Q2 2020 Resolute Forest Products Inc Earnings Call
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Recorded today Thursday July Thirtyth Twentytwenty at nine am Eastern time, I would like to now turn the meeting over to Miss Marianne demise, Treasurer, and Vice President Investor Relations. Please go ahead misses the much.
Thank you.
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Today, we'll hear from you've got some president and Chief Executive Officer anything.
Right.
Financial Officer, you can follow along with the slides for today's presentation my logging on <unk>.
The presentation.
Age.
Section of our website.
Today's presentation.
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All information our press release and yet pending.
A reconciliation of non-GAAP information to U.S. GAAP financial measure.
We'll also make forward looking statement.
Forward looking information is based on our current assumptions and beliefs and expectations.
Involve a number of.
And uncertainty and can change and condition.
Please.
In our press release and onsite today's presentation.
Right.
Yes, the Marianne.
Thank you for joining us today.
We reported $37 million about just the they'd be the industrial water $5 million improvement.
Turning to me.
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The second quarter's results reflect better pricing football an increase in lumber shipments in the current pulling back on the weaker Canadian dollar. Despite despite the significant throw in paper demand Goldman Lightning pandemic.
By segment.
Reported quarterly adjusted EBITDA of six Didnt meet on Doros and marketable off by 30 doors from the first quarter.
We remain on the order for tissue don't quite Threem you know.
$25 million for one production by 9 million and form you don't Doros paper.
Going by government.
Operating independent Mick has not been easy.
We focused our attention on Q short term priorities.
Including.
Operating on the rigorous protocols are on the health and safety or employees contractors I'm sorry.
Reducing our paper production on consistent with the thrombotic degrees and into Karlovic activity affecting demand.
Maintaining disciplined liquidity management monitoring customer credit risk and controlling spending a role as unit and capital expenditures.
We stay on <unk> on high order situation evolves and your risk the low such as the risk or further trying to sort of shows in hot spots to minimize the spread over the virus.
More shipments of chemical Paul Rose by 8% into first five months of the year compared to December last year, reflecting a certain percentage reason the demand for Hollywood and the site injuries and soft.
The trends generally reflect higher tissue demand with the ongoing dynamic and inventory swings offset by a significant degrees in Vince printing and writing demand.
Chinese demand grew by 12% in the period with all growth coming from hardwood.
North American demand grew by 6% for softwood, Washington person or force for <unk>.
Needle industry operating rates and the reason I, just 3% for softwood and 91% for her.
Yes price prospects on price in the market pulp segment rose by $34 per metric ton into quarter four six person.
What shipments were up 45000 metric tons, nor most as you do the timing of venue at all to adjust the cone and talking to be meals and the shortly as on recycle raw material.
EBITDA in the segment improved by $30 million through $16 million.
What we benefited both benefited from higher demand for higher what did you issue.
No what printing and writing shipments I just started to puts some downward pressure as those markets stabilize in the ongoing dynamic economy.
Not surprisingly the tissue business as seen on overall pickup in demand in this by the big environment, but also a significant shift in consumption patterns.
US Autoliv demand grew by 19% in the first five months of the year culprit 2019, why the men far away from home was down by focusing.
Why pricing in tissue segment improved by four for scientific water.
Men slip.
4000 short tons of 14% due to a shortage of inventory as we just to meet the spike in customer demand in early stages of the by them.
The price improvement reflects favorable mix between converted brothers in front on road as well as pricing gains in both the retained and away from home segments.
But the lower volumes right EBITDA don't premium gardens in the quarter finished goods inventory at quarter end remained low at 5000 short tons.
We've got you knew to focus on customer portfolio ups musician tissue business.
Particularly in the retail segment, where we coach new to make inroads as we placed volume with new customers and demonstrate the quality of our products.
Overall, we expect to coach new to gained momentum in the coming quarters.
After a 26 through up in Israel.
US housing starts to recover to a very encouraging Susan I, just a level of 1.2 million by June.
From the end of the first quarter to the end of the cigar the benchmark price for to buy for two and better than a great lakes destocked by about $100 per doesn't board feet.
Why the benchmark price for comparable infant study is up by about.
$50 per doesn't bother me.
This reflects stronger than expected, causing styles, but also robust demand from the repair and remodeling market.
Jewelry theres stays at home and garden centers is reported to be up by 18% compared to last year.
With product shipments rose by 7 million board feet into water, reflecting the added capacity for a fourth quarter of Prashanth.
So I mean is acquired on February onest as well as the impact of Canadian Railroad brocades into first quarter.
