Q1 2022 Resolute Forest Products Inc Earnings Call
Good morning, and thank you for standing by welcome to Resolute first quarter earnings call. Following todays conference there will be a question and answer session. If you would like to ask a question at that time. Please press star followed by one on your phone I will now turn the call over to Maryann, Mush Treasurer and Vice President.
Investor Relations. Please go ahead.
Okay.
Good morning, welcome to our results first quarter earnings call today, we'll hear from Jamie let alone President and Chief Executive Officer, and supervisory at all senior Vice President and Chief Financial Officer, you can follow along with the slides for today's presentation by logging onto the webcast using the link in the presentations on our website webcast page.
Under the Investor Relations section of our website and you can download the slides.
Today's presentation will include non U S GAAP financial information, our press release and your appendix to the slides include a reconciliation of non-GAAP information to U S GAAP financial measures.
We will also make forward looking statements.
Forward looking information is based on our current assumptions beliefs and expectations all of which involve a number of business risks and uncertainties and can change as Congress shouldn't do please review the cautionary statements in our press release and on slide two of todays presentation I will turn the call over to Amy Thank you, Brian and good.
And thank you for joining US today, we reported $270 million of adjusted EBITDA in the first quarter compared to 111 in Q4, the results reflect favorable pricing momentum in each of our segments, particularly in wood products and paper.
Unfortunately transportation network improvements were slower than expected. This is especially true in Quebec, where most of our production is based which has led to lower sales volume and higher inventory levels by segment, we reported adjusted EBITDA of $230 million for wood products.
Off by 138 million $26 million in market pulp up by 1 million minus $4 million in tissue down by three and $34 million for paper up by 'twenty two.
We further strengthened the balance sheet with significant cash generation in the quarter and we improved the competitiveness of our business with two tuck in acquisitions in the wood products segment, namely the other 50% of our engineered wood partnership, allowing us to lock in the downstream integration of.
Over 60 million board feet of lumber capacity.
And our cogeneration facility adjacent to our Centare sawmill, which allows us to maximize the use of biomass from our regional operations generate green power and further enhance our competitiveness in the Abitibi region.
With our strong balance sheet and liquidity well over 1 billion, we have significant flexibility to generate long term value for shareholders and to drive sustainable economic activity in the communities, where we operate.
Let's talk about our individual businesses, starting with wood products.
First quarter U S housing starts reached $1 8 million on a seasonally adjusted annual basis up by 5% from the previous quarter.
Benchmark lumber prices were strong with volatile during the quarter and the transportation network has been sluggish.
Our average transaction price rose to $1022 per thousand board feet, an increase of 410 or 67% from the previous quarter.
Production improved by roughly 35 million board feet in the quarter, and we added 12 million board feet equivalent with the new I joist capacity.
But shipments were 86 million board feet lower due to limited railcar and truck availability, particularly in Quebec, which pushed finished goods inventory up by 97 million board feet to $223 million.
We continue to work hard to adapt to ongoing challenges in the transportation network and we expect to gradually normalize inventory levels over the second half of the year, starting with a significant improvement in shipments in the second quarter.
While underlying fundamentals for building materials remain positive we are mindful of inflationary pressure and rising interest rates, which could affect pricing and margins.
Global demand for chemical pulp through February rose by 1% with demand for hardwood up by 2% and softwood down by 2%, while Chinese demand has been softer year to date, North American and European markets have been resilient.
Our average transaction price increased by $9 per metric ton and our shipments were 28000 metric tons, lower which reflects the capacity curtailment at Calhoun and significant logistics constraints as a result, our finished goods inventory rose by 23000.
Metric tons.
We expect to see a marked price improvement in the coming quarter based on publicly available price announcements. This trend is the result of logistics challenges the global geopolitical environment and the accumulation of significant unplanned industry downtime.
Accordingly, we expect our margins to widen but the timing of maintenance will offset some of the positive impact in the second quarter.
We expect to gradually reduce elevated inventory levels over the course of the year, starting with a modest increase in volume in the second quarter.
Through March U S at home tissue demand improved by 4% and the away from home segment grew by 6%, but to levels still well below pre pandemic demand.
Our average transaction price increased by $47 per short ton or 2% in the quarter due to better product mix and shipments rose by 1000 short tons.
