Resolute Forest Products Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Resolute Forest Products Third Quarter Results Conference Call. At this time, all participants are in listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would like to now hand the conference over to your speaker today, Marianne Limoges, Treasurer and Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning. Welcome to the third quarter earning calls. Today we'll hear from Yves Laflamme, President and Chief Executive Officer, and Rémi Lalonde, Senior Vice President and Chief Financial Officer. You can follow along with the slides for today's presentation by logging on to the webcast using the link in the presentations and webcast page under the investor relations section of our website and you can download the slides. Today's presentation will include non-US GAAP financial information. Our first release and the appendix to the slides include a reconciliation of non-GAAP information to US 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 conditions do. Please review the cautionary statements in our press release and on slide 2 of today's presentation. I will turn the call over to Yves.

Merci, Marie. Bonjour, good morning, and thank you for joining us. Today, we reported $140 million of adjusted EBITDA in the third quarter, $103 million improvement compared to $37 million in the second quarter. which is largely due to recent rally in lumber prices. It also includes a $29 million contribution from the U.S. sawmills that we acquired earlier this year. By segment, we reported quarterly adjusted EBITDA of $2 million in market fall, down by $14 million from the second quarter, $6 million for tissue, up by $3 million, $139 million for wood products, up by $114 million, Together with our strong Canadian lumber business, the one-time acquisition of U.S. Sawmills positioned us well for the recent spike in lumber prices, contributing $38 million to our EBITDA this year. While the pulp and paper segments continue to face difficult pandemic economics, the tissue business is picking up steam. With the $6 million of EBITDA generated in the quarter, it has generated $19 million of EBITDA in the last 12 months. Let's review our individual segments, beginning with modern pulp. Board shipment of chemical pulp rose by 5% in the first eight months of the year compared to the same period last year, reflecting an 11% increase in demand for hardwood, offset by 3% degrees for softwood. This trend generally reflects the higher demand for virgin fiber based on tissue in the pandemic, which favors hardwood for the corresponding impact of lower worldwide printing and writing demand, which has been unfavorable to software. This helps to explain industry inventory trends, as producer stocks at the end of August were reported to be on the low end of normal range for hardware, but above for software. But this data does not change our long-term view on pulp, particularly software, as global inventories appear now to be stabilizing towards balanced levels. Accordingly, we are cautiously optimistic that markets will improve with overall economic conditions. In the quarter, our average transaction price in the market pop segment slipped by $26 per metric ton, or 4%. Finished goods inventory fell to 71,000 metric tons, and shipment increased by 15,000 metric tons from the outage-affected second quarter. EBITDA in the segment was $2 million. On tissue, the pandemic-driven increase in retail demand for tissue products carried into the third quarter, but the pace has eased since the Q2 peak. Through September, U.S. at-home demand grew by 16% compared to 2019, but conditions in the away-from-home market have been far more challenging as demand has been down by 9%. The away-from-home market continues to be impacted by the pandemic due to the drop in commercial activity. Pricing in our tissue segment improved by 4% in the quarter, or $71 for short-term, which reflects our progress around customer mix. But shipments slipped by 3,000 short-term due to lower demand in away-from-home, which is about a third of our business. Finished goods inventory at quarter-end was 6,000 short-term. Quarter over quarter, segment EBITDA improved by $3 million to $6 million. Going forward, we will focus on initiatives around customer portfolio optimization and productivity improvements. On wood products, the benchmark prices for 2x4 random land, 2 and better, and 8-foot stud delivered grade lakes rose respectively by about $500 and $450 per 1,000 board feet from the end of Q2 to the end of Q3. both reaching more than $1,000 per 1,000 board feet in September, while the benchmark prices for $2.42 and better were up by about $475 per 1,000 board feet, reaching close to $1,000 per 1,000 board feet at the end of the quarter. U.S. housing starts increased to a seasonally adjusted annual rate at a rate of 1.4 million units in the quarter, and the repair and remodeling market also remains strong. Our wood product shipment rose by 16 million board feet in the quarter, and finished goods inventory was unchanged at 121 million board feet. The average transaction price rose by $217 per thousand board feet, or 57% compared to the second quarter. As a result, EBITDA improved by $114 million in the quarter to $139 million. Although market prices have been off their highs in recent weeks. The demand from the repair and remodeling sector, as well as robust housing stock speed, speak to strong market fundamentals. As both the National Association of Home Builders and Forest Economic Advisors have recently said, existing home inventories remain at low levels, while the number of households has been growing steadily over the past years, contributing to an under-built market. Accordingly, we are making a high priority of bringing our newly acquired El Dorado Arkansas sawmill online as soon as we can. We are currently on target for an early 2021 restart. As we've said before, the dramatic reduction in economic activity during the pandemic has been particularly hard for marketing dependent paper products. North American demand for uncoated mechanical papers and newsprint fell by 24% and 27% respectively year-to-date compared to the same period last year. For uncoated mechanical papers, this reflects a drop of 30% in supercalendar grades and 19% for standard grades, while the decline in newsprint is explained by a drop of 30% for newspaper publishers and 23% for commercial printers. The shipments to capacity ratio for all uncoordinated mechanical paper was 73% compared to 83% last year, while North American newsprint was 75% compared to 83% last year. Global demand for newsprint was down by 22% through September, and the world newsprint shipments to capacity ratio was 71% down by 12 points year over year. To address the prevailing market conditions, We continue to operate with a 30% reduction against run rate capacity, recording 171,000 metric tons of downtime in the quarter. Despite the difficult conditions with this linear production footprint to cope with the dramatic reduction in economic activity during the pandemic, our shipments remain stable at 351,000 metric tons. We reduced finished goods inventory by 5% and the average transaction price improved slightly in the quarter to $595 per metric tons, or 1%. EBITDA in the quarter segment improved by $2 million to $6 million. Following a very difficult stretch of over six months, there are signs that paper market activity is slowly and gradually starting to recover, but we expect that the pandemic will have caused some measured to step change in the circular demand decline trend. I will now have Remy discuss our financial performance.

