Q2 2021 Resolute Forest Products Inc Earnings Call
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Yeah.
Good morning.
And we'll hear from Gideon at all and President.
Presenting chief Executive Officer, and imagine all senior Vice President and Chief Financial Officer, Ken.
And then follow along with the slides from today's presentation by and logging onto the webcast using the line.
And 2 presentations and webcast page under the Investor Relations section of our website and you can download the slides.
<unk> presentation.
Non-GAAP financial information.
Our press release and your pending for 2 slides include a reconciliation of non-GAAP information to U S GAAP financial measures.
We will also make forward looking statements.
King information is based on our current assumptions and beliefs and expectations.
Of which involve a number of business risks and uncertainties and cash.
Change and conditions do please.
Please review the cautionary statements in our press release and on slide 2 of today's presentation and Walter.
Corporate solutions, yes.
Good morning, everyone and thank you for joining US today, we reported $445 million of adjusted EBITDA.
EBITDA for the second quarter compared to $221 million and the first quarter.
Benchmark lumber prices, reaching record highs in.
And our best ever quarterly shipments and the wood products segment generated $415 million of EBITDA and increase of $183 million from the first quarter and the other segments, we reported adjusted EBITDA of $36 million and market pulp up by.
And 2000.6 million minus $3 million for tissue down by 6 and $9 million and paper up by 18.
We used the exceptional cash generation from our wood products segment to make lasting changes to our business and to increase value for our shareholders we reduced.
And that by $180 million, reaching our target leverage of $300 million and funded debt, we declared a special cash dividend of $1 per share or $79 million in total which was paid earlier this month, and we announced an additional 50 million.
Of high return quick payback projects to further strengthen our wood products segment, let's talk about the individual businesses, starting with wood products.
And 1.6 million starts on a seasonally adjusted annual basis in the second quarter U S housing starts continue.
And to a strong demand environment, although the repair and remodeling sector cooled off over the summer as the population begins to return to normal the accommodative interest rate environment aging housing stock low home inventory and encouraging demographic trends and set the stage.
To a point, where continued strength and lumpier demand.
Benchmark lumber prices reached record highs and May and as a result, our average transaction price increased sharply in Q1, $2.1156 per thousand board feet and increase of 280.
$82 per thousand board feet, or 32% compared to the previous quarter.
Our shipments were 83 million board feet, higher or 17% to $575 million, our best ever quarterly shipments and finished goods inventory reduced to 124.
Okay.
After restarting in Q1, our El Dorado and <unk> saw mills.
We continue to ramp up operations with both running on 2 shifts since the end of April we anticipate the saw mills to produce about 125 million square feet and this year elsewhere. We.
Expect to take about 25 million board feet of downtime and the third quarter for capital projects and to optimize summer production.
World demand for chemical pulp was 2% lower in the first 5 months of the year compared to the same period last year, reflecting a 5% decrease.
Mellissa and demand for softwood and a 1% decrease and hardwood.
But the year over year comparison as difficult as the pandemic influenced market dynamics and the reality is that supply and demand conditions were tight and Q2.
Producer inventories at quarter and closed within.
Within normal ranges and global industry operating rates averaged 89% for softwood and 93% for hardwood.
Following the pandemic induced dip our average transaction price rose sharply by $140 per metric ton quarter over quarter or 22% to.
<unk> hundred $87 per metric ton with gains and all rates, but our shipments slipped by 19000 metric tons or 7% due to the planned annual outage at the Calhoun mill and other production shortfalls.
From a historically low level and the previous quarter.
7 of our finished goods inventory closed at a more normal level of 63000 metric tons.
We expected the second quarter to be challenging for the tissue segment as a result of the and market inventory rebalancing and that is what we experienced with lower shipments and unfavorable.
<unk> product mix that pulled down on our average transaction price.
Market downtime as a result of the pressure keeping our finished goods inventory unchanged compared to Q1 at 8000 short tons.
Accordingly, our average transaction price decreased by $56.
Per short ton or 3% and shipments fell by 17% to 19000 short tons.
Reflecting the continued impact of the pandemic North American newsprint demand declined by 10% year to date through June compared to 2020 and demand for.
For uncoated mechanical paper was unchanged.
