Q3 2019 Earnings Call

After the presentation, we will conduct a question and answer session if you'd like to cure for question. Please lift your phone receiver and press star, but the number one on your telephone keypad in order to withdraw your question. Please press. The Penske. Please note that this call's feel courted today October 31st 2019 at nine am Eastern time, I'd now like to turn the meeting over to this so then.

Try to Clini Treasurer, and Vice President Investor Relations. Please go ahead Mr. perfectly me.

Good morning, welcome to levels third quarter earnings call today, well hear from even love them, President and Chief Executive Officer, and when you alone.

Vice President and Chief Financial Officer.

I can follow along with the slides for todays presentation by logging onto the website.

I think the link in the presentation and webcast page under the Investor Relations section of our web site.

Or you can also download the flight.

We will also make forward looking statement forward looking information is based on our current assumptions Lilly and expectation, Oh, which involve a number of business risks and uncertainty and can change if conditions.

Please review the cautionary statements in our press release and looks like to today's presentation.

I'll now turn the call overseas.

Good morning, Thank you for joining us.

Today, we reported $23 million alleges that they bid though for the took water.

$59 million, an award them the easy to meet on those were reported in the second quarter.

The decline breast fully reflects pricing pressures across most of our spring.

By segment, we reported quarterly adjusted EBITDA negative $5 million and market people don't $37 million from the second quarter.

The bridging our strong financial situation earlier this week with extended an entry is our senior secured credit facility.

This renewal and upsize gives us an additional $175 million of liquidity for more than 740 Museum in total and that's very cold as ever and we don't bridging and the additional collateral.

This is another tool to further enhance oftentimes scherfig stability in the execution of our strategic transformation initiatives.

As reported by several of our peers. This has been a challenging third quarter for the industry.

The board systems, we have taken through a threat that Paul balance sheet, but was the Sean Oh, well go through new to execute on our strategy. Despite this current cyclical downturn.

Let's review, our under the restarting men beginning with marketable.

Ward shipments for wallboard weren't don't 3% in the first the launch of the year compared to the year ago period watch support Forbes shipments will focus on higher in the same period.

Just on board growth was led by the third quarter rebound in Chinese demand.

It's important to note that global truck wouldn't mills ran at 93% shipments with the poster issue.

What how they wouldn't be as we're at 83% as hardwood producers and rental real others remain elevated.

The ongoing weakness in global markets weighed heavily on our realized pricing.

The average transaction price dropped to $625 per metric ton don't know, what's the most since the beginning of 2017.

Well what are shown relatively stable compared to previous water shipment of rose this quarter, Oscar Olivas shop with us.

As we walk don't call finished goods inventory to more normal level.

Hold on to U.S. tissue consumption grew by 22.5 person through August compared to December last year.

Our tissue business performance continues to improve with budget Tuesday and pricing gains.

We continue to focus on customer portfolio optimization with better quantitative and increasing our the rich transaction price with favorable product mix and better pricing for away from home products.

Our priority is to improve converting operations to reduce the seems apparent her own and optimize our customer portfolio to generate better margins.

Oh, I think stopped in the U.S. workforce on it or on the seasonally adjusted basis in the first nine months of the year compared to the same period in 2018, averaging 1.250 million unit.

Which reflects a 2% degrees and single family starts and the one person degrees in mid to find yourselves.

One that's why benchmark pricing was up compared to Q2 are the restaurants are comprised of seven doors, but doesn't mostly due to unfavorable sales mix this quarter.

Even ongoing weakness in demand, we continue to manage but it shouldn't and meant they all finished goods inventory at normalized level by taking over somebody million board feet of don't Diamond of water for nearly 170 million board feet year to date.

Assays volume felt accordingly.

Demand from newspaper publishers fell by 16% why demand from commercial bring Thursday growing 9%.

Even with the store base on demand decline in the third quarter, the North American shipments to the best every show dropped to 83%.

Global demand for the been from newsprint was done by 10% through August going Britain December last year, and the world newsprint shipment to capacity to reissue was also aided group or something.

Overall, Android realized pricing drove a 4% this quarter with a more significant degrees index policies.

Due to the ongoing softness we continue to take top or we don't time to maintain our finished goods inventory at normalized level.

As a result.

Our newsprint segment generated a 6% EBITDA margin this quarter.