Thank you, Yves. We reported net income of $62 million in the third quarter or 72 cents per diluted share excluding special items. This compares to a net loss excluding special items of $22 million or 25 cents per share in the previous quarter and a net loss excluding special items of $34 million or 37 cents per share in the same period last year. Special items of $5 million in the quarter include other expense from foreign exchange translation and non-operating pension and OPEB credits. Total sales in the quarter were $730 million, up by 118 compared to the second quarter, mostly led by the significant increase in lumber pricing, including the strong contribution from our U.S. sawmills. Manufacturing costs rose by $5 million in the quarter after removing the impact of volume and foreign exchange. Compared to the second quarter, the all-in delivered cost for market pulp increased by $27 per metric ton, or 5%, mostly due to planned major maintenance. Together with the lower average transaction price, EBITDA decreased to $2 million. The deliberate cost in tissue decreased by $55 per short ton in the quarter or 3% due to the timing of maintenance outages. With a 4% increase in the average transaction price, EBITDA for the segment improved by $3 million to $6 million. In the wood product segment, Combined with a significant increase in transaction prices, EBITDA rose to $139 million, $114 better than the last quarter. Papers delivered cost remained relatively unchanged. The average transaction price improved slightly, and EBITDA for the segment came in at $6 million for the quarter. Yesterday, we entered into a 10-year secured delayed term loan facility with InvestSmart Quebec for up to $167 million with an initial availability of approximately $114 million subject to certain conditions. Borrowings under the Canadian dollar denominated facility are secured by our duty deposits and will bear interest at a commercial floating rate of interest equal to 1.45% above the Canadian bankers acceptance rate, which is about 20 basis points higher than our ABL facility. The facility is meant to be used to finance activities and support obligations in Quebec. The strong EBITDA from wood products helped to generate $100 million of cash from operating activities in the quarter. We used the tailwind to further de-lever the balance sheet by repaying all of the $69 million of outstanding revolving borrowings under our credit facilities, except for the low-interest 10-year term loan used to finance the acquisition of the U.S. sawmills. We also contributed to shareholder value by opportunistically repurchasing 4.5 million of our shares, or 5% of outstanding for a total spend of $18 million in the quarter. At quarter end, our liquidity had strengthened by $81 million to $477 million, not including the new financing facility, and net debt dropped by $62 million to $541 million. We spent $53 million in capital expenditures in the first nine months of the year, compared to $82 million in the same period of 2019. We're still targeting $90 million for annual capital spending. We made $20 million in softwood lumber duty deposits in the quarter, bringing our total deposits to $214 million, which is reported in other assets on the balance sheet. On pension, we contributed $18 million to pension plans in the quarter and we made OPEB payments of $2 million with a combined expense of $7 million included in adjusted EBITDA. The lower contribution reflects a temporary benefit from the deferral of $17 million to the U.S. plans in the quarter under the U.S. stimulus bill. But after quarter end, We contributed $34 million to the U.S. plans and caught up on all amounts deferred in the year. The deferred amounts were otherwise due on January 1st and carried higher interest. Accordingly, consistent with earlier guidance, we expect pension contributions for the year to be $112 million and OPEB payments of $13 million.