But the average transaction price live by non dollar over doors on board feet call brings to the first quarter, which lies the breadth the benchmark prices ads I, just mentioned reflecting market uncertainty.
The early stages of the unfolding pandemic.
EBITDA in the numbers segment improved by $9 million in the quarter $25 million.
The number market lately has been the bright spots against what we're pessimistic expectation in April driven by the strength of the repair and remodeling market and stronger, causing styles, giving us the unfortunately to bring back to punish him.
Some of the site sideline and it didnt capacity such as two of our either start management gigabit.
The integration of our US number asset is progressing well.
Also benefited from a.
Above seasonal surge in demand for thinking.
Number demand remains promising.
Our pursuing our plan our plan to bring the has already though our kids are facility online in early 2021.
But they make as has a substantial effect on the paper segment.
Let's take a reduction in economic activity has been particularly hard for marketing dependent projects like newspaper inserts Flyers and commercial papers.
North American demand for OPKO don't mechanical papers, and newsprint fell by 24, 23% respectively. In the first half of 2020 corporate Secretary on last year.
This reflects the.
30% to 40% and supercalender grades, 17% for standard raise and 23% for both newspaper publisher and Commission printers.
The shipments capacitor issue for all quarter mechanical papers was 72% corporate ready for last year, why North American news print was 79% Colbert way to 5% last year.
Mobile demand for newsprint was down by 18% through May and award you sprint shipments to capacity to reassure was 74% don't buy 11 for year over year.
We adjusted this reality by curtailing furnished on capacity by nearly 30% against our run rate capacity heading into the crisis, leading to a drop in shipments by 132000 metric tons or 27%.
Across all grades.
Accordingly.
We recorded approximately 180000 metric tons of don't diamond of water.
And we reduce finished goods inventory by 20000 metric tons from the end of the first quarter.
Yes, rich transaction price remained relatively stable decreasing by $8 per metric ton, mostly due to use but nevertheless.
Segment EBITDA was supposed to do a formula door.
The significant slowdown in economic activity they would have an ongoing.
Paper, and we will continue to address our capacity as conditions evolve.
I will now have Remy discuss our financial performance. Thank you Amy we reported a net loss of $22 million in the second quarter or 25 cents per share. Excluding special items. This compares to a net loss excluding special items of $29 million worth 33 cents per share in.
This quarter and net income excluding special items of $11 million or 12 cents per diluted share in the same period last year.
Vessel items in the quarter include $15 million from the settlement of an insurance claims related to the 2015 acquisition of Atlas tissue for which we expect to receive the proceeds in Q3 and net gain on disposition of assets for the sale of our Augusta facility for $9 million and other income net.
From foreign exchange translation, and nonoperating pension and OPEB credits.
Note that in the second quarter, we combine the results of our newsprint and specialty papers segments into a new paper segment.
Better reflects our internal analysis, given the diminishing percentage of newsprint and specialty papers in our product portfolio.
Total sales in the second quarter were $612 million down by 77 million from the first quarter, which reflect the impact in the Covance 19 pandemic on paper demand with shipments down by 27%, partially offset by the additional volume of our U.S. saw mills and the first quarter.
Impact of Canadian rail blockade on lumber shipments.
Manufacturing costs rose by $7 million quarter after removing the favorable impact of the weaker Canadian dollar and the lower volume.
Compared to the first quarter. The all in delivered cost per market pulp decreased by $14 per metric ton or 2%, which combined with a $34 per metric ton improvement pricing for news $16 million EBITDA quarter, a $13 million.
The delivered cost in tissue increased by $167 per short ton in order for 10%, mostly reflecting the impact of lower shipments and maintenance costs associated with the annual outage.
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EBITDA for this segment was $3 million down from six in the previous quarter.
And the wood product segment, the delivered cost fell by $25 per 1004 feet or 7%, reflecting better productivity.
Combined with the 14% increase in transaction prices EBITDA rose to $25 million 9 million better than last quarter.
Papers delivered cost was $20 per metric ton higher in the quarter due to the impact of downtime.
EBITDA was 4 million down by 10.
We generated $125 million of cash from operating activities quarter, largely due to a 92 million dollar reduction in working cap, including a seasonal decrease in roundwood.
Yeah.
We spent $37 million capital expenditures in the first half of the year compared to 45 million in the same period of 2019.
As we mentioned last quarter in light of the uncertain economic environment, we are reducing our annual capital spending expectations 90 million.
Putting capital to be invested in the U.S sawmills.
We took the opportunity to reduce borrowings under our revolving credit facilities by 191 million in the quarter repaying all of the amounts borrowed in Q1, except for a 180 million dollar 10 year term loan that we used to finance the acquisition.