For ongoing doesn't make any could be burst contracted by 15% in the first nine months of 2019 compared to the year ago barrier.

Hello market fundamentals dray switching and consumer de stocking led to a 20% declining demand for stand on grades while demand for supercalender grades dropped by 9%.

Compared to the first nine months of 2018, the shipments to Kapusta ratio for all go to mechanical papers degrees from 90 Dude weighted reversal.

Our greatest transaction price declined by $21 per short ton compared to last quarter why sales volume remains relatively unchanged.

EBITDA margin was 11% this war.

I wouldn't know how to let me discuss our financial performance before I conclude with our outlook. Thank you eat good morning, everyone. Today, we reported a net loss of $34 million in the third quarter were 37 cents per share excluding special items. This compares to net income excluding special items of $11 million.

Or 12 cents per share in the previous quarter and $96 million or one dollar three cents per share in the same period last year.

Special items in the third quarter reflect mainly non operating pension and OPEB credits of $12 million and a $23 million litigation charge recorded in other expense.

Our total sales in the third quarter were $705 million down by 50 million from the second quarter, while pricing was lower across all segments, except for tissue. The most significant impact was the $114 per metric ton drop in market pulp pricing.

Overall sales volume was unchanged as lower lumber and paper shipments, reflecting reduced production were offset by higher market pulp volumes as we took steps to reduce the inventory build from Q2 to more normal levels.

Manufacturing costs increased by $19 million in the quarter after removing the impact of volume and foreign exchange, reflecting more planned maintenance outages in the quarter and the largely seasonal increase in chemical usage.

Combined with the reduction in average transaction price EBITDA decreased to negative $5 million.

Delivered cash cost in tissue increased by $29 per short ton, but the increase in costs was more than offset by the higher average transaction price leading to a slight improvement in EBITDA to 1 million.

Newsprint delivered cash costs increased by $12 per metric ton to 537, driven by lower volumes and unfavorable chemical usage.

The delivered cash cost and specialty papers increased by $28 per short ton to 647, primarily attributable to higher maintenance and lower cogeneration contribution associated with downtime mostly plan at one mill.

Together with a decrease in realized pricing EBITDA declined to $15 million were $85 per short time.

We ended the quarter with $69 million of cash and significant available liquidity of $566 million, even with this quarter's decline in profitability net debt to adjusted EBITDA for the last 12 months remained low at 1.1 times.

In the third quarter, we generated $25 million of cash from operations 47 million less than in the second quarter, largely reflecting lower EBITDA.

Roughly in line with our pace of spending so far we expect to invest approximately 120 for the full year lower than our previous estimate of 150.

So far in 2019, we've returned $12 million of capital to our shareholders with the buyback of 1.8 million shares representing 2% of our total outstanding shares there remains $12 million under the existing share repurchase program.

Earlier this week, we announced the extension and Upsized of our senior secured credit facility a farm facility for up to $360 million, replacing the existing 185 million dollar facility entered into in September of 2016.

The amended credit agreement includes a term loan facility of up to $180 million and a six year revolver of up to 180 million.

The term loan facility is available with the delayed draw period of up to three years and the choice of maturities of six to 10 years from the date of drawing.

Without pledging any additional collateral this boost our available liquidity by $175 million to over $740 million, 30% increase at very competitive rates and on favorable terms.

In October we paid 19 million Canadian dollars in connection with an unfavorable decision from the cut back superior court related to our 2012 acquisition of fiber.

The payment and timing of any additional consideration will depend on the outcome of the appeal process.

Finally, we contributed $33 million to pension plans in the quarter and made open payments of $3 million with an expense of 9 million included in adjusted EBITDA.

We continue to expect to make $100 million of pension contributions and $15 million of open payments in 2019 within associated expense of $30 million in adjusted EBITDA.

Ill now turn it back to eve for concluding remarks.

Thank you Amy.

Well marketable despite current challenging conditions, we see encouraging signs and stronger industry operating rates for softwood pulp, which represents about two third of our production capacity.

The plan major all other regions safety sent in the fourth quarter would represent approximately 12000 metric tons of lost production.

In addition.

The regular annual maintenance the outage, we owe loss.

But then the second phase of the organic expansion project for incremental tonnage.