We expect rising pulp costs in the second quarter to offset incremental average transaction price gains and shipments to remain similar.
North American demand for uncoated mechanical paper increased by 7% in Q1, mainly due to grade substitution, but newsprint slipped by 6% our average.
Transaction price for paper rose by $37 per metric ton or 5% in the quarter due to favorable market conditions in all grades.
Our shipments fell by 22000 metric tons, largely reflecting the capacity curtailments at council.
Finished goods inventory remained elevated at 85000 metric tons as a result of limited railcar and truck availability.
Paper pricing conditions are strong due to limited supply the macroeconomic environment and logistics constraints, but.
But we expect higher prices to be partly offset by higher planned maintenance in the quarter I will now ask Sylvain to pleased to discuss our financial performance.
Thank you Amy.
Reported net income of $107.
$7 million in the first quarter or two.
$2.26 per share excluding special items.
This compares to net income excluding special items of $37 million 48 per share in the previous quarter.
And net income excluding special items of 100 <unk>.
$19 million or $1 45 per share in the same period last year.
Special items in the first quarter included.
$45 million in other income, mostly due to a gain on our 50% equity interest in a resolute LP I joists partnership in connection with the acquisition.
$7 million in non operating pension and other postretirement benefit costs.
And.
$4 million in closure.
A related charges for the indefinite idling of the Calhoun mill.
Compared to the previous quarter. Our results include the favorable impact of $7 million.
Indefinite idling of pulp and paper operation at the Calhoun Mill, which occurred early in the first quarter.
We reduced our 2022 cash flow was your cost expectation.
Office paper operations.
Up to $22 million from 32.
Total sales in the quarter were $945 million up by $111 million.
Third to the fourth quarter.
Selecting higher realized prices in all segments.
Partially offset by lower shipments as a result of logistics constraints.
And the indefinite idling of our Cowen pulp and paper operations.
Mainly driven by higher log cost manufacturing cost rose by $23 million in the quarter after removing the impact of volume.
The capacity curtailment in calendar <unk>.
Foreign exchange.
Compared to the fourth quarter all in delivered cost of the wood products segment rose by $77 million without sports league or 17%.
Mainly reflecting higher stumpage fees and harvesting expenses.
EBITDA in this segment improved by $138 million and $230 million.
And the market pulp segment delivered costs decreased by $8 per metric ton or 1%.
EBITDA in this segment improved by $1 million and $26 million.
The delivered cost in tissue increased by $141 per short ton or 7%, mostly due to higher pulp prices, including the loss of direct pulp integration at the cabinet.
EBITDA for this segment fell $3 million to negative $4 million.
Papers delivered cost decreased by $47 per metric ton or 6% due.
Due to lower overall operating costs following the curtailment that talent.
We offset by higher freight costs.
EBITDA for this segment improved by $22 million to $34 million.
We generated $147 million of cash from operating activities in the quarter.
An increase of $67 million of inventory.
Mainly as a result of logistics constraints and a seasonal buildup of work ahead of the spring breakup.
We expect log inventory to come down during the second quarter.
Finished goods inventory.
<unk> to gradually normalize in the second half of the year.
In March we completed the acquisition of <unk> I, just I joined the partnership for $50 million net of cash acquired and working capital adjustments.
We made $13 million in capital expenditures during the first quarter and maintain our $130 million target for the year.
We also made $43 million in softwood lumber duty deposits in the quarter.
Bringing our total deposits.
$440 million, which is recorded in other assets on the balance sheet.
On April six Moody's announced a credit rating upgrade to <unk> from <unk> with a stable outlook.
As a result of our improved financial performance and leverage.
The strong cash flow generation in the quarter, our net debt fell to only $140 million at quarter end with a leverage ratio approaching zero, excluding pension and our liquidity was over $1 1 billion.
Finally, we contributed $20 million in pension plans in the quarter.
OPEC payments of $3 million.
Considering the significant increase in bond yields since year end.
Year end on March 31, and pro forma.
Accounting deficit would've been eight other than $25 million down from $1 41.
On the other than the funding deficit increased to $525 million due to Q1 market performance.
We will conduct a formal revaluation of the accounting physician only at year end in accordance with U S. GAAP rules.