Have you guys solved.
The term loan carries a floating rate of interest of about 2% today net of an expected patronage dividends.
With quarter end cash at $27 million, our liquidity improved by $47 million from the end of the first quarter two 396.
We made $17 million softwood lumber duty deposits in quarter, bringing our total deposits to 194 million, which is recorded in other assets on the balance sheet.
Finally, we contributed $16 million to pension plan in the quarter and we made OPEC payment of 3 million with a combined expense of $8 million included in adjusted EBITDA.
The contribution reflect a temporary benefit from the deferral pursuant to the U.S. stimulus bill $8 million to us plans.
Quarter.
We expect to defer up to a total of 34 million in contributions for the year, but considering that the catch up is due on January one which is a bank holiday deferred amounts will need to be funded before year end.
Accordingly, our pension contributions for the year will be $112 million, and we will make $13 million.
Payments.
The net pension and OPEB liability on the balance sheet was essentially unchanged from the end of the first quarter because of the offsetting impact payments and the weaker Canadian dollar.
While asset values have recovered somewhat from the turbulent first quarter, we've seen a further deterioration of prevailing interest rates, which would weigh against the funding ratio on an accounting basis and on a funding basis, implying higher contributions in the future.
As usual, we will conduct the assessment only at year end and based upon the conditions at the time in accordance with applicable accounting and pension funding.
Yes.
The call that pandemic and the in shrink economy fault broad unprecedented challenges and business uncertainty.
I wanted to dig you're fortunate to express my gratitude for the commitment of our employees contractors and suppliers and their weight on the and how the war.
The pull together, allowing us to operate as an essential business to our commitment to walk us safety, while remaining focused on the job well done.
On behalf of the board of directors and executive team I want to essentially thank them.
Sorry.
Operator, we will now take calls.
As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound. Please standby only compiled acuity roster.
First question comes from the line of Paul Quinn from RBC capital markets. Your line is now open.
Yes, so much learning it.
What are called on it.
Hey, just couple of questions, maybe starting to look at Pope.
Okay and short term weakness is how we expect it to be in the short term.
During the oil could you speak up a little is very hard to hear from.
Yes, sorry, you called that short term weakness in market both in and just wondering how weak you expected to be in how long that we get schools.
It's really related to does I says the printing and writing business.
We.
We all for you know something better coming into 2021 as we as we see the.
The focus we have right now, but we expect the.
Two next quarter to be smaller than what we had in.
Some of water.
Okay, and then on with products and.
It looks like Eldorado no change really bringing that online early in 2021 any way to accelerate that given the market strength that we're seeing in wood products.
That's good question with definitely look at this very seriously and.
Unfortunately.
We were going to do it so that's something that we were evaluated the so your stated that the possibly to do with that we came at the conclusion that.
You know we.
We got to restart us sort us as possible if we get on the one shift to with the.
Capex spending right now.
So if we succeeded to restart going in that area or maybe by the end of the year. This year would be more like you know one ship startup portraying or something like that but we don't see big.
Big volume coming in on the market before the beginning of next year.
Okay just.
One thing that could PCC insurance is a $50 million insurance from related that is that related the AG Atlas acquisition or where's that coming from.
Yes, so Paul its Remy so we had record warranty insurance as part of the transaction. So we made a plane following the acquisition and reached a settlement. So it's $15 million. The cash is expected in Q3 and it is not in adjusted EBITDA either.
Great. That's all I had just like guys. Thanks.
Paul.
Your next question comes from the line of Hemisphere Patel from CNBC capital markets. Your line is now open.
Hi, good morning.
Good morning, or you might be a 70 million board feet at that downtime that you've been taking in Canada and the last three quarters is any of that still down today.
Yeah, we still have.
But that volume we have to take into consideration we had three stud mills down and also even though we have meals that we don't have the wood supply drawn in Canada for potential so.
So having said that we started two of the stars middle as mentioned in the by script, but we still have a once the because in the northwest and Ontario is that still though.
Okay, and when did those two a windows to restart.
There is started about that would say pretty much at the beginning of this quarter.
During the third quarter. So in July, yes, sorry, third quarter, sorry, saying this quarter authority.
Thank you.
Okay, Great and even I think you mentioned in your remarks.
Her to figure at June retails.
And now are in our markets sales up 18%, if I heard that right. It was that your own volumes through that though that the status that we got from.
Sent through statistics that was published so that that's on the on volumes.
So so say good gardening and everything so is that just about rubber.
Okay, and then where you're.