I'll focus for tissue is to build on the recent sales growth and productivity gains delivering measure.

But steady improvements over the next few quarters.

Even as conditions in lumber markets remain somewhat uncertain, we believe wood products results will improve as reported industry capacity rationalizations begin to reduce the available to block.

We expect some improvement in realized pricing in fourth quarter and into 2020.

Thank you at this time, if he would like to ask a question. Please press star followed by the number one on your telephone keypad. If you are using a speakerphone. Please with the handset before pricing any key.

Your first question comes from the line of Hamir Patel from CBC capital markets. Please go ahead.

Hi, good morning.

Yes, what I see and we fit on the markets with the you know we've seen the a lot of curtailments announcement and permanent closure, so sometime maybe a little buttons with the adding capacity in the you saw us so so about including our service company has mentioned we're big enough.

Down in the in the year so I.

I mean in the last few weeks and has been said by you know under this like you and we see the business that it takes a wide between the announcement and before the laws and everything is process unsold and consumed. So I mean, the answer is that we're starting to feel a mall, but ends between you know the production and the demand right now so.

And I think that means that the pipeline might be.

I was significant lower than was few months ago.

Great. Thanks, that's helpful and Rami just a question for you on on Capex do you ever preliminary estimate yet for 2020 and any major capital projects are you starting to think about for us for next year.

So I would probably work with the number that we're forecasting for this year him air So 100, Twentys, probably a good number to use a as you know a good chunk of the Capex is is for asset maintenance.

And we don't have a I mean, we do have a couple of projects, including what we've talked about the safety sand capacity expansion.

And some projects to to improve organic growth, but no major add on to that in terms of strategic projects at this point.

Okay, great. Thanks, Rami, that's a that's all I had I'll I'll turn it over.

Thank you.

Your next question comes from the line of Paul Quinn from RBC Capital markets. Please go ahead.

Yeah, Thanks, very much out good morning good.

Good morning.

Yes, I mean, you're facing very difficult newsprint and specialty papers markets, but thats, but that's nothing new but then you highlight in your.

In your press release your.

Your ability to take advantage of future transformation opportunities just wondering what those are for you guys.

Well I think that the as we've been saying you know for few quarters that the goal of the company's skewed to looking at the fortune to of course, a number and the hot we believe when can we grow and you know.

And Paul Boswell and if possible you know.

Try to do better in in the tissue and maybe as far as we can be integrated you know maybe going in tissue as well. So that's the three a focus we have in a major newspaper the bus we again in the declining market. So that's pretty much the.

So so when you're talking transformation, you're not talking a conversion from an existing you see news printer, especially in new say something like containerboard it's more.

Acquisitions organic growth within those three three main area.

Thats correct thing that the you know as far as packaging or.

We are we picked the are charged went through tissue. So we keep focusing on tissue as far as diversifying to companies on the deposit that precise.

Okay. That's helpful. And then just just on wood products.

You guys are down in price seven bucks quarter over quarter just.

Sometimes that has more impact than we thing and.

That's why we we.

We see as being part of the mix when we're talking about can it in the newest newest markets.

All right, that's all I had that silica thanks.

Is there any additional questions at this time. Please press star followed by the number one on your telephone keypad. Your next question comes from the line of Sean Stewart from TD Securities. Please go ahead.

Thanks, Good morning, I got on the call a bit late so I apologize. If this was a dress previously I'm wondering if you could just provide a little more context on what you're seeing in offshore in newsprint markets I gather that's where a lot of the pressures been but if you could go across some of the major regions you sell into.

In the export market and provide some context on.

Fundamentals in those specific regions.

Well, we definitely see a lot of competition is on the export market and as we said, it's both 40% of losses, So and it's a really really competitive markets. There is a significant GAAP right now between the us and the North American market that would say and export market.

And we see that the going that way for.

Okay, and you envision sustaining that type of relative exposure in terms of your shipment mix to offshore markets going forward do you have a longer term objective of where you think that percentage goes to thing that the as we said we've been taking significant long time or.

We're going to have to it's not just both resolutes double the whole industry you know you're going to go with the market is all you're gonna have to take.

Well difficult decisions.

Okay. Thank you for that context I appreciate it.

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

This concludes our conference call today, Thank you everyone for joining.

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

Thank you. Thank you.