As a result of capacity reductions in the pandemic, including our own the shipment to capacity ratio for North American newsprint was 92% and the first half of the year compared to 83% last year.
Uncoated mechanical papers.
And 87% compared to 72% and year ago.
Compared to the previous quarter, the average transaction price in the papers segment increased by $39 per metric ton during the second quarter or 7% and shipments improved by 4000 metric tons due to a.
Per will recovery and global markets inventory.
<unk> decreased by 17% to 72000 metric tons.
EBITDA for the segment improved by $18 million to $9 million.
I will now have some <unk> discuss our financial performance.
Thank you Amy good morning, everyone.
We reported net income of $300 million and the second quarter from $3.74 per diluted share excluding special items.
This compares to net income excluding special items of $119 million per.
$1.45 per diluted share and the previous quarter.
And our net loss.
<unk>, excluding special items of $22 million or 25 per share and the same period last year.
And special items for the second quarter include $49 million and losses related to the lumber hedging contract.
In the quarter, we close all outstanding lumber futures positions.
<unk> total sales and the quarter were $1.1 billion.
Up by $267 million compared to the first quarter due to higher realized market prices and most of our segments.
This variance was mainly driven by wood products wood.
$234 million increase this quarter, but also by our default newspaper.
And that's with respective contributions of $23 million and $17 million.
Manufacturing costs rose by $19 million and the quarter after removing the impact of volume and foreign exchange.
Compared to the first quarter, the all in delivered cost and wood products segment rose by $30 per thousand.
And Fortunately or 7%, mostly as a result of higher stumpage fees and higher freight costs, partially offset by variable compensation provision and the previous quarter.
EBITDA and this segment improved by $183 million to 4.
<unk> $415 million.
And the market pulp segment.
<unk> cost increased by $35 per metric ton or 6%.
Due to higher fiber costs and the effect of lower volume.
EBITDA and this segment improved by 26 million to $36 million.
Delivered cost and tissue increased by $295 per short ton or 60.
Reflecting the lower volume as a result of downtime and a sluggish demand environment.
EBITDA for this segment fell by $6 million and negative $3 million.
Papers delivered costs improved by $13 per metric ton or 2% due to seasonal reduction and energy expenses and cost savings.
Percent indefinite idling of the Docomo and Atmos sprint sales and the previous quarter.
Offset in part by higher planned maintenance costs.
EBITDA improved by $18 million to $9 million.
We generated forms and and $1 million and cash from operating activities and the quarter.
From day represents an increase of $276 million compared to Q2 last year.
Cash from operating activities, primarily reflects the strong performance and the wood products segment as well as the seasonal reduction and run wood inventory.
We made $33 million and capital expenditures during the second quarter.
And as we normalized capital spending toward a revised target of 125 million from the year.
We reduced debt by $180 million and the quarter, representing all of the amounts outstanding under our revolving and term credit facilities.
Leaving is our only remaining debt to $300 million.
Unsecured.
Quarter, 4 and 7.8% senior notes due 2026.
We concluded the quarter with cash and cash equivalents of $177 million.
$1.1 billion and liquidity and net debt was $126 million at quarter end.
We made $57 million and softwood.
And with lumber duty deposits in the quarter, bringing.
Bringing our total deposits and $332 million, which.
Which is recorded and other assets on the balance sheet.
And also announced a special cash dividends of $79 million.
Which was paid on July 7 to holders of record at the close of business on June 20.
<unk>.
Finally, we contributed $27 million on pension plans in the quarter and medical past statements and $3 million.
And with higher long term interest rates and positive gains from investments our pension funding deficit was $445 million.
As of June 31.
180.
$4 million improvement compared to the $629 million funding deficit disclosed at year and distillate at yearend.
In accordance with U S. GAAP, the accounting figures will be re measured only with year end results.
And in line with the American Rescue Plan Act of 2021, we expect our remaining.
2000, and pension contributions to drop by around $13 million this year.
Accordingly, our total pension contribution guidance from 2021 is now around $107 million.
Compared to our $120 million guidance provided earlier this year.
And I'll pass it back onto Remy.
Although.
Benchmark lumber prices have come down significantly in recent weeks and remain volatile we are confident and the underlying business fundamentals, we believe and our wood products business for the long term with this segment, representing a key pillar of our ongoing transformation.