Your southern mill that has a lot of decking exposure. What what are you seeing are you seeing any signs of deceleration yet and at some point the demand has to seasonally weaker now when do you see that playing out this year.
Yes, so first of all the Youre right, we were British exceeding can volume of digging into solve is just to remind you that that the Glenn will solve it was looked but you said it when we acquired that so.
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But as you put a good on it and to answer your question, we were expecting that you know.
Coming British.
Automotive or so but right now we're not fitting that at all so we know that is going to go into going to happen but.
You can always kind of unusual and everybody that business fitting to say and what we don't see that slowdown as we speak.
Okay, Great. That's that's helpful and then just on.
That's the mill I can you say, who you sold that site two and a what their intentions are for that machine.
We sold it to its neighbor to graphic packaging. So we're not sure what they intend to do.
Here, but that you could have I don't think gets to restart operating news.
Yes.
Okay fair enough.
Then just curious how you think about the optionality.
As all the Optionality.
In the remaining paper fleet. So when you think about.
Potential alternative products.
What what products might that include.
Well I think you do we.
As we've been doing in the last few at the last few years, you know, we're transforming to go venue with that.
You know tissue pulp and and lumber has we you can see we grew in lumber us for stress roaming the assets of course, we certainly have to potential.
Asset that would be transforming something else.
But as we speak you know with the by they make situation the cash and everything's on the we have anything on the table right now that is ready to go.
Yes fair enough and just one last one from me out Remy could you comment on.
The sort of government grants that you may have had access to it.
You too how much was that said and what what level would you expect in Q3.
I know good question here. So we actually did not qualify for the program called the emergency range subsidy, we did not qualify in Q2.
In light of that change is that the government has adopted we expect to qualify in Q3, but they're not going to be huge sums it might be it obviously depend on the revenue Theres a factor that you applied to the revenue loss.
It could be maybe a couple of million dollars and we'll see how the revenue plays out but zero in Q2.
Great. That's a that's only now I'll turn it over thanks. Thank you.
Your next question comes from the line of Sean Stewart from TD Securities. Your line is now open.
Thanks, Good morning.
Good morning tribe.
Two questions. The the pulp costs this quarter trend to much better than we would've expected given that the downtime at Calhoun Thunder Bay.
Can you give us any context on other variables in that mix and what might have contributed to the.
Positive trend in costs, despite the the maintenance downtime this quarter.
Yes, good through me answer that.
Certainly have a two places the fiber cost was cheaper, but under the that's really more neither so to answer your question, specifically shine, we capitalized and defer the major maintenance outage costs over that period between outages. So so thats why we.
We spread it out to minimize potential variability from from month to month.
But quarter over quarter other than that you'll see that costs.
Really didn't move around Q2, much fiber costs were were okay, but it was all around maintenance overall, we're seeing a trend and we've been focusing intently on reducing our spend controlling spend especially in light of the pandemic environment.
We have.
The couple of outages out just to add to preserve cash, but we're trying to be very disciplined about how we share how we spend our money. There is a bit of a tailwind also in natural gas and electricity prices, obviously with that.
With the pandemic here in the last couple of months.
Okay, Thanks for that and.
If I'm wondering if you can differentiate conditions between domestic and offshore.
Publishing paper markets, right, now and and further to that it seems like most of the curtailments to this point or for just about all of them the been temporary.
Is there a point at which you consider indefinite are permanent shot.
To to right size your capacity based on the paper side.
Yes, I mean, the thing that it's a slow the markup due to the offshore market.
Besides is definitely a very very difficult as far as a ship in general, but when you look at the Decarbonizing situation in India.
Which is a pretty significant consumer newsprint.
It's definitely.
An area were.
It's harder than in North America, right now, even though even though it's the.
In North America, either so as far as the assets, yes, it's all to operate.
You know as we you know we have two machines. The two machine, but three machine has been down the two with become more and the one and they must and we also have to white paper machine at ARVO.
So.
We have we have the flexibility with few fewer muse or paper machine to produce you know.
Or new spread or.
You know wide, which as opposed to manage the you know how much mark is going to come back and the so they have to restart the big machine to the same time. So long story short. This stood the Alberta is it's really hard numbers you are right now.
Some of this is going to become permanent or not the as we go so but the so it was pretty obvious the just for resulted with what the whole market will be back to where the war going on with both the three months ago. So I think.
Something's going to have an up into the industry at least.
That's all I had thanks very much for that detail.
Yes, John.
There are no further questions at this time and will to turn the call back over to Mississippi much.
Well. Thank you everybody for joining us today have a great day. Thank you. Thank you.
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