Q4 2020 Domtar Corp Earnings Call
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Good day, ladies and gentlemen, welcome to the downturn Corp, fourth quarter and full year 2020 of results. At this time all participants are in a listen only mode. Following the presentation. We will conduct a question and the answer session and participants are asked the press star one to register for a question.
Should you require any assistance during the call. Please press Star then zero on your Touchtone phone as a reminder of this call is being recorded today February 11th 2021, I would now like to turn the meeting over to Mr. Nicholas Estrela. Please go ahead.
Thank you Orlando.
And welcome everyone to our fourth quarter and full year 2020 earnings call.
And you'll be of home senior Vice President of cheap Chief Financial Officer, and interim Chief Executive Officer will be hosting the call. Today is John is on temporary medical leave during.
During the call references will be made to supporting slides and you can find this presentation in the investors section of the website.
As a reminder, all statements made during the call that are not based on historical facts are forward looking statements subject to a number of risks and uncertainties many of which are outside our control.
I invite you to review Domtar's filings of the Securities commissions for a listing of those.
Finally, certain non U S. GAAP financial measures will be presented and discussed and you can find the reconciliation to the closest GAAP measures in the appendix of this morning's release as well as on our website.
As a reminder of personal care results were classified as discontinued operations for all periods presented in the earnings release and the accompanying investor presentation as of the fourth quarter of 2020.
The results from continuing operations represent our pulp and paper segment and corporate shared services and overhead.
Pulp shipments the personal care are also considered to be third party shipments so with that I'll turn it over to Daniel.
Thank you Nick and good morning, everyone. As you know John is on temporary leave after the contracting COVID-19, and the boss.
<unk> has asked me to take on the Chief executive responsibilities, while he's out I'm getting frequent updates on drums health and I am pleased to report that he is doing well resting at home.
2020 was anything but every year the.
Back of the global pandemic on the economy and on the tour was dramatic and unmatched in the recent history.
And the significance of restructuring and downsizing of dumped all of their business with over 900 of our colleagues, leaving dumped on and the suspension of our capital allocation program.
So all of this time on waiver, we stay true to our values and we have accomplished a great deal of demonstrates the resiliency by continuously adapting to changing market conditions.
We kept all of operation running efficiently improve our processes and made our company the stronger.
The focus on all of our people, taking consistent action to protect them and to support our communities.
The core of our efforts were rigorous and disciplined COVID-19 for the insurance protocol put in place for all of our location across the business.
The protocols change mainly due to the operating procedure and require active participation of all employees.
The of course of managing the pandemic, we also recorded our lowest ever safety incident rates.
We are really proud of all of our employees respond in this challenging 2020.
In paper, our ability to adjust quickly reflects the agility of our teams as well as the optionality of all of us at base.
We maximize gas cash regional costs and remainder of valuable partner to our customer.
We've reduced our capacity and the inventory by idling nearly 40% of our production in the second quarter, leading to a 25% permanent reduction by year end.
By focusing on cost reduction because of the business and we're moving some of our iOS the cost manufacturing assets, we have reduced our paper of cash cost by nearly 6% year over year and by 10% in the second half of 2020.
All of our smaller network also allowed us to improve our customer mix.
In pulp we grew volume grew by seven per cent in 'twenty 'twenty as we've converted the paper to pulp capacity.
The shoe Carnival and personal care end use market at very strong demand throughout the year and kept the order books for.
We stayed focus on customer mix and value proposition to improve our margin.
We also continued to ramp up our investment in high return projects to optimize and drive efficiency and performance across our paper assets, sorry pulp assets.
Personal care, we continue to provide essential products during the pandemic and executed well on all of our customer win.
I think the excellent work to improve profitability gain new customer and to improve the operating structure and cost profile of the business.
The increased 42% of versus prior year and margin improved 320 20 basis points.
Now with respect of our strategic roadmap, we are proud of the work accomplishments in 2020.
First we've reached an agreement to sell the personal care business second we've launched our first line of board conversion at Kingsport, and we initiate the preliminary engineering study for the addition of of low cost line of board of lineup of ours down taking advantage of the scale fluff pulp operation and surplus of pulp.
The <unk> capacity.
Third we announced the $200 million cost reduction program, the focus and aligned the organization on all of our transformation and twist Fabless, even greater accountability for performance.
Let me take a moment to expand on these three the initiatives.
