome Suzanne to our organization. We are very pleased she has joined the Board and we look forward to benefiting from her experience and expertise.
Silvana Travaglini -- Treasurer, and Vice President, Investor Relations
This concludes our formal presentation. Operator, we will now open the call for questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions) And your first question comes from the line of Paul Quinn from RBC Capital Markets. Please go ahead.
Paul Quinn -- RBC CAPITAL MARKETS LLC -- Analyst
Yeah. Thanks very much. Good morning, gentlemen.
Yves Laflamme -- President and Chief Executive Officer
Good morning.
Remi Lalonde -- Senior Vice President and Chief Financial Officer
Hey, Paul
Paul Quinn -- RBC CAPITAL MARKETS LLC -- Analyst
Hey. So I'm a little confused on the tissue segment, just in your commentary you've got, sales growth is on target and then you're highlighting that you've made significant progress in Q4 on quality and productivity. So EBITDA is flat, but does that basically mean that pricing realizations have come down to balance the positives with the negative or the flat EBITDA?
Yves Laflamme -- President and Chief Executive Officer
I think that, Paul, we made significant improvement on operation, mostly in the last month of the quarter, so we see -- on quietly we're talking about the tissue machine and the caliper side that gives more quantitative converting. This is why we haven't seen the benefit of that right now. So we are testing with new products, we have some productivity testing. I would say that lowered the volume somehow in production. And also for the Florida tissue, so pulp cost was also higher, which is why we don't see the impact right now. So we're expecting better results in the next quarter.
Paul Quinn -- RBC CAPITAL MARKETS LLC -- Analyst
Okay. And then maybe you could just spend a minute on the quality, especially at the new machine, just because it's new technology there. Are you able to do the super premium or what type of grade output are you achieving at the facility?
Yves Laflamme -- President and Chief Executive Officer
Yes. So the machine in Calhoun, we're definitely progressing in the right direction. I think that's the best tissue, we are really where we should be. We're still -- I think on the premium side on the towel, we're getting there, so -- but not really where we'd like to be. But we can compete with pretty good quality on the towel as well. So -- but, yes, we think we're where we want to be, and this is part of the improvement we're talking about. We've worked very hard over the quarter with suppliers of the tissue machine and when I'm talking about the caliper, this is exactly what I'm saying, now we're meeting exactly at least on the bath -- close to the towel the quality we wanted to meet.
Paul Quinn -- RBC CAPITAL MARKETS LLC -- Analyst
Okay. And then, just switching over to lumber segment, I mean the drop in contribution was expected given the pricing drop. Just wondering if you could give us a forecast on log costs, what you're seeing and where you are with curtailments currently?
Yves Laflamme -- President and Chief Executive Officer
As far as curtailment, we have put it back on track since the beginning of the year. So I mean back to where we were before we curtailed over the last quarter. So productivity is OK, but as you know, winter is always tougher so forecast on the first quarter should be OK, but maybe not as good as without -- I was looking, as an example, at the sawmill at Atikokan this morning, the weather was minus 41 before wind factor. So it's pretty -- so the other half, as far as the costs, we said that log costs went higher. As you know, the Quebec new regime system that -- I am saying new, but it's been there for few years now, is more connected to the market. And so when the market went high like it did in the first half of the year and it was pretty good also the previous year in 2017, stumpage and wood cost are adapting to that. And there is always a lag. So now when the price went down as fast as it went, of course, the cost didn't readjust that fast. So this is why we had a significant gap between the lumbers' selling price right now and the wood costs. So that is a pretty significant add-back on our EBITDA as you can see at this moment.
Paul Quinn -- RBC CAPITAL MARKETS LLC -- Analyst
Okay. And then, just lastly, you've got a number of facilities that are down right now and I think we saw something in the news around Fort Francis and I guess Thorold is also out there. Maybe you can give us an update on what your plans are with those facilities?
Yves Laflamme -- President and Chief Executive Officer
Yes. As far as Thorold, we're still looking for -- we explored everything we could to restart that mill, but we came at the conclusion that it was not an easy thing to do even with different products. And we have some prospect to sell the mill. We're still looking at this. We don't have anything solid right now to announce, but we're working on it.
As far as for Francis, I think well, it's been pretty public about what's happening with this potential new interest with called Repap. So, we haven't had one communication with those guys so far and it's all we've done. I mean as far as what they're doing or what they want to do, we're pretty much like you. We're reading it on the newspaper and the news what they are doing than talking to them right now.
