Q3 2021 Resolute Forest Products Inc Earnings Call
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Good morning, My name is Julie and I will be a conference operator today at this time I would like to welcome everyone to regulate forest products third quarter earnings call.
Maryann, Nemo's Treasurer, and Vice President of Investor Relations the floor is yours.
Thank you Julian good morning, and welcome to read those first quarter earnings call. Today, you will hear from President and Chief Executive Officer.
Senior Vice President and Chief Financial Officer, you can follow along we decides for today's presentations.
Hi.
Web site, where you do have.
Webcasts. This morning, so I just find should be available on our website you just want to cancel that during the call.
And Ah you can go and how old are Lake Austin presentation and went under the Investor Relations section of our website and you can also do a lot of his life.
Two day presentation will cause you know when you asked GAAP financial information our press release and your appendix to dislike because we you should have done got information do you ask a financial measures.
Also make forward looking statement for what I'm looking for me is based on our current assumptions beliefs and expectations all of which was involved with a number of business risks and uncertainties and can change as conditions too.
Please review the cursory statement in our press release and on site to up to date presentations I will turn the call over to Amy Nice good morning, and thank you for joining us apologies for the issues with the slides were trying to get the most of those for you on the Webcasts you as soon as possible.
Today, we reported $144 million of adjusted EBITDA for the third quarter compared to 445 million in the second quarter Hum.
Coming off the record highs and benchmark lumber prices reached in May this quarter's results reflect the sizable impact of peak prices converging back toward trends.
For their part are pulp and paper businesses built on the momentum of the second quarter with strong pulse shipments in higher transaction prices invalid segment by segment, we've reported adjusted EBITDA $75 million for what product down by $340 million 52.
And market pulp up by 16 minus 4 million for tissue down by one and $31 billion in paper up by 22.
This quarter, we paid a one dollar per share a special cash dividend and we also repurchased 1.2 million shares at an average price of $10.95, let's look at the individual businesses, starting with wood products.
The third quarter U S housing starts came in at 1.6 million on a seasonally adjusted annual basis similar to the previous quarter.
Having cooled off significantly during summer months, our sales to home improvement centers picked up nicely heading into the traditional busy season, which we think speaks to the underlying resiliency of the repair and remodel channel.
Our average transaction price fell in Q1 to $573 per 1040 feet.
$583 or 50% decrease compared to the previous quarter.
Shipments were 64 million four feet lower at 511 million, reflecting lower demand capital projects downtime vacation accommodation and pandemic related workforce availability constraints and the us south.
Finished goods inventory increased to $129 million 40 feet.
World demand for chemical pulp was 3% lower in the first eight months of the year compared to the same period last year, reflecting a 3% decrease in software and a 5% decrease in hardwood.
Almost all of the drop reflect the 7% reduction in demand from China, which has deteriorated over the course of the year, partly as a result of Destocking and more recently as a result of energy related and end user downtime.
This has also caused an increase in producer inventories heading into a busy or maintenance outage period.
Through August global industry average operating rates were 88% for softwood and 89% for hardwood.
Our average transaction price froze too a historical high of $826 per metric ton in the quarter, an increase of 5% from Q Q.
We saw appreciable gains across all grades, but mostly first loss and hardwood and mostly in North America, which represents approximately 80% of our total pulp shipments.
Our shipments also increased by 30000 metric tons as a result of inventory changes in finished goods inventory fell to 52000 metric tons.
Through August.
At home tissue shipments were down by 11% from 2020 levels, while away from home shipments were up by 4% against their historically low levels of 2020.
The business face the slow recovery for commercial consumption and this year's inventory rebalancing. In addition to pandemic related headwinds with labor availability and logistics constraints.
Our average transaction price decreased by $60 for a short time or 3% due to unfavorable product mix as we mitigated the impact of the headwinds by selling more pair of roles and in a lower grade.
We recorded production downtime of 3500 short tons in the quarter 3000 fewer than Q too.
As a result, our shipments rose by 4000 short tons and finished goods inventory fell by 2000.
The headwinds I mentioned combined with the year to date $5 million a ramp up costs at the recently acquired Hagerstown converting facility. Unfortunately overshadowed the performance of counting tissue, which was profitable in Q3.