Alright, Thank you still rank our strategic objectives for the company remained focused on growing our wood products and pulp businesses and on driving further improvements in our overall asset performance to that end, our current priorities and wood products are integrating our recent acquisitions in Quebec continue.
<unk> to enhance productivity in our U S sawmills and investing in our assets with strategic capital projects and ensuring their disciplined execution for pulp, we are driving operational efficiency and productivity and investing strategically to grow capacity organically.
Following the indefinite idling of pulp and paper operations at Calhoun, We indicated last quarter that we would review strategic options for the tissue business as part of this exercise. We recently launched a sales process to explore divestiture options.
In the coming days, we will start main table bargaining with union leaders, representing many of our Canadian pulp and paper employees.
Our Union partners have been instrumental in our progress as a company and their contribution is critical to our continued success. We look forward to a constructive open and collaborative dialogue building on our shared goal of making sure resolute remains an employer of choice and a successful company contributing to vibrant communities.
In closing I am pleased to confirm that we surpassed our 30% absolute GHT emissions reduction target cutting them by 34% from 2015 levels.
This concludes our formal presentation operator, we'll now open the call for questions.
Thank you if you would like to ask a question. Please press star followed by one on your touch on your telephone keypad. If you would like to remove yourself from the queue. Please press star one again.
Your first question comes from the line of Amir <unk> of CIBC capital markets. Please go ahead.
Hey, good morning.
Right right.
Unprecedented array of paper and newsprint hikes in recent months.
Will that eventually hit your entire <unk>.
The paper business or do you have some long term legacy contract prices that may limit the upside too much realizations.
No.
I mean.
We are always trying to get a win win deals with our customers. The mirror, but I would tell you that there are not too many long term contracts that would limit the upside we do as you can see in this quarter have realized a significant improvement in pricing and we expect that to.
It continues so there arent many long term contracts that would limit our upside there.
Okay, great. Thanks, Thanks for that that's helpful and just on the tissue strategic alternatives process.
Do you have a sense as to when you would expect that process to conclude.
No not yet him here I mean, we've launched it and so we let our we need to let the process follow its course and and we will see it through but I don't have anything to report as of yet and I'm not quite sure yet how long it'll take to to work it through.
Okay fair enough. Thanks, I'll turn it over.
Okay.
Your next question comes from the line of Kasia coffee cake of TD Securities. Please go ahead.
Yeah.
Hi, good morning, everyone as cashless standing in for Sean.
First question I'm sorry.
Hey, good morning.
You might be able to talk about inflation, how that trended this quarter relative to what you were heading into the quarter.
Yeah, no absolutely so what we were expecting last quarter.
Does for a slight reduction in energy prices is a function of natural gas prices.
Uh huh.
We're expecting fiber to go up just on the basis of lumber prices and freight also two to come up and what actually happened is an increase in total costs by $23 million all of which really came from a higher log costs. As a result, as we indicated of stumpage fees for <unk>.
Higher lumber prices and we also saw increase in freight cost as a result of the logistics constraints that we've been talking about <unk>.
And a slight uptick in energy prices on the favorable side, we did get the benefit of removing our Calhoun as a result of the indefinite idling of pulp and paper operations, there and we saw a bit better on power generation and lower SG&A because in the last quarter, we recorded a.
Mark to market for some of the the equity based compensation.
So that's.
The key items in terms of what we expect in the quarter ahead.
We stumpage fees will be a function of lumber prices.
We expect that freight cost will remain elevated because we still have a high inventory at facing some challenges around logistics constraints and we are expecting an uptick in maintenance costs as we head into just normal spring spring maintenance season.
That's great and just on that last point.
Insurances.
With me today for the maintenance.
In pulp and paper I would be looking for plus $20 million quarter over quarter.
Okay great.
And then you spoke a lot about.
And I expect inventory to gradually normalize over the course of the year.
This was taken this quarter related to shipping constraints.
Pardon me I was how does your platform running now.
Reference chicken 33 million enforced. He is finished goods inventories and remember is that historically elevated.
On that.
That's a good question cashes so.
I mean for us the logistics constraints are reflected in excess inventory and so we have as we talked about finished goods here of $57 million on the balance sheet from from last quarter.
And we had higher freight costs of $8 million, we did not have any significant production interruptions as a result, so we're really building inventory. So the way we think about it is that this is really EBITDA deferred as opposed to denied.
