Resolute Forest Products Inc.

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to Resolute Forest Products' third quarter earnings call. Marianne Limoges, Treasurer and Vice President of Investor Relations, the floor is yours.

Thank you, Julianne. Good morning, and welcome to Resolute's third quarter earnings call. Today, we'll hear from Rémi Lalonde, President and Chief Executive Officer, and Sylvain Girard, Senior Vice President and Chief Financial Officer. You can follow along with the slides for today's presentation by logging on our website. We do have a little issue with the webcast this morning, but the slides should be available on our website if you want to consult them during the call. And you can go and follow the link of the presentation and webcast under the investor relations section of our website. And you can also download the slides. Today's presentation will include non-US GAAP financial information. Our press 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 two of today's presentation. I will turn the call over to Remy.

All right, good morning and thank you for joining us. Apologies for the issues with the slides. We're trying to get them up for those of you on the webcast here as soon as possible. Today we reported $144 million of adjusted EBITDA for the third quarter compared to $445 million in the second quarter. Coming off the record highs in benchmark lumber prices reached in May, this quarter's results reflect the sizable impact of peak prices converging back toward trend. For their part, our pulp and paper businesses built on the momentum of the second quarter, with strong pulp shipments and higher transaction prices in both segments. By segment, we reported adjusted EBITDA of $75 million for wood products, down by $340 52 million in market pulp, up by 16, minus 4 million for tissue, down by 1, and $31 million in paper, up by 22. This quarter, we paid a $1 per share 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. 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 process. to $573 per thousand board feet, a $583 or 50% decrease compared to the previous quarter. Shipments were 64 million board feet lower at 511 million, reflecting lower demand, capital projects downtime, vacation accommodation, and pandemic-related workforce availability constraints in the US South. finished goods inventory increased to 129 million board 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 softwood and a 5% decrease in hardwood. Almost all of the drop reflects 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 end-user downtime. This has also caused an increase in producer inventories heading into a busier maintenance outage period. Through August, global industry average operating rates were 88% for softwood and 89% for hardwood. Our average transaction price rose to a historical high of $826 per metric ton in the quarter, an increase of 5% from Q2. We saw appreciable gains across all grades, but mostly for fluff and hardwood, and mostly in North America, which represents approximately 80% of our total pulp shipments. Our shipments also increased by 30,000 metric tons as a result of inventory changes, and finished goods inventory fell to 52,000 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 faced a 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 per short ton, or 3%, due to unfavorable product mix as we mitigated the impact of the headwinds by selling more pair of rolls and in a lower grade. we recorded production downtime of 3,500 short tons in the quarter, 3,000 fewer than Q2. As a result, our shipments rose by 4,000 short tons and finished goods inventory fell by 2,000. The headwinds I mentioned, combined with the year-to-date $5 million of ramp-up costs at the recently acquired Hagerstown converting facility, unfortunately overshadowed the performance of Calhoun Tissue In 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 in uncoated mechanical papers have been particularly strong, with demand up by 4% so far this year, partly as a result of substitution down from coded grades. 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 in all grades as the tighter supply and demand dynamics helped the recovery from the impact of the pandemic. But our shipments were 18,000 metric tons lower this quarter, and finished goods inventory remained unchanged at 72,000 metric tons, reflecting a destocking effort in prior periods. EBITDA for this segment improved by $22 million to $31 million. We'll now have Sylvain discuss our financial performance.

Thank you, Remy. We're now on page 10. We reported net income of $67 million in the third quarter or $0.84 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 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 iJoyce partnership. Total sales in the quarter were $817 million, down by $323 million compared to the previous quarter, due to lower realized market prices and shipments in wood products, partly offset by higher realized pulp and paper prices and higher pulp volume. Total costs were similar the 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 product segment declined by $4 per thousand board feet, or 1%, due to gradually falling stumpage fees. EBITDA in the segment decreased by $340 million to $75 million. In the market pulp segment, the delivered cost was unchanged in the quarter at $665 per metric ton, reflecting higher maintenance and energy costs diluted by higher shipments. EBITDA in the segment improved by $16 million to $52 million. The delivered cost in tissue improved by $109 per short ton, or 5%, due to lower downtime. EBITDA for the segment fell by $1 million to negative $4 million. The paper's delivered cost was unchanged due to lower maintenance costs from plant outages in the previous quarter, offset by higher chemical and energy costs. Segment EBITDA improved 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 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 $119 million of quarter end cash, liquidity stand stood at $930 million and net debt 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 $1 per share of common stock, or $79 million in aggregate, on July 7 to holders of record at the close of business on June 28. Finally, we contributed $28 million to pension plans in the quarter and made OPEP payments of $2 million. With higher long-term interest rates and positive gains from investments, our gross pension funding deficits was $457 million, a $172 million improvement compared to the $629 million funding deficit disclosed at year end. As discussed during the last earnings call, we reduce our expectations for 2021 pension contributions from $120 million to $107 million. We expect the 2022 contributions to be about $95 million based on current market conditions. In accordance with U.S. GAAP, the accounting figures will be remeasured only with year-end results, but based on current market conditions, we would expect the accounting deficit to reduce significantly. I'll pass it on to Remy.