We are pleased today to announce that Rémy Lalonde will take the reins of as President and CEO and serve on the Resolute Board of Directors as of March 1st, 2021. Although today begins the official transition, Rémy has already served as an indispensable partner on the range of strategic initiatives we have undertaken over the past few years. Rémy not only has the enthusiastic support of the Board, I can generally said his colleagues are also today celebrating his success. Remy represents the best of the resident culture. He's a great performer and he has developed direct manufacturing experience by leading one of our key mills and deep financial expertise as CFO as well in his previous corporate roles. He's also known for setting high performance expectations for his people just as he does for himself. He's driven, transparent and inclusive and is well known by the investment community and our range of stakeholders. The choice of Remy is accreted to the internal talent developed by the company. Remy's professional and personal qualities are a great fit for a tough and demanding industry in challenging times. With the passing of the baton, Resolute is certainly in capable hands. Resolute will be well served by Remy's leadership as we take the next steps in our strategic transformation.

Thank you very much, Eve. I want to thank the board and our shareholders for their confidence and for this incredibly exciting opportunity to assume the leadership of this company. I also want to thank Eve very much for his support and his guidance. The last two years of CFO have been a great development opportunity, and it has a lot to do with the confidence he's shown in me and the challenges that he gave me. This is going to be the seventh role that I take on with Resolute. having started as a securities lawyer in 2009 and growing with opportunities offered along the way. I've also been in charge of investor relations. I've been treasurer, and I've had the wonderful opportunity to spend two and a half years running one of our biggest and most profitable assets in Thunder Bay. The perspective and the experience that I gained from these various roles have served me, and I think the company, very well each step of the way. Each of the roles has shaped me in some way, and I'm certain that they will help me as I assume the leadership of the company in a few months. My first priority in the transition will be to continue to be the best CFO that I can be to support Yves as CEO until his retirement and to execute faithfully on our business priorities. The second will be to listen to the board, to shareholders, to employees, and to our communities about the things that are important to them. The third, practically speaking, is to begin an immediate search for my successor as CFO and to execute a smooth transition plan. I wholeheartedly believe that this company has a very bright future and I am very excited for the opportunity to lead this talented team of 7,000 plus dedicated people. Our job is clear. We need to accelerate the evolution of our business to generate value for our shareholders and to drive sustainable economic activity in the communities where we operate. The road ahead is certainly not without its obstacles, which will require some hard choices, but we're up to the challenge. I'm confident that Resolute's culture of dedication, rigor, teamwork, and setting high expectations is exactly what we need to build on our progress.

This concludes our formal presentation. Operator, we will now open the call for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pen key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Sean Stewart from TD Securities. Your line is now open.