And Q2, and Q3 of this year world demand for newsprint and North American demand for uncoated mechanical papers have been higher compared to the same periods of the pandemic affected 2020.
Conditions and Uncoded mechanical papers have been particularly strong with demand up by 4%. So far this year, partly as a result of substitution down from coated rates.
Through September the shipment to capacity ratio for North American newsprint was 94% compared to 82% last year, while uncoated mechanical paper was 89% compared to 73% a year ago.
The average transaction price in our paper segment increased by $54 per metric ton during the quarter or 9% with gains at all grades as the tighter supply and demand dynamics helped to the recovery from the impact of the pandemic, but our shipments were 18000 metric tons lower this.
<unk> order and finished goods inventory remained unchanged at 72000 metric tons, reflecting of destocking effort and prior periods.
<unk> for this segment improved by $22 million to $31 million I will now have Sylvain discuss our financial performance.
Thank you Jimmy we're now on page 10.
We reported net income of $67 million in the third quarter or 84 cents per diluted share. Excluding special items. This compares to net income excluding special items of $300 million or $3 74 per diluted share in the previous quarter and net income excluding special items of 62.
$2 million or 72 cents per diluted share in the same period last year.
Special items in the quarter.
Mostly related to $12 million in foreign currency translation gains and $8 million of equity income, mostly from our I Joyce partnership.
Total sales in the quarter, where $817 million down by $323 million compared to the previous quarter due to lower realized market prices and shipments and wood products, partly offset by higher realized pulp and paper prices and higher pulp volume.
Total costs more similar to previous quarter on a consolidated basis after removing the impact of volume and foreign exchange.
Compared to the previous quarter. The all in delivered costs for the wood products segment declined by $4 per thousand four seat for 1% due to gradually falling stumpage fees.
Have been done in this segment decreased by $340 million to $75 million.
And the market pulp segment delivered costs was unchanged in the quarter at $665 per metric ton, reflecting higher maintenance and energy costs diluted by higher shipments.
It did and the segment.
Proved by $16 million to $52 million.
The delivered costs and tissue improved by $109 for a short time or 5% due to lower downtime.
And the Dove into segment fell by $1 million to negative 4 million.
Papers delivered costs was unchanged due to lower maintenance costs from plant outages in the previous quarter offset by higher chemical in energy costs.
<unk> editor in two by $22 million to $31 million.
Moving on to page 12.
We generated $105 million of cash from operating activities in the quarter and invested $32 million in capital projects for a total of $79 million a year to date.
Due to supply chain delays and limited contractor availability, we now expect our capex investments this year to reach approximately $110 million down from our previously disclosed estimate of $125 million.
With a $119 million a quarter and cash liquidity stand.
At $930 million and net debt at one at 184 million.
We made $39 million in softwood lumber duty deposits in the quarter.
Bringing our total deposits to $371 million at quarter end, which is recorded in other assets on the balance sheet.
We took advantage of market conditions to repurchase over 1.2 million shares in the quarter at an average price of $10 95.
We also paid the special cash dividend of one dollar per share of common stock or $79 million in aggregate on July 7th two older as a record at the close of business on June 28th.
Finally, we contributed $28 million to pension plans in the quarter and made aubade payments of $2 million.
With higher long term interest rates of positive gains from investments are gross pension funding deficits was $457 million $172 million improvement compared to to $629 million funding.
Funding deficit disclosed that you are at.
As as discussed during the last earnings call, we reduce our expectations for 2021 pension contributions from $120 million to 107 million. We expect of 2022 contributions to be about $95 million based on current market conditions.
In accordance with Us GAAP, the accounting figures will be remeasured only with year end results based on current market conditions, we would expect the accounting deficits reduced significantly.
Pass it on to repeat.
After a peak to trough swing of roughly 1000 per $1000 per thousand board feet in the third quarter lumber prices seem to have stabilized at above trend levels on a pre duties basis in the coming quarter, we're looking for higher lumber shipments and slightly lower fibre costs, but considering the path of mark.
Get prices, we could see a quarter over quarter reduction in average transaction price.
We expect paper realized prices to build on their third quarter momentum and the seasons seasonally busier fourth quarter.
Even as market pulp conditions have been very strong, particularly in North America, and Europe energy related and user downtime in China is slowing global global demand and adding downward pressure on prices and volume.