We've entered into an agreement to sell the personal care business to American industrial partners for $920 million from them for them part of this transaction accomplishes several key objectives first it is of significant milestone in our ongoing portfolio of transformation and our focus.
On building, an industry, leading paper pulp and packaging company.
Transaction provides them with capital and resources to invest in all of our future and we will also lead to a more optimized business portfolio.
With the proceeds we expect to reduce debt by approximately 600 million dollar all of a strong balance sheet and liquidity will position us for religion, resiliency and growth and will be an important pillar and providing flexibility to maximize the value creation we.
We also plan to buyback of about $300 million of shares.
As you will recall, we suspended our capital allocation program early in 2020 to preserve cash.
Today, we announced that we are resuming our stock buyback program. The decision isn't all three of our confidence and dumped on future and our commitment to delivering value to our shareholders.
In terms of cost reduction we are on track to realize the full $200 million of annual run rate saving by the end of 2021 in the third quarter of 2020, we've launched a series of initiatives, including business optimization manufacturing cost reduction and the right sizing of our support functions.
Concept of the work to lower our costs and that NPL reduce the complexity.
Couple of I think the execution of our cost reduction program is the priority for 2021.
Our strategic choices on portfolio productivity and organization structure, our net independent strategies the re.
The in force and build on each other.
The initiative will create a more empowered agile and accountable organization and will help us deliver on our financial goals.
In 2020, we come through in the our entry into the growing packaging market with the announcement of the conversion of our Kingsport mill to containerboard.
And the experience and competent team in place responsible for asset conversion commercial strategies business processes and the operational readiness. We also we are also establishing a comprehensive fiber procurement strategy.
Given that the significant number of recovered paper supplier with over 100 of location, which can cost effectively supply of fiber to kingsport.
This will that all four of very efficient supply chain model and will enable us to utilize low cost of black holes, so bringing recovered paper to the meal.
The team has made great progress in 2020 on major equipment is in order and the project is on schedule four of 2022 start up.
Since announcing our entry into the packaging space, we have had significant interest from independent bus converters and end use customers. Our commercial efforts are focused on the healthy group of potential customer and we continue to extend all of our unfortunate pipeline the can.
The sports on version in preparation for the current on the ball launch is also a focus of <unk> 'twenty 'twenty, one and the centerpiece of our growth going forward overall.
Overall, we have a clearer on that to create significant long term shareholder value by focusing on our portfolio around paper pulp and packaging.
With paper, we are the leading market, but the spending in North America with low cost and well invested the paper Mills. We also have the best customer in the industry and the rich product portfolio that includes growing grades we have of sell it then eyecatching I've got through the business that can yield attractive returns even in the most challenging environments.
And Bob.
That's all of our Capex at the increases we are focused on the idea of growth segment, including global hygiene and tissue and towel markets. We have a very comprehensive pulp assets with the potential to further increase of our pro forma from strategic investments and drive all of our meals towards first quartile and finally, we will also answer the content of that.
The market without the D competitive assets and the differentiated go to market strategy.
Look at now of our Q4 financial lives of beginning on slide four we reported this morning of net loss of $1 seven per share for the fourth quarter corporates are of net loss of $1 67 per share for the third quarter of 2020.
The fourth quarter results include an after tax loss of 778 cents per share from discontinued operation compared to earnings of 34 cents per share for the third quarter of 2020.
Our earnings from continuing operations before items was 34 cents per share in the fourth quarter compared to a loss of two cents per share in the prior quarter.
In the fourth quarter, we recorded $25 million of accelerated depreciation and $30 million of restructuring costs related to our cost reduction program.
EBITDA before items from continuing operation amounted to $91 million compared to $87 million in the third quarter.
Including the result of personal care EBITDA before item was $124 million in the fourth quarter.
Turning to the sequential valuation of the earnings on slide five.
Consolidated sales were $21 million higher than the third quarter depreciation and amortization was $3 million of the war and the journey was $6 million lower when compared to the third quarter and.
In the fourth quarter, we recorded an income tax benefit of $16 million.
Now turning to the cash flow statement on slide six cash flow from operating activities amounted to $135 million, while capital expenditure amounted to $45 million. This resulted in free cash flow of $90 million into the fourth quarter for the.
Full year cash flow from operating activities amounted to $411 million and capital expenditures amounted to $175 million. This resulted in free cash flow of $236 million for 2020.
Turning to the quarter fault, the with the quarterly waterfall on slide seven.