Thank you. Good morning, everyone. First off, congratulations to you both on the CEO transition. Remy, very happy for you. Thank you, John. A couple of questions. I'd like to get your context on the lumber price correction we've seen over the last seven to eight weeks. Hoping you can provide some thoughts on price variances from region to region and across grades and I guess especially for some of the decking grades we've seen in the U.S. South where there's been extreme volatility. And more broadly speaking, do you have a sense that a floor is near for lumber markets in general? Let's start with some context there if you can.

Yeah. So, of course, you know, we've seen lately that prices were going down on lumber pretty fast, but, you know, prices, you know, for a little while. So, as far as regional, I think that, you know, we closed the gap really importantly between stud grade and random land for a while. We had about $100, $120 per total boat field difference between the two. That's something that has been closed. We saw the impact of repair and remodeling, you know, which most of the houses now are built at 9 foot and 10 foot. The wall, I mean, But now, you know, you can see the repairs more on the 8-foot. And regionally, you know, you were talking about decking, so we're pretty much involved in decking with the U.S. sawmills. And, you know, we're expecting this business going down. It's usually seasonally, and we're facing that a little now, but we still have a pretty good business on it. So as far as the bottom, I think that, you know, I don't think that all customers saw the list stop the same day using lumber. It's about some speculation and inventory on the distributors, let's say, distribution channel. I think we've probably reached the bottom. We saw lately, the last couple of days, that it's kind of coming back now. The demand has to replenish inventories. We're not at the best time, November, December, but we know that the pipeline and inventory are pretty low on the customer side and probably on the supplier side as well. We're pretty all for going forward that we may have reached a floor, but telling you that we expect to go where we were about a month ago, I think that was pretty exceptional, so I wouldn't commit on that one.

Thanks for that detail. The second question I have is on capital allocation for 2021. A couple of questions on that front. Your appetite for further returns of capital to shareholders into next year as the balance sheet continues to evolve? And initial thoughts on 2021 CapEx plans and any detail on specific initiatives you might be focusing on for next year?

Well, I think as far as the CapEx expenses, We're going to stay really disciplined, you know, as you saw this year. You know, we're still in the middle of this pandemic, and we've been very fortunate on the lumber side, but it's still pretty difficult on the other businesses. Of course, one of our priorities is to restart our El Dorado sawmill and keep going. The investment capex plan we had in that mill, we're going with the first step, but we have other capex and going forward to complete the program. So there is going to be pretty much business as usual, and as we said about three months ago, we certainly have projects that are more interesting, but still not ready to talk about it.

Okay. Thanks very much, guys. That's all I have.

Thank you.

Your next question comes from the line of Amir Patel from CIBC Capital. Your line is now open.

Great. Thanks. And, Yves, congratulations on your retirement. And, Remy, congratulations as well on your new role. Thank you. I want to first start on the lumber side. And, you know, we've got the upcoming final determinations due later this month. You know, I know with the preliminary figures resolute, didn't see as much a reduction as the rest of the Canadian industry. Are you expecting any meaningful change in your relative position when the final comes out?

Yeah, you know, you're right. You know, unfortunately, we're going to be at a disadvantage compared to our Canadian competitions, even with the ones that got the average starting sometime at the end of November. So if you look at the numbers, you know, I always look at those tariffs two different ways. You have the anti-doping case and the cost-reverting duty case. And as far as the anti-dumping, you know, which is the one that we usually manage as a company, it's about marketing and sales strategy. So we are the lowest in the industry. So it means that we've been doing a pretty good job on it. And fortunately, contrary to what happened in the last dispute with the U.S., you know, the revision of the stoppage and forestry regime by province are not done with the province, and the more they are done with the company. And we're kind of doing the benchmark for Ontario and Quebec, and we are the only ones. So it's kind of the result of – I'm not saying it's the right result, but I'm saying it's kind of the result that we got for Quebec and Ontario. And so we see what's going forward, and we think that that rate is wrong, you know, but we're going to have to live with it till, you know, the next review or maybe some victories that we got on the WTO lately. So that's all I can say right now. You know, the rate of the, not the antidumping, but the cultivating duties kind of out of our control pretty much.