For both the pulp and paper segments, we expect an uptick in overall costs as a result of higher energy and chemical prices as well as freight costs.
For tissue, we expect to see gradually improving pricing and costs as we improve product mix and uptime, even as we continue to face slowly recovering markets as well as logistics and labour availability challenges.
The team's focus remains on driving improvements to leverage are integrated Pope advantage and bring to light the value of the assets I'd.
I'd like to close with a few words from my friends are festival will be retiring as senior VP for corporate Affairs, and Chief legal officer at the end of the year. After a 36 year career with resolute, which he started as the lawyer in Quebec City.
As a member of the executive team for almost 25 years shock has played an instrumental role in shaping the resolute of today on behalf of the board and the executive team past and present I want to thank soft for his many years of loyal service to the company.
As an executive she has been the Guardian of this company's moral compass for decades, we all joined to wish him a happy healthy and well deserved retirement with his wife Bridget and their family shock has agreed to stay on on a part time basis as a special adviser to me.
By the same token I am thrilled to welcome to the if I need a class to the executive team.
She has been with resolute for 20 years has outstanding credentials and as our Vice President for legal affairs for nearly 15 years for experienced covers the full range of practice areas, including transactional governance litigation commercials and public policy, she's equal parts brilliant lawyer and practical business.
Person and as such there is no better candidate to succeed shock as our next senior Vice President for corporate Affairs, and Chief Legal Officer.
Yeah.
Those are formal presentations fehringer will now.
Call for fast.
Thank you. Thank you I would like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again.
So just a moment to compile the Q&A rosner.
Yeah. Our first question comes from Sean Stewart Securities. Please go ahead. Your line is open.
Thank you good morning, everyone.
A few questions good morning.
Let's start with tissue.
Encouraged to see this Calhoun is is profitable.
Can you give us some context when you when you use that term is that EBITDA positive is is operating earnings positive at Calhoun, what's the context for profitability there.
I think about it.
Audit EBITDA basis, Sean and I think it's important to underscore because.
There were some pretty significant challenges in in the tissue business.
In the third quarter, including some downtime as a result of the pandemic.
There were challenges also with labour availability at dusk and logistics constraints. So the headwinds were fairly strong so when I think of profitability I think about EBITDA profitability.
Okay.
And I know, there's a lot of moving pieces for that that business that many which are under your control, but from a broader perspective, what's your thinking on a transition to overall profitability for that segment and then presuming you can you can turn the the margins around there.
Does the overall scale of that business makes sense for resolute.
Just a matter of adding more converting capacity.
How do you think about the ultimate strategy for the tissue segment.
While all reminders Shawn that last year, we made $17 million of EBITDA with the tissue business.
And I think we can still do better than that we continue to improve on a number of levels I think what's what's key for the business is that.
Quality is there.
And a productivity has now established measurable and demonstrable. So the business case for resolute in tissue.
Is to integrate pulp and to downstream margins that are more stable over over the cycle. So I think the business case makes sense, where we need to continue to do better is around the execution. So we acquired Hagerstown in December of last year to fill part of a convert.
Hurting gap that we had with parent roles, we were making in Calhoun that we could not convert.
And then.
After effects or the late effects of a pandemic. This year have made things pretty pretty challenging so what I see on the path ahead, especially in the coming quarter here as product mix.
Improves.
And we hopefully get through the challenges of the pandemic will be able to convert more will be able to diversify the portfolio more and then we should be able to drive more profitability from that.
That's great detail. Thanks for me.
Second question, maybe for so long.
Capex budget.
I appreciate there is some deferrals for this year.
Any initial views on what 2022 might look like and.
Context on the saw mill discretionary spending program appreciate it's early days there but.
How is that.
Folding as we move forward.
So good question shot actually where we're working through our budget at the moment, so we're still defining where that setting but it's clear.
At some of the delays of this year will will aim to catch them up next year.
We announced back in queue to a number of programs, which we started some in the us south and some in.
Some in Canada, and Quebec, and Ontario actually.
So those have started but but like we said in.
In the remarks.
It's a difficult environment from sub contractors. So we're trying to balance making sure we don't overpay for for services and stuff and getting progress on those projects because they are very good projects. So.