When compared to the third quarter EBITDA before items increased by $4 million due to lower maintenance for $10 million a year of positivity.
The TVT for $10 million lurid of Janney for $7 million and lower raw material costs for $1 million. These were partially offset by lower selling prices for $7 million out of your other costs were $7 million lower volume index for $5 million higher freight costs for 4 million.
And unfavorable foreign exchange the rate of $1 billion.
Our paper business on slide eight sales were one per cent of the war of if this last quarter and were 17% of the word versus the same quarter last year estimated EBITDA before item was the hardwood and $5 million.
The manufacturer of paper shipment were 1% lower when compared to the third quarter and 17% of the world where some parts of the same period last year.
Average average transaction prices for all of the paper grades were $2 per ton higher than the last quarter due to customer and product mix.
The strength of the pub business on slide nine.
Those were 9% higher versus the last quarter and 8% higher than the same period last year estimated EBITDA before item was the negative $5 million.
While the shipment were 40% of air versus the third quarter, and 10% higher when compared to the center of the last year.
Average pulp prices the grew $17 per metric ton versus the third quarter net.
If you look at page 10 now.
All paper inventories increased by 10000 tons when compared to the last quarter, while pulp inventory decreased about 3000 metric ton.
As usual you will find on slide 11, and 12, our estimate for some key financial items for the coming year with.
With respect to maintenance, our total maintenance cost for the year.
I expect it to decrease by $13 million to $421 million cash.
Capital spending should be between 310 and $330 million and includes costs related to the kingsport conversion and some strategic investment in our fall business.
Before I discuss the outlook, let me provide some additional color on the fourth quarter our.
Our paper business was steady with total shipment in line with the prior quarter, although activity was stable across all channels office supply continues to recover and we had the strong performance in food security the medical and thermal paper grade. We also reduce flexed on an exports in the fourth quarter, which improve our mix.
In addition, we've used this as all of the slower periods to replenish low inventory level. The head of paper maintenance done in the first half of 2021.
The pricing remained relatively stable and consistent with the year to date the average.
Strong pillar of positivity and capacity utilization of our mill system resulted in a good cost performance.
This continued the trend that we've seen in our corporate per meals over the last few quarters.
The poultry wrong. The other day scheduled to cease of operation by the end of the current quarter. We are transferring of large portion of their grades to auto meals to continue support the key customers.
And the full business, we've shipped over 480000 tonnes in Q4, the highest quarterly volume of the year and one of our of best in recent history.
The strong cost performance at sort of the attributable to lower maintenance.
As well as the our cost reduction program.
The main dynamics continue to improve and we announced several price increases over the last few weeks the recovery in global pork market has been driven by a few items the mainland China increased substantially in Q4 as did maintenance and unplanned downtime of the second half of 2020, improving the market supply and demand balance.
Inventory at the producer level are also low and we believe that stuck in Chinese sports are decreasing and the.
Personal care business, we had a strong finish to the year our performance increase on strong sales of the adult incontinence products in North America and the good performance in the of up following the seasonal impact of the softer summer months.
Our sales performance reflect good momentum in the core business and solid demand.
Now, let's review the outlook for 'twenty 'twenty one.
As we've noted in prior quarters, all of our outlook could be impacted by changes in market condition, especially due to unforeseeable pandemic related impacts in <unk>.
Paper demand remains uncertain and dependent upon recovery from the pandemic largely linked to the return to office in school.
As the year progresses them and should start to accelerate as the vaccination treating of people gain greater confidence to return of two offices in school. We expect me if they're on pulp market the gradually improve while cost inflation should be moderate.
Net of the personal care business is expected to close in the first quarter of 2020, and we have received regulatory approval in Europe and are expecting the north American of approval in the next couple of weeks.
In closing despite the challenges of 2020, we've achieved strong results and we will continue to focus on keeping our operations safe I'm proud of the team of work in 2020 that all of us to move of the company forward in accordance with our strategy despite changing time.
Many goals last year, especially on cash management of cost reduction, while the remaining an agile valuable partner to our gross number.
We believe these changes will improve the company for the long term.
Of the awards start to emerge from the pandemic and as market improves we are well positioned to capture opportunities and to several of our market and all of our customer. We are in the midst of year process of transforming dumped on and we look forward to more progress in 2021.
I'll return the call back to Nick Nick.
Yeah.
Thank you Danielle.