Okay, great. Thanks for that, Yves. And I saw there was a report recently from, I think, the Montreal Economic Institute highlighting potential for Quebec to increase its harvest. Do you see much runway there in any sense as to where the government is in potentially making some changes?

No way. I mean, there's been commitment from government to review the forestry system since we got the auction market and everything. So, actually, we got pretty good commitment from the Ontario government as well to try to – in Duke to get more supply. Of course, after a certain period of time, it's going to be the second phase of this forestry regime since we got it for about six, seven years now. It's okay to be reviewed, but I can tell you right now that I haven't seen any announcement and we don't know what it's all about. I know the economic group last week talked about it. They were pushing for more wood supply. But it's really hard to say right now. We don't know what it's all about. So we haven't seen the results.

Great. And Remy, could you give any indication yet on CapEx for 2021?

Yeah, so as Yves mentioned, heading into next year, with the uncertainty that we're still facing in the market, lumber's been great. but the pulp and paper businesses haven't recovered to the full extent yet. So we're still going to manage fairly carefully into next year, Hamir. So I wouldn't expect any material increases, at least not at this point.

Okay, great. Well, that's all I had. Thanks, guys.

Thank you.

Your next question comes from the line of Paul Quinn from RBC Capital Markets. Your line is now open.

Hey, thanks. Good morning, guys. Congratulations on the retirement and Remy on the promotion. Thanks, Paul. I guess to start in lumber, it just looks like shipments were up $16 million in production, probably just slightly less than that, up $14 million with the inventory change. What's your ability to increase this meaningfully in the short term, and how should we think about that startup volume coming out of El Dorado when you get the mill back up?

Yeah, as far as increasing in Canada, the production, it's about pretty much wood supply. As far as finished goods, the reason that the shipments we've had lately on this quarter didn't go down or stay about the same is the capacity of kilns, capacity and dressing the wood on the planter side. As far as a steady improvement in capacity in Canada, So we're pretty much running what we can with the number of supplies, with the wood supply we have. As far as the radio, it's 180 million more feet capacity mill. So we expect when we're going to restart to restart on one shift for at least a couple of months. And then, you know, being probably full capacity two months after that, and hopefully, you know, after four months or so, reaching the level that we would like to be with this capacity of 180 million more feet. And the other one that we need to push a little better was part of the plan. The integration is doing great, but the Glenwood, Arkansas is now back on two shifts. That's what we wanted to do, but we still have some ramp up to reach full capacity with that. Okay, thanks for that.

I think you said you took 30% downtime in paper, and I guess in the spirit of accelerating the evolution of your business, just wondering when you're going to make a decision on paper, machine, or facility closures.

Yeah, well, you know, you're talking about closure?

Yeah, I mean, it looks like there's a different level of supply.

Yeah, so what we've done as far as – You know, the ones that are closed or still closed are Bekovo and Amos. We met with the communities and unions lately, telling them that we don't see those mills restarting soon, so we're going to heat the mills until spring, I would say, and see what's going to come out of it. On the other side, you know, on the paper side, we are pretty good that flexible mills can produce different grades of paper. And we took two machines down in HANMA on the white paper side. But the good news is now, you know, we restarted one of them on four days a week. We're having the biggest one running. We have the opportunity to make sure we can get orders on different types of papers instead of losing the orders when it's beneficial for the company. And kind of like taking as an example, when you have a big machine running, we can run a small machine like a sawmill, you know. running that about four or five days a week and doing maintenance over the weekend and restarting on the Monday, which has been pretty good for us right now.

All right. That's all I had. Best of luck, guys. Thanks.

Thank you.

There are no further questions at this time. I will turn the call back over to the presenters.

Well, we want to thank you all for joining us today. I wish you all a great day. Thank you. Thank you.

Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.