So I suspect next year will be will be higher than this year because of this.
Delay that.
Delaying spending that we have right now.
But we're still finalising the extent of that.
Those numbers.
The second part of your question related to our investment on the U S out in the startup of El Dorado. For example is that what you meant they're yeah exactly yeah. So so that's moving along actually and and what's happened in the third quarter with the lower demand we.
We took advantage of that too.
Do some of the work that required operation to slow down or even stop for for a few days and take some downtime on that so we're still committed to all of that El Dorado is is operating at about one five shift right now.
So that's.
That's kind of going well I would say and it's allowing us to.
To step back after a very busy started the year there we try to maximize production.
To really optimize for the go forward basis.
I might add to rationalize as far as El Dorado is concerned. So has always said we started running dogs through in December and actually started making sales in Q1 throughput at the facilities up about 40%.
As of September October versus the average of Q1. So we are making good progress. This survey said.
Okay.
That's that's good okay. That's all I have for now thanks, guys. Thanks, Sean Thank you.
Your next question comes from having a pet how some CIBC capital markets. Please go ahead. Your line is open.
Hi, good morning.
Given the given the strong liquidity.
Tax assets.
In the U S. How are you feeling about the potential for more lumber M&A give.
Given maybe what you are seeing in the market and some of the recent.
Transaction values, we've seen in the us so.
That's a very good question from year and.
I think I would underscore that.
We have set that number is going to be a key pillar of our transformation strategy and that remains the case, we've indicated that the.
The us out was of particular interest for us certainly with some of the assets that we've seen transact I think expectations on valuation have have have increased.
Our approach for M&A is is always going to be the same we think that the evaluation has to make sense for us.
And.
And.
There has to be an additional benefit whether it's through synergies or operational gains for us disease. There, but you are correct to point out that as far as we think about it with the sizable tax asset that we have that is a synergy that we can bring to a potential transaction that any are not necessarily everybody.
Can.
Okay, great. Thanks for them you that's helpful and I wanted to get your thoughts on in British Columbia, We've seen the government moved to <unk>.
Restrict the old growth logging in some parts of the province, what what impact do you think that could have won the overall number markets.
Yeah. So army, we don't operate NBC, who mirror so.
I'm not an expert on on how things develop their I have read some things about potentially limiting the availability of fiber I mean, if you think about where we are as as an industry, particularly in Canada fiber availability is one of the key challenges that that we as an industry have.
I would tell you that on the on the eastern Seaboard in Quebec, and Ontario, where we operate we have pretty good visibility on on fiber availability, but the trend for the industry is is higher fibre costs particular, NBC. So I think the way I would think about it is that.
Anything that that.
That reduces or calls into question the access to fibre.
Will.
Could have an impact on on fiber availability in fibre costs, which ultimately will get reflected into into prices and I think that if you look at where.
Rice's have trended since we've come off the peak.
Trough seems to be higher compared to where the trough was say.
Say in the last 10 years before the peak and I think the key difference between those points is probably Canadian farber costs and I would add also duties.
Fair enough. Thanks, Thanks for me, so I'll turn it over.
Thanks.
As a reminder, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Your next question comes from Paul Quinn, Some RBC capital markets. Please go ahead. Your line is open.
Yeah, Thanks for watching morning, guys too.
Good morning, maybe I'll start starting the pay per se.
Kind of curious as to the guidance it looks like your guiding for for the Q3 momentum to continue in a queue for so does that anticipating a higher Q4, which traditionally has a seasonal decline.
Well, we are expecting gains in prices in queue for the conditions for paper.
All are.
Are actually very very tight right now.
What we've seen in the last year is that capacity has come out.
And as the economy has been on the path to recovery the demand has not come down as much as capacity has so we're seeing.
Some some demand Paul against a fairly tight supply and that's pushing prices up so yes, we see prices higher in in queue for.
I'll remind us and I think this is the point of your question in queue for costs tend to be higher.
For seasonal factors, so while we may see higher prices, there will be higher costs as well, particularly in this inflationary environment, where energy prices and.
And.
Chemicals and frayed are also a little bit higher.
Okay. So at the end of the day the gains in pricing are going to be offset by the the increase in cost and the higher Canadian dollars.
I think that's that could very well be the case for Q4.