So with that I'll Oh the.
Moving over to Orlando to open up the line for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Once again, everyone. Please press star one on your telephone keypad to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
Once again, everyone that is star one to ask a question and we will take our first question from Anthony Pettinari with Citi. Please go ahead.
Oh good morning, guys. This is actually Randy tole sitting in for Anthony.
I just wanted to the only on Paul.
Paul Good morning.
Can you touch on just pulp pricing a bit we've seen some pretty aggressive announcements by competitors over the last month itself, particularly on the swap side, but less on the softwood side is there anything driving particular strength in swaps that wouldn't affect the softwood side and then additionally, our.
Realizations in pulp quarter to date or Bruce <unk>. Thank you.
Alright, So let me Sheryl that's on that that's a good question on Thats definitely part of the recent developments of we've announced a series of the pulp price increases I think excuse the capture of yesterday an idea the last leg of the month of March actually from the from US So in total.
We've increase of our pulp price.
In North America of between $175 per ton to draw.
The watering 40, depending on the grades.
And in China.
I think it's between the hardware and 50 in and 200 and again depending on grades.
So we believe.
I will see the benefit of those of a.
Price increases as always.
China as the more ended yet the impact in our P&L. China's is the is the net price and is net net.
The next month all the ways. So it's it's implemented rather quickly in North America, and the announcements of always before discounts on the discounts I think in 'twenty and 'twenty one.
Around 40, 42% on average plus there's the some contractual obligation in the U S that will delay a little bit of the of the impact on our P&L. So so far I can't share with you that.
Our pump shipments in the January was strong and end of price increase versus where we exited the Q4 by about 30 Bucks a ton.
Okay understood and then maybe just staying on the pulp side.
Just update us on how pulp operations of that passed on are running I think previously you had plan to switch from hardwood to softwood bales of <unk> is that still on paper.
And then just maybe your mix expectations for asked on specifically in 2021. Thank you. Okay. Good good question on thank you.
The conversion of the matter is down to the full softwood is done I mean, we're still in the ramping mode. So we're not.
The speeds are we will be soon but it's going well. So that's the answer would produce more or less 707000 tons of pulp per year with the capacity of.
About 500000 ton of on the ones, which is the.
The fluff line, but that can all do also do suffer.
Softwood Bill and the other two on mid are in the normal pulp dryer that will do softwood stuff. We built so the mix will depend on market conditions.
If theres a few sneak contracts or the obligations of will serve all of our customer, but when we have kind of it.
Open tons on solve the spot done whatever you want to call. It we're picking all the ways our wet whereas the best many of them, that's where the aneel. So that makes it will swing a little bit but.
The mill is set to do five out of 1000 ton of softwood than 200000, sorry, 500000 ton of fluff and 200000 ton of stuff with Bill.
Got it that's very helpful. I'll turn it over thank you.
Thank you.
Okay.
And our next question will come from Mark Connelly with Stephens Inc. Please go ahead.
Hey, Good morning. This is John the right here on for Mark.
Good morning wanted to start off.
Good morning.
Let me start off and paper could you help us better understand what drove the favorable mix in Q4, and which is usually a bit weaker and what that means for Q1.
Yes with pleasure.
We took actually proactive action as you probably recall last summer by taking.
A lot of the lack of order downtime that the ended up to be a significant permanent reduction of arc FSC, 25%. That's all all of us to work a little bit on our mix. So we we as in Q4, so the way less what we called flex on an export with the a and the war on that than north.
The American prime grades.
Playing the good performance in the in our paper business in terms of pricing in Q4 versus I'm on which.
You I mean versus what you've seen in many many years normally Q4 of falls was before it was always kind of a bit the weaker and we're using that time to do a lot of flex and and and sometimes a bit more exports also ambitious but the what we've been able to avoid this year. So all of our stemming Q4 its reworked.
Very well almost full I think we took.
Just the six or 7000 tons of luck or the on time in the <unk>.
I mean, the more kind of of a niche grade, but the the rest of the systemic sort of you worked full so we're very pleased with the hesitation the.
Price realization in Q4.
Okay, Great and then.
With personal care gone and other moving parts could you just give us an idea of normal maintenance versus growth Capex in 2020 once number thanks.
Yeah, I mean maintenance and dumped on the pulp and paper business should be between 100 of the 120 million per year. We've spent the significantly less in 'twenty and 2020, I mean that because of the 10 day. They can the unknown impact. We've we made the decision to postpone some.