This is why we announced in June and additional 50 million.
And capital investments for projects that will generate value across market cycles by improving the overall efficiency of our operations and reducing costs and incrementally increasing production capacity.
And we look for the favorable momentum to carry into Q3 with higher realized prices.
And stronger shipments as conditions normalize for paper a price recovery should continue which will support our cash generation strategy for this business segment.
We see encouraging signs for the away from home space and our tissue business and we expect a return to normal demand trends in the coming.
Months once the retail inventory rebalancing that affected the industry and the first half of the year passes.
With more than $1 billion and available liquidity at quarter and we're in a great position to pursue our transformation and committed to maintain a balanced approach to capital allocation using our free.
Cash flow to generate value for shareholders to build a stronger company and to drive sustainable economic activity and the communities where we operate.
Yes.
And our thesis.
And we will now and copper costs.
Thank you if you'd like.
To ask a question. Please press star followed by the number 1 on your telephone keypad.
Pause for just a moment to compile the Q&A roster.
Yes.
And our first question will come from Samir Patel from CIBC capital markets. Please go ahead. Your line is open.
Hi, good morning.
Sure.
I was wondering if you could comment a bit more about.
And you alluded to the sort of we saw a moderation.
Moderation and R&R demand.
And any.
I don't know if they just are you able to quantify what you're seeing in that channel and and maybe any differences you're seeing between Canada.
And Canada and in the U S.
Yeah.
Yeah.
Amir and prices have come down pretty significantly and we think has started as a result of a slowdown as I indicated with the R&R activity and quite frankly, what.
And we've heard anecdotally is that people have.
Other areas in which they want to spend their money. This summer after being cooped up for over a year as a result of the pandemic.
And our view this doesn't mean that the R&R segment boom is over I think if you think about the underlying trends that that drove it a lot of it is.
As related to <unk>.
<unk>, if you will as a result of the pandemic and increase from work from home, So and our view I think things are cooling off over the summer, but we think we think there is still.
Theres still optimism around continued strength there.
Fair enough and not for any given.
The strong balance sheet has there been any change and how you approach the pension liability going forward.
Well, it's come down pretty significantly from year as Sylvain indicated 2 things 1 is that discount rates are a little bit higher.
And.
And assets have actually performed well so that has brought the deficit down from 630 at the end of the year to 445.
He is looking for ways in which we can.
Reduce the risk.
And reduce the liability 1 of those things that will benefit.
<unk> from our the changes around the U S pension relief, that's going to reduce the contribution that we have to make in the coming years.
And this 1 so our contribution and forecast is down by $14 million. This year to 107 as opposed to the 120 that we said earlier and for next year.
And we expect it to come down a bit more as well. So I think that's that's a good news story, but we're always looking from here for ways in which we can reduce the risk around pension and reduce debt that deficit.
Okay, great. Thanks, Thanks for I mean, Thats and Thats, all I had I'll turn it over thanks.
Thanks Samir.
Your next question comes from Sean Stewart from TD Securities. Please go ahead. Your line is open.
Thanks, Good morning, everyone.
Kevin.
Good morning.
With respect to the lumber downtime you touched on the 25 million board feet.
Was that all related to the cash.
Capital projects and our.
Our price is low enough and eastern Canada that you would consider market downtime.
Based on on margins being low enough at this point that that would make sense for you.
Yes.
Thanks, Sean.
Answer to your question is the 20.
Million board feet is related to.
The capital projects that we talked about and also as we say schedule optimization.
People have been working very hard and the last year.
And we want to make sure that they can take their vacation so some of that.
5 out eliminating shifts here and there to allow people to take vacation and concentrate our operations. So thats, what we mean around optimizing our production schedule.
As far as our profitability our operating cost all in delivered is was $452 per thousand board feet in.
In the quarter.
And so we think that means we're pretty competitive in even in a tighter pricing environment, but look benchmark prices have been very volatile.
Believe that things will normalize that.
There is an encouraging demand strength to come.
That is it driven largely by by Homebuilders, we talked a little bit about the R&R earlier with premier, but I think homebuilding is the lion's share of lumber consumption and it's a positive positive future there.