But I am hoping that price will be sticky for longer.
Okay keep those fingers crossed maybe two.
Switching over to the lumber.
You mentioned slightly higher shipments in queue for which again generally the top 100 production quarters is that because there's less overall shut despite the holiday showed some Christmas.
Well, so what we're thinking about though Paul is against Q3 and in Q3, we did reduce our shipments by $64 million as a result of the list that we mentioned capital projects downtime vacation accommodations.
And also some workforce availability, so when compared to Q3, we expect our shipments to to go up.
One of those things that we've seen as.
We were kind of joking that the quietest place to hang out on a Saturday afternoon. This summer was a big box store.
But the reality is that our shipments since the trough of this summer to the box stores has increased very.
Very well back to I would say pre pandemic levels. So we think that speaks to the continued strength around repaired remodel.
And also homebuilding, which.
And in the South is not as affected by the weather that you and I have to put up with.
Okay, and then just shifting over to pulp and they were seen pricing.
Clearly starting to.
To be.
To come down significantly in China, and that'll resonates other parts of the room, how bad do you think pulp markets will get over the next six to 12 months.
Yeah, no you're you're correct I mean, we there has been growing pressure I mean, what we see ultimately is what's in our own order book.
80% of which is in North America, having said that China is four 8% of the market and.
There destocking in the last couple of months and the end user downtime is putting downward pressure on pulp prices I think there's a couple of factors up all that I think about one that's not clear to me is whether the lower demand.
That we see in China is deferred or destroyed.
Don't know the balance between those those to the reality is that we're in an environment, where the logistics are constrained.
There's also in the fourth quarter of the seasonally higher maintenance outages. The play into it we also see especially in North America higher demand for tissue.
And and printing and writing on the other hand, we do see higher producer inventories as you pointed out before as well.
And there is the looming.
Increase in Latin American capacity, so our expectation for the fourth quarter as we're probably probably going to lose a couple of dollars, but I don't expect it to be.
You know.
More than.
I don't expect to lose the gains that we have gained so far this year.
Okay and then just.
Back on to tissue following up Sean's question I mean, if we sit back and look at this tissue business I mean, you've invested over 270 million back in 2017 40 years later.
We're happy that it's profitable in Q3 and I suspect that the.
The total investment is probably north of 300 million.
Remy, you say 17 million and EBITDA in 2020 with the incredible.
Tissue year for the market something we've never seen before so.
A business that you can actually get back to you know.
Making cost of capital.
And what do you think that timeline.
That's the case.
Well I think that there is a couple of things that need to happen.
Again, I'll reminders the advantages the integration to Paul.
For us so we do not have the vulnerability that perhaps other tissue producers might have as far as.
Cyclical nature of Poland. So we can build on that we also have a cost advantage for that integration, particularly in Calhoun.
My goal is saying $17 million for last year wasn't to set the high water Mark I think it's something we need to build on I think the opportunities for us are really around.
Increasing the converting through but I mentioned that we acquired a converting facility at the end of last year and that improving the diversification of our portfolio.
And so the reality is that this year has been pretty challenging labor availability is a big big challenge for it not just us, but a lot of people and as far as logistics is to put a number on it 90% of our business is customer pickup.
So it is something over which unfortunately, we don't have as much control as we might have an another business. So I mean I think Paul.
All of that.
It won't be next year, but I think that we can we can get.
Respectable EBITDA for for that business.
Just need to keep focusing and I think as I indicated before the quality of the product is there. The production is consistent it's understood and it's.
And then there is upside for us to go and chase. So it's just about execution and we just need to keep driving to break delight the value of the assets.
Alright, that's all I had best of luck guys.
Thanks, Paul.
We have no further questions I would like to turn the call over to Marianne Nemo link for closing remarks.
Okay. Thank you we would like to apologize again for the technical issues, but declines such date.
Been able to resolve an issue next difference two minutes of the call.
And I would like to remind you that the presentation is available on our website for downloading if you wish.
To consult them.
In closing, we'd like to thank you for attending our call today, and we'd like to join US and wish you a great day.
Ladies and.
Gentlemen, This concludes today's conference call. Thank you for your participation you may now disconnect.
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The host has ended this call Goodbye Lenny motto, a cauchy hoopla.