Capex into I mean actually worked very hard to maximize cash flow in the business.
To be to be ready in the end to be.
Able to go through the the entire storm. So I mean normally 100 of the hundreds one yeah. I think next year are in the number of share of bids over the year. There was about the $120 million of maintenance Capex.
Okay. Thank you.
And our next question will come from Sean Stewart with TD Securities. Please go ahead.
Thank you good morning.
A couple of months John Danielle.
Good morning.
Wondering if you can give a bit more detail on the strategic investments.
Pulp.
Specific investments you're thinking of scale of those investments and timeline for implementation.
The Lora I mean, we we've created that three years ago, I think I'm kind of a roadmap for all of our of pulp assets. I mean pulp is the is it is the core business for the empower. This is I mean, our external capacities of around 2 million tonnes. So that's the business that we need to improve overtime so of three.
Years, four years of who we had a roadmap of of different projects and that's war one by one a day.
The bought all of the king of the assets and reducing their costs. So the next series of this actually we take we took proposing a pause in 2024 of the same reason I've discussed earlier and next series of kind of a we're resuming that so we're gonna have a couple of projects.
The two were to improve profitability and improved throughput and nothing.
That I can share and then I wanted to share, but the I mean, it's also kind of just I would say normal, but it's part of our long term plan to improve our cost position in our pulp business.
Okay.
The second question and you might have referred to this and I missed it in your prepared comments, but.
In the Q4 results on an annual run rate.
On.
Our percentage of the the 200 million in annual cost savings you're targeting over a couple of years or by the end of 2021, rather how much of that if any would have showed up in the Q4 results.
Alright. Thank you. Thank you for the question I think it's the great.
The information to share the cost saving was a three fold that one was manufacturing saving of right sizing our portfolio and right size of portfolio of assets or the.
I forget if you will and the third leg was.
The right sizing the the the SG&A or the support functions.
On a big portion of our cost saving more frontloaded, we've close the Kingsport assets, we got out of the closure of the porcher on that is the I was partially closed at the end of the year I think of it will close the this quarter actually we've also shut the Alaska per machine that Ashley on so a big portion was moving to.
That's the remove all of those fixed costs.
So a lot of the savings of more frontloaded. So as of yearend our run rate of the 200 millions of others around 70 per cent.
So there's still 30% of that needs to be the capture of next year a portion of it as two of the capacity rationalization with the closure of the final.
Tony in the in force you're on the rest of his.
It's still the right sizing the support function where we.
We need to change processes chain stuff do differently. So that we can extract those are those the synergies.
Thanks for the day several while the accordingly.
It's all I had thank you.
And next we will hear from Adam Josephson with Keybanc. Please go ahead.
And one that good morning, Hope you and your families of well and just wanted to wish John My very fast in a speedy recovery.
I'm sure that the army listening is listening. So is the you probably heard us wishing him of the dwell.
Good good good.
Daniel just on update on Kingsport of Nash down. If you may can you just talk about what progress you've made at Kingsport since your last call and then on ask now has the John mentioned on the last call that Youre on the process of deciding whether you have the capabilities to take on too rather of.
Large projects basically at once and that you expected to make the decision sometime this year. So would appreciate an update on that as well if you can.
Alright, so kingsport.
Everything is going according to plan. So we're in the demolishing phase and demolition will continue into the spring we've applied for any of our environmental permits are that should.
Be obtain in the next four of five five to six months and at that point, we will start construction on the first aspect of our the first construction will do with the OCC plant and the OCC warehouse.
So we should see that in five six months are the at the same time our progress.
Progress on procurement of that share in my prepared remarks.
We are we are in discussion with the.
The big bits of the of the potential of recovered paper of provider and I think it's the.
It is actually very positive in terms of their location and the ability to.
The backhaul the recovered paper after shipping liner board, so very efficient supply chain, and we're still making progress in our commercial.
The discussion if you will a lot of interest the current market is actually.
Helping it to some extent I think where we're going through all of the industry is going through a time, where.
The linerboard is the always the containerboard is in short supply and so the independents are suffering more than the average.
The the have a live example of why aligning with the business like cars that will.
The there for them in good and less good time is great. So I think I think on the commercial side, we're also making our interest in progress.
And we'll keep updating you.
As the as we know more and as we can share more.
Terrific. Thank you guys.
On the leg of the question whether the Ashdown.