Paul Quinn -- RBC Capital Markets -- Analyst
Well, I wish you luck then. Thanks very much.
Operator
Your next question comes from the line of Hamir Patel from CIBC Capital. Please go ahead.
Hamir Patel -- CIBC Capital -- Analyst
Good morning.
Yves Laflamme -- President and Chief Executive Officer
Good morning, Hamir.
Hamir Patel -- CIBC Capital -- Analyst
Yves, we've seen a lot of uncoated freesheet capacity slated to come out of the market and it looks like pricing could be strong there for maybe the next 18 months. How much competing grades could you produce if you wanted to ramp that up? And would you have to spend any money to do so?
Yves Laflamme -- President and Chief Executive Officer
I think we're pretty much where we can be right now with the mills we have. I don't think we see a way to adding any capacity right now. But the thing is that, with the uncoated freesheet going up and some time there is downgrade in the paper from uncoated freesheet that gives up some opportunities in the other grades, and that we're feeding that right now. So it means that when we have other grades, that the demand is going down that there is no, let's say, closure of capacity, it helps to cover the other fives and we've been feeding that right now. So that brings solid pricing as you said and not just on that grade, so which is good for us. But as far as adding capacity, it's more preventing to curtail capacity right now.
Hamir Patel -- CIBC Capital -- Analyst
Fair enough. And Remi just a question for you on the pension deficit. In slide 18, it shows the funding purpose figure at $586 million. Is that after taking effect of the switch to a going concern basis in Ontario?
Remi Lalonde -- Senior Vice President and Chief Financial Officer
Yes. It is, Hamir.
Hamir Patel -- CIBC Capital -- Analyst
Okay. Great. That's all I had. I will turn it over. Thanks.
Yves Laflamme -- President and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Sean Steuart from TD Securities. Please go ahead.
Sean Steuart -- TD Securities -- Analyst
Thanks. Good morning. Couple of questions. I just want to follow-up on tissue and with respect to Paul's question, you gave some context on the Calhoun progress. And I guess I just want to reference the Atlas assets and you've written it off effectively and you referenced the frustration you have. Is there any fix for those assets, whether it's CapEx related or capital-light initiatives to turn that performance around?
Yves Laflamme -- President and Chief Executive Officer
I think as far as the performance, what Remi was saying is that, of course, it's a surprise that it didn't perform what we felt when we acquired that. But as far as improving the Atlas assets, we've been pretty good. I mean as far as housekeeping, safety and productivity, we're definitely heading to the right direction. I mean it's a big difference compared to when we bought it. And also as far as investing, we've made significant changes over the quarter. We closed two converting lines in Sanford moving that to Miami and stopped using an external warehouse and using the space we have in Sanford, see if we can save that way as well. And we're looking, of course, at other opportunities, but I mean the assets we bought, as we speak today, are definitely much different than the ones that we've seen at the beginning. So this is all I can say for now, Sean.
Remi Lalonde -- Senior Vice President and Chief Financial Officer
Yeah. Maybe if I can add too, Sean. I mean what we wrote off was $81 million of goodwill and then the long-lived assets was about $39 million.
Sean Steuart -- TD Securities -- Analyst
Okay. Got it. And when you say you expect to be profitable at Calhoun over the first half, are you talking operating earnings profitable or positive EBITDA?
Yves Laflamme -- President and Chief Executive Officer
Well, you know, I am going to start with EBITDA for now, so hopefully and then, hopefully, I can do both. But we didn't necessarily target one particular, we just want to be profitable and hopefully, we're going to start with EBITDA. So, we'll see what we can do.
Sean Steuart -- TD Securities -- Analyst
Okay. And for the 2019 CapEx budget, you'd safely say I suppose that that CapEx is fully embedded in 2019? The spending you have for the sawmills should we think of that as a multi-year plan to optimize those assets or is it 2019-weighted?
Yves Laflamme -- President and Chief Executive Officer
I believe in 2019 we're going to be pretty much done of those sides as well. As you know, sawmill projects are usually completed in about 12 months, so we think the ramp up, it's something different, but as far as completing the project, I would say that the one that's been approved so far is going to be completed in 2019.
Sean Steuart -- TD Securities -- Analyst
And can you remind us of the expected capacity pickup in the sawmill assets once that capital is spent?
Yves Laflamme -- President and Chief Executive Officer
Yeah. So the goal is to have an improvement in productivity of about $40 million to $50 million more through the year. So, of course, when you see what we've done in the last quarter, when you curtail because of the market and logs, but as -- if everything goes well, we're still aligned to meet that capacity so that should be about what we had before.