And 223 million board feet of inventory for the lumber business I would characterize as a very high it's about double what it was at the end of a call. It 2020, so we like to keep it at say 100 to 125 million board feet. So 225 is on is on the high side. So it's going to take a little bit of <unk>.
Time before before we can get all of that distributed.
But but we expect to work it down over the second half of the year, starting with a modest increase in shipments here in in the second quarter.
In the lumber business, we expect a significant increase in shipments about 100 million board feet.
Oh, that's going to be pretty.
And last one for me just broadly speaking.
The strategic objectives, you gave some context already but where does M&A strategic pecking order.
How do you look at returns attached to the shares.
Okay.
Most of that.
By that time and authorized.
Mediasite.
Recall correctly.
So I mean M&A is a tool that we are that we use and so if you look at say in the first quarter, we bought out our partner in the I Joist business, we acquired a cogeneration facility in the Abitibi region to tactically improve the competitive position of our of our lumber.
Business. We also did by the three U S saw mills from Con effects two years ago.
So we always think of M&A in terms of value added synergistic acquisitions.
But it has to make sense for us, but you know the way the way that we think about it kasha is rather than looking at M&A with significant valuations, where your return expectations are only slightly better than your cost of capital it kind of forces us to look inward and to realize that some of our highest return on.
<unk> are investing in our own assets and growing them organically, which is why we've got a fairly full pipeline of capital projects, we still expect to make about $130 million of investments this year.
<unk> the project in the lumber business that we announced last summer.
And those are really high return projects that we're pretty excited about so we want to take a balanced approach to capital allocation. You talked also about some of the things that we're doing around share buybacks, which we have been active on AR and AR.
And that reduction too, but the big picture for the company is that we had a very strong cash generation in the quarter.
And we're getting pretty close to having that net net cash position, which when you look at the history of the company is a pretty a pretty good thing.
Great I really appreciate all the detail that's all I had.
Thanks Ghansham.
Your next question comes from the line of Paul Quinn with RBC capital markets. Please go ahead.
Hi, Good morning. This is <unk> on for Brian Thanks for taking my questions.
The matters to be your thoughts on the sustainability of paper pricing here and how you expect pricing to evolve over the near and medium term given the limited supply and logistics constraints you mentioned.
Well, we we think that paper prices are strong and we will continue to be strong. There are as you indicated a number of factors involved in that we have increased our expectations around that.
The free cash flow generation from the paper business in the next five years just on the basis of how tight conditions are especially in 2022 and 2023.
Paper is obviously very impacted by by capacity.
And we think in today's environment, bringing additional paper capacity can be challenging we're certainly not planning to bring additional paper capacity. If you think about the cost inflation around energy chemicals logistics.
The cost and availability of labor there is a lot of challenges around bringing additional capacity online. So that the secular decline trend will remain but we think that the runway for the next couple of years remains healthy and we're still very encouraged by the free cash flow potential from that business for the next few years.
Yeah.
Great. Thanks, very much it's very helpful.
Maybe next just wondering if you have any sort of refreshed outlook for engineered wood products business.
Including whether youre thinking about your business any differently now following the acquisition of your partners, 50% interest.
And maybe how you're thinking about a contribution and growth there going forward.
Well I can tell you that the business generated $12 million of EBITDA in our in the first quarter. So we're pretty excited about bringing.
The I joist business in the family. If you will as you know it was an equity pickup before so this is the first time that we're including the EBITDA.
I think that the underlying fundamentals for the <unk> business are really key off of our building materials forecasts.
So if you think about the underlying trends that are driving demand in the lumber market.
The historical under building in the last decade, the demographics that are favorable to the future.
We think it's a it's a good it's a good place to be the additional benefit for resolute is that it allows us to integrate downstream 60 million board feet of lumber capacity in house. So so now we're pretty we're pretty excited about the business.
Okay. Thanks, very much that's all for me and I'll turn it back.
Okay. Thanks, Matt.
Okay.
And there are no further questions at this time.
I'll turn the call back over to you.
Thank you.
Thank you everyone for joining us today, we wish you a great day.
Thanks.
That concludes today's conference call you may now disconnect your lines.
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Your participation in this conference has been terminated by the host Goodbye.
Good luck to keep US you Wanna coffeehouse.