We're still in the in the in the Engineering study, we're still looking at the.
And full of different configuration.
The key key element for us is the that I mean.
We wanted to be of low cost producer. So we want them or we won't do a conversion or do something if we cannot convince ourselves that we're actually very well positioned within the first quartile and what I mean by well positioned I mean, although left side of the first quartile in the first husker. So we're still working towards that.
And it needs to make financial the financial sense at the end. So we're in that process. I think you alluded to the fact that John share that we think will be decision of the ready.
Well, we know what the the answer of that toward this year.
I'm going to just repeat that I mean, I think towards the end of the year.
Are we should we should have the the information that we need to decide if that was down is a good candidate for.
For the net conversion.
All right. That's great. Thank you had two other questions. One on the buyback can you talk about the timing of that and the nature of that would be an open market repurchase of Dutch tender just given the liquidity in years of how are you thinking about the buyback in terms of how you will do it and the timing around it.
Oh I'm. Unfortunately, I mean, we haven't made any decision on that yet we're still exploring what's the the best tools I mean theres no tool opening remarks open March at the.
Open market repurchase accelerated share repurchase tender and all of the different variation of the.
Of the three tools.
Tool that we just discussed I mean this is this is all on our tool kit and we're still on on what do you think that.
It's going to start very likely.
After the close of the transaction in terms of size of old repurchase.
And that's the discussion we'll have with the with our board. The in a couple of weeks in terms of our wet with seller of accommodation and the and that's where we're going to make that decision that you were or where.
<unk>.
The indifferent in terms of tools I mean, what we're aiming at is how can we repurchase our stock the most efficient we and end to the benefit of the law remaining shareholders.
I appreciate that and then just one last one on your paper demand outlook for the year, obviously that the comparisons will be difficult on the first quarter in the very easy in the second quarter, because that's obviously when the ban fell off and then it'll be the comps will be kind of neutral thereafter, I would thing how are you thinking about what a reasonable expectation for what the band.
It would be this year.
Just given how long do you expect the Lockdowns to persist then again the E. The difficult comps in <unk> types of Q Kid of et cetera.
So it's a good question I mean, its sexually very tough to two of the firm point of view of that I mean, if you look at what the P. P. P. C or you are seeing in the markets. One is the I.
I think it's calling for a flat year over year. If you look at the 12 months of Z is a bit more optimistic with the I think of two three per cent a improvement in the overall paper demand in North America.
Yeah, and I think I think it easy is that about the review of its own a forecast.
The forecast because dependent Mickey is lasting a little bit longer than what the itself first.
I mean, if if if we look at it I mean January results of shipment.
Compared to last year that was the normal more normal of.
The month I think we're at 15% decline Ah Theres a couple of the shipment of the last so it's it's more closer to 12%.
And there's still a lot of people not working.
At the office, our schools that are not running full.
So there's probably a little bit of the additional consumption that's going to come out of we went COVID-19 will it will be a in our rear mirror.
I'm on.
We're kind of cautiously optimistic in terms of them and we believe that as the year progresses, we should see them. The more paper consumption actually we've done that piece of 30 that shows.
It shows that the the people that are returning to the office of 85 per cent of those people claim that the print as much as the were at prior to being asked to work at home. So if it's true.
On a portion of the of the decline that we've seen of last year will will come on back of all week. So I mean overall I mean, we're confident of work.
Our belief is that we're going to see a volume increase and the.
Because of our decision to close capacity late last year I think we will have a very very efficient the portfolio of assets and high utilization on our own system.
Thanks, So much Daniele and best of luck on the quota.
Thank you.
And our next question will come from Mark Wilde with Bank of Montreal. Please go ahead.
Thanks, Good morning, Daniel and good morning, John.
[laughter] I wondered if we could start out I really have kind of two Arizona. The focus on one of its just the impacts of the weaker U S. Dollar on these rapidly rising pulp costs on.
On your paper business, both in terms of imports of uncoated free sheet. But then also just the question of whether now this ultimately has an impact on the North American paper market.
Let's talk about but first I mean, I think you're you're you're raising a good point that the price increase that then the announced for China. There's a portion of it that you can see is financed by the of the currency change the.
The other being a weaker versus the Chinese currency Ah, that's that's going to help a little bit the.
The Chinese market to absorb those increases but by the window of the increases all so net net higher than what we've seen.