Sean Steuart -- TD Securities -- Analyst
Okay. That's all I have. Thank you.
Silvana Travaglini -- Treasurer, and Vice President, Investor Relations
Thank you.
Remi Lalonde -- Senior Vice President and Chief Financial Officer
Thanks, Sean.
Operator
(Operator Instructions) Your next question comes from the line of Roger Spitz from Bank of America. Please go ahead.
Bill -- Bank of America-Merrill Lynch -- Analyst
Hi. This is Bill (ph) on for Roger. Thank you for taking our questions. Do you expect any further near-term asset sales?
Yves Laflamme -- President and Chief Executive Officer
I mean it's hard to say. I wouldn't say that. Maybe for Francis and Thorold, but other than that if there are opportunities, as any company we would look at everything as we did with the two last ones that we sold, but to say that we have something that we're really looking at right now on our core assets, the answer would be no, as we speak.
Bill -- Bank of America-Merrill Lynch -- Analyst
Got it. Thank you. And how do you see working capital in Q1 2019 and full year 2019? Do you see it as a use or a source of cash?
Remi Lalonde -- Senior Vice President and Chief Financial Officer
It's probably going to be a use. We tend to build log inventory over the course of the winter so that we have enough raw materials for the spring part, but net-net over the year it should be -- it should work itself out.
Bill -- Bank of America-Merrill Lynch -- Analyst
Got it. Thank you. And last question, how do you see 2019 sales and admin expenses versus the $165 million in 2018?
Remi Lalonde -- Senior Vice President and Chief Financial Officer
Sorry you said the SG&A?
Bill -- Bank of America-Merrill Lynch -- Analyst
Yes
Remi Lalonde -- Senior Vice President and Chief Financial Officer
Do you want to take it?
Yves Laflamme -- President and Chief Executive Officer
Yeah. I think on the SG&A, we expect to be lower than where we were this year. Of course, with the Fairmont and Catawba being away as far as sale and expenses, so we expect a reduction in 2019.
Bill -- Bank of America-Merrill Lynch -- Analyst
Great. Thank you very much.
Yves Laflamme -- President and Chief Executive Officer
You are welcome.
Bill -- Bank of America-Merrill Lynch -- Analyst
Thanks.
Operator
Your next question comes from Paul Quinn from RBC Capital Markets. Please go ahead. Mr. Quinn, you line is open.
Paul Quinn -- RBC Capital Markets -- Analyst
Yeah. Sorry. I was on mute. Of the $160 million in CapEx in '19, what are we expecting to spend on the lumber operations?
Remi Lalonde -- Senior Vice President and Chief Financial Officer
I think it's about $40 million?
Yves Laflamme -- President and Chief Executive Officer
$40 million, yes.
Paul Quinn -- RBC Capital Markets -- Analyst
Okay. And then, you outlined the 40 million board feet, 50 million board feet tick up in production, when do you expect the cost to come down? Like if we looked at--
Yves Laflamme -- President and Chief Executive Officer
Yeah. Of course, we expect -- yeah, so the answer is, yes. If we keep everything like it is today, like wood costs and everything, it would go down. So -- but hopefully, we expect to have lower costs coming more from the log side than the 40 million board feet, because 40 million board feet out of about 2 billion capacity is not that big. So -- but, yeah, hopefully, it was the lag, I was talking about the price compared to stumpage is going to shorten a little during the next year-or-so, at least the quarter.
Paul Quinn -- RBC CAPITAL MARKETS LLC -- Analyst
All right. That's all I had. Thanks. Best of luck.
Thank you.
Remi Lalonde -- Senior Vice President and Chief Financial Officer
Thanks, Paul.
Operator
There are no further questions at this time. I turn the call back over to management for closing remarks.
Silvana Travaglini -- Treasurer, and Vice President, Investor Relations
So, this concludes today's conference call. I will thank you all for joining us today. Thank you
Operator
This concludes today's conference call. You may now disconnect.
Duration: 36 minutes
Call participants:
Silvana Travaglini -- Treasurer, and Vice President, Investor Relations
Yves Laflamme -- President and Chief Executive Officer
Remi Lalonde -- Senior Vice President and Chief Financial Officer
Paul Quinn -- RBC CAPITAL MARKETS LLC -- Analyst
Paul Quinn -- RBC Capital Markets -- Analyst
Hamir Patel -- CIBC Capital -- Analyst
Sean Steuart -- TD Securities -- Analyst
Bill -- Bank of America-Merrill Lynch -- Analyst
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