Okay, Thanks for that detail.
Second question and the balance sheet.
Just on basically where you want it in terms of leverage targets can you speak to M&A ambitions and wood products.
I know, we're only a couple of months into this this correction, but is the opportunity set for M&A opened up at all in recent weeks and.
You touched.
You guys have ambitions and wood products beyond commodity lumber engineered wood products that type of thing would that be of any interest.
So our strategy around acquisitions, and particularly and the lumbar space.
There.
And there's 2 things that we want to do overall with our strategy, we want to we want to pursue growth and the strongest areas of our business and for us that is pulp and lumber.
For lumber acquisitions is a logical strategy, we were pretty successful with the acquisition of <unk>.
And in the U S South last year.
From from Con effects, and so we're always looking at opportunities.
They have to be at the right price, we're like we'd like to think of ourselves as.
Pretty pretty shrewd buyers, so right time right price right opportunity.
So we.
So and we get a lot of things.
The answer on.
Broadening beyond just a commodity base and I'll point out that in our portfolio of assets, Sean and we do have assets that are engineered wood products, we have to I joist facilities and the Lax Asia area, which is a joint venture.
Sure with with LP.
And that is very successful and we have other engineered wood facilities as well so that is something that we.
No.
And I wouldn't necessarily rule it out, but as I say it has to be right time, right price and it has to make sense right now in terms of synergies.
<unk> and the business rationale for doing it.
That's great detail, that's all I have for now and thanks Rami.
Okay. Thanks, Sean.
Okay.
Your next question comes from Paul Quinn from RBC Capital markets. Please go ahead. Your line is open.
Yes, thanks very much.
Morning, guys.
Wood products you noted your costs were up 30 Bucks a thousand just winter wear that stumpage increase was was that Ontario, and Quebec with a view itself.
Yes, so a lot of that Paul was stumpage increases, both Ontario, and and Quebec.
And my mind the way, we look at it we think that with benchmark prices trailing off and as you know stumpage is a function ultimately of lumber pricing. So we think that stumpage fees and our fiber costs have peaked in the second quarter I expect that to start coming.
And in Q3 as the lower benchmark prices work their way down the chain. It comes down more quickly just the way the formulas work it comes down more quickly and Ontario than it does in Quebec, but the net net impact is that I expect it to be a favorable variance in Q3 and Q4.
Yeah.
Okay and thanks.
And being down and.
Your tissue results were weaker than I expected.
You noted downtime because how much downtime.
Where you took that downtime and and how can you free.
This business going forward here.
Yeah, no. It's a good question Paul So basically as I said before we knew the second quarter would.
B talk because of it because of the inventory rebalancing we've heard from other producers who have faced some headwinds in this space as well.
And so the downtime for US was a tissue machine that we took down at at Miami and then we took a couple of weeks downtime on the tissue machine in Calhoun.
So that was the converting operations as well all of which was designed to make sure that we were not building inventory.
And a sluggish market.
And the signs are that as more people go to the ball parks and museums and hopefully schools and the next couple of weeks.
And some from home space is picking up.
And the retail we think we will normalize also in the coming in the coming months.
1 of the factors that's.
And that's at play here is that a lot of the tissue producers are facing higher costs as a result of rising pulp costs.
And the away, which for US we get the benefit of integration too to our pulp assets. So.
And we'll get the benefit of hopefully rising prices here, but really to focus on higher shipments.
The idea so we just need to let things normalized and not make rash decisions for what was and admittedly.
Very difficult quarters from salt of the market conditions.
Okay and then just lastly, just on pulp it looks like it's rolled over in China here, a couple of months back and and that's working its way around the globe just wondering what your market assessment.
We think.
We think there is a bit of a headwind Paul.
Very from we have less exposure to China is as you know there was a bit of headwind my sense is that prices will peak in July and then and probably softened a little bit but based on what we see and the demand people still need pulp and conditions are strong for.
Producers, so we think that it could soften a little bit, but if it does it should be fairly modest.
Alright, Thats all I had best of luck. Thanks.
Thanks, Paul.
We have no further questions I would like to turn the call over to Beth.
Cash the closing remark.
Okay.
Thank you for joining us today.
Inc.
This concludes today's call you may now disconnect.
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A question.