In other markets, where the transaction of the art in the U S. Dollar. So so yes, I mean currencies of is it is the plus I think four four of pulp price to what the go through but I think there's real demand in China the.
The economy is slowly starting a little bit the everywhere.
And then there's this issue of of the bringing ore or of transporting the the pulp from from North America to Asia that is creating a longer supply chain.
That might be of a bit of a of an explanation also for the for the rise in the in pulp prices.
As for paper I mean the.
Importantly, the U S are not a large.
Large as we speak right now.
I don't think we're we're not expecting to see changes there with currency movement or not so I don't think he is going to have a significant net back in the in imports and and and and paper.
Consumption coming from the the the domestic supplier.
I think this is this is neutral in terms of of our paper business.
Okay. So you don't think the fact that pulp is going up and raising kind of paper.
Paper Producers' production cost in Asia and in Europe, We will have any ripple back effect into the domestic market.
I think well, it's going to have an effect on pulp consumption.
What we'd like to be too expensive paper.
Pretty soon they may take action.
Action in terms of the.
Increasing price or actually stopping producing but I don't think that's going to have an impact on the on the uncle just free sheet market in the U S.
Okay.
The other question I had is just.
Are you going to have some the syntax loss benefits are from the sale of the personal care business and if you are could you quantify those.
This is the that that there's a small loss, it's going to be a capital loss. So it's only the.
Can use it the only against capital gains so.
It's a it's something that the one we're gonna have kept the Gainesville I have the benefit but it's not operational loss of therefore, not something we can do the against normal the normal profit.
Okay, and just one last one of if I could just slipping.
When do you expect to have any volume commitments.
For the Kingsport startup do you expect you'll have volume commitments at the time of the start up and does the fact that the market is so tight right now actually make it a little more difficult to get those commitments because people feel like.
If they make the commitment to you now that they might have difficulty getting containerboard over the next 18 months in this very tight market.
I think you're touching a sensible.
Sensible point I mean, that's that's the thing that's been the same thing since the beginning I mean, we we.
We are on one side on one of them.
Asphalt permit went through all the because we would have to give too much of a vehicle that mix of.
Of our of our business and at the same time, our potential customer are afraid of permitting and embedded.
The become known that they've committed to volume to us. So I mean, it's kind of of the lose little situation. If you were to kind of it right now, but it's our intention to have a some commitment before year end before the current year. So discussion of are progressing very well again.
The reception is is great. The the I think one lesson learned and in the discussion we had with potential customer is you have the.
A lot of good projects are that they'd like to to do.
But there the risk of supply is the ease of bigs are issue that they're facing so our view is as we grow and linerboard going to see the the independent books, a producer of investing further and growing further also so I think it's a win win for four of it and for them.
Okay sounds good I'll turn it over thanks Daniel.
Thank you.
As a reminder, press star one to ask a question and our next question comes from George Staphos with Bank of America. Please go ahead.
Hey, Daniel how are you doing with.
Good morning, George on as well I joined the.
The call late so I apologize if some of this is already covered.
The first question I, just wanted to piggyback on on the topic actually that Mark raised so.
And our coverage of them.
The pulp producers in the Latin America, there's a lot of discretion of last year about how.
You did see swing pulp production relative to integrated paper production.
And the net of it was that.
At any given time of half a million times with swinging back and forth I'm surprised that you think that a pickup in the pulp market.
Not ultimately tightened up and help.
Improve the overall commercial outlook, if you will from coated free sheet, recognizing you know the U S is obviously a much more vertically integrated market, but you do get the swing contract true up from time to time on both products. So anything else that you would share on that front and on a couple of follow on in pulp.
Again, I think at the margin it it might have an impact both I mean, if you look at the total imported paper in North America.
It's it's the high so so it fits reduce a little bit because puppies being too expensive the start shipping in the in the U S. Yes, it's gonna have a small impact, but I fail to see that being a mover. So at the margin yes.
Is it the big of a big mover.
I I don't think so.
Okay.
Appreciate it I don't want to beat the dead horse here. The second thing that we're hearing about this morning from some of the other companies some of the larger pulp producers is there a view that they are at really really low inventory levels.
And then you know based on their intelligence on this is obviously the harder part of the equation. They believe customer inventories are relatively low and recognizing in lines of relatively low recognizing is the big difference between paper grade and fluff.
Customers in the grade itself, what's your view on where your customers' inventories are at this moment of Azure.
Trying to push there are several increases in and what gives you that view one way or another.
We share I mean, we're hearing more of is the same thing that you just said.
Our inventory in China seems to be a low are we hearing that the inventory of the ports also are being reduced.
I've mentioned earlier all of its kind of the supply chain, the little bit more long or complex.
True to its tweets you are right now. So you you have to assume I think you can guess that there's a the.
People are trying to replenish their inventories and maybe even a create the a small buffer given the supply chain issue.
So where are you seeing the same thing so there's definitely a hard additional of positive consumption plus a little bit of the of the supply chain issues that are.
And the currency as we said earlier the explaining the the price increases that we've seen.
Yeah, and just to be clear the the comments on day one of the companies today was that.
Chinese inventories for at least of their customers are.
Higher maybe than average, but lower than what they were saying of third quarter net has been a consideration in terms of the cycle I guess.
The last question I had for you on on this topic.
You know, even though you have price increases in the market.
And like.
You said the number of times you know you think fluff as a good place to be in terms of growth you know the.
Profitability as we've all chatted about on the on these calls or the last couple of years has been perhaps not where you would like it to be.
I think its great that were seeing some movement now on pricing.
But it seems to be being led once again by the commodity grades.
And.
Why is this the business that will actually sustain a.
Price on a return above your cost of capital as opposed to being just drag around by whatever is happening in the commodity markets, where the north American guys. Even if it's fluff or relatively high cost why does the business you still want at the end given that volatility in your return on a return that's been below your cost of capital from what we can say thank you guys. Thank you Daniel.
Thank you.
I think I think the the fluff.
It's reassuring as kind of an interesting one there's a a lot of swing capacity in the southeast of the U S. A producer of it can do both fluff and it would be of SKU has as we can do also of the share of little bit earlier, and I think you we've discussed in prior.
Calls are that the sum.
Application of Clough.
A war.
Requiring less fluff. So there was kind of of a dip if you will in the in the men a kind of a one time event.
The that that created kind of of that that oversupply. If you will but we're still highly confident on fluff overtime.
Baby diaper feminine hygiene adult.
Diapers will continue to grow and were of high quality producer.
And at the core long term this is Phil.
The business that were country of denim.
Okay. Thank you I'll turn it over.
And our next question will come from Paul Quinn with RBC capital markets. Please go ahead.
Yeah. Thank you very much in the morning Daniel.
Good morning, Paul.
Yeah, just a couple of.
Oh, just because you haven't got enough of them yet.
Yeah, you could remind us.
Pulp shipments by geography, you know breaking that down in the age of Europe, and North America, and what do you expect any change in that the CLO.
Personal care.
Well, we're shipping about the half of our production in Israel and the large portion of what's in the joys of is in China, and the and kind of a 10th of a central theme of up into the rest of in North America and no we're not planning.
The two other big shifts I mean worse.
The the one change that you you're going to see on in 2021 is the first as Nick mentioned in the prepared remarks on our sales through our personal care business on Orca and all kinds of their third party sales. So the number we can the shortfall will be higher we were selling of hundreds of odd thousand ton to a total of personal care business will come through.
On that yourself.
That's it.
At the same level.
At the same level.
But that's at the overall.
Overall, I mean, our external forecasts at the capacity is around 2 million tonnes. So we should you should expect of me 400 in the eating in Q4 was the very close to a two words, you should see of being at quarter after quarter.
Okay.
The other thing you associate there maybe.
Maybe in any of the question just on pricing.
Many of the 42 per cent the stat that you mentioned on that but yeah, I mean I thought it was on high thirties.
It brings up the question.
The idea of way of taking the pulp in any of the sky on the industry to try to move back to a net basis in North America.
It would be great I agree with you. This is a this is adding complexity to give the impression that the the the commodity is very expensive when it's a it's I mean, if you have a 40% of this congress is different the pls, it's kind of a vicious circle, a it's sort of at some point and its almost impossible to the stuff, but the I mean.
If if someone finds a way to to restart all of that I will definitely keep part the part of the discussion.
Okay. Thanks best of luck.
Thank you Paul.
And there are no further questions in queue I'll turn the call back over to Nicholas Estrela for additional or closing remarks.
Thank you Orlando, So we will release, our first quarter 2021 results on Thursday May six 2021, Thank you for listening and have a great day.
And ladies and gentlemen. This concludes today's call. We thank you for your participation you may now disconnect.
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