After a peak-to-trough swing of roughly $1,000 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 fiber costs, but considering the path of market 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 in the seasonally busier fourth quarter. Even as market pulp conditions have been very strong, particularly in North America and Energy-related end-user downtime in China is slowing 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 labor availability challenges. The team's focus remains on driving improvements to leverage our integrated pulp advantage and bring to light the value of the assets. I'd like to close with a few words from my friend Jacques Achon, who 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 a lawyer in Quebec City. As a member of the executive team for almost 25 years, Jacques 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 Jacques for his many years of loyal service to the company. As an executive, he has been the guardian of this company's moral compass for decades. We all join to wish him a happy, healthy, and well-deserved retirement with his wife Brigitte and their family. Jacques has agreed to stay on on a part-time basis as a special advisor to me. By the same token, I'm thrilled to welcome Stéphanie Leclerc to the executive team. She's been with Resolute for 20 years, has outstanding credentials, and as our Vice President for Legal Affairs for nearly 15 years, her experience covers the full range of practice areas, including transactional governance, litigation, commercial, and public policy. She's equal parts brilliant lawyer and practical business person, and as such, there's no better candidate to succeed Jacque as our next Senior Vice President for Corporate Affairs and Chief Legal Officer.

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

Thank you. If you'd like to ask a question, please press star followed by the number 1 on your telephone keypad. To withdraw your question, please press star 1 again. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Sean Stewart from TD Securities. Please go ahead, your line is open.

Thank you. Good morning, everyone. A few questions. Good morning. Remy, I want to start with tissue. Encouraged to see that Calhoun is profitable. Can you give us some context when you use that term? Is that EBITDA positive? Is it operating earnings positive at Calhoun? What's the context for profitability there?

I think about it on an EBITDA basis, Sean, and I think it's important to underscore because, you know, there were some pretty significant challenges in the tissue business in the third quarter, including some downtime as a result of the pandemic. There were challenges also with labor availability and some 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 business, many of 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 turn the margins around there, Does the overall scale of that business make sense for Resolute? Is it just a matter of adding more converting capacity? How do you think about the ultimate strategy for the tissue segment?

Well, I'll remind us, Sean, 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 key for the business is that the quality is there and the productivity is now established, measurable, and demonstrable. So the business case for Resolute in tissue is to integrate pulp into downstream margins that are more stable 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 converting gap that we had with parent roles we were making in Calhoun that we could not convert. And then the after effects or the late effects of the 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, we'll be able to convert more, we'll be able to diversify the portfolio more, and then we should be able to drive more profitability from that.

That's great detail. Thanks, Remy. Second question, maybe for Sylvain. The CapEx budget, Appreciate there's some deferrals for this year. Any initial views on what 2022 might look like and context on the sawmill discretionary spending program? Appreciate its early days there, but how is that unfolding as it moves forward?

So good question, Sean. Actually, we're working through our budget at the moment, so we're still defining where that's setting, but it's clear that some of the delays of this year, we'll aim to catch them up next year. You know, we announced back in Q2 a number of programs which we started, you know, some in the U.S. South and some in Canada, in Quebec and Ontario, actually. So those have started, but like we said in the remarks, it's a difficult environment from subcontractors, so we're trying to balance You know, making sure we don't overpay for services and stuff and getting progress on those projects because they are very good projects. So I suspect next year will be higher than this year because of this delay in spending that we have right now. But we're still finalizing the extent of those numbers. The second part of your question related to our investment on the U.S. South and the startup of El Dorado, for example. Is that what you meant?

Yeah, exactly.

Yeah. So that's moving along, actually. And what's happened in the third quarter with the lower demand, we took advantage of that to do some of the work that required operations to slow down or even stop for a few days. It takes some downtime on that. So we're still committed to all that. Eldoretto is operating at about one and a half shift right now. So that's kind of going well, I would say, and it's allowing us to step back after a very busy start of the year there. We try to maximize production to really optimize for the go-forward basis.

I might add to that, Sean, as far as Eldoretto is concerned. So as Sylvain said, we started running logs through in December and actually started making sales in Q1. throughput at the facility is up about 40% as of September, October versus the average of Q1. So we are making good progress, as Sylvain said.

That's good. Okay, that's all I have for now. Thanks, guys.

Thanks, Sean. Thank you.

Your next question comes from Hamir Patel from CIBC Capital Markets. Please go ahead. Your line is open.

Hi, good morning. Remy, given the strong liquidity you guys have in all the tax assets in the U.S., how are you feeling about the potential for more lumber M&A, given maybe what you're seeing in the market and some of the recent transaction values we've seen in the U.S.? ?

Yeah, no, that's a very good question, Hamir. And, you know, I think I would underscore that, you know, we have said that lumber is going to be a key pillar of our transformation strategy, and that remains the case. We've indicated that the U.S. South was of particular interest for us. Certainly with some of the assets that we've seen transact, I think expectations on valuation have increased You know, our approach for M&A is always going to be the same. You know, we think that the valuation has to make sense for us and, you know, there has to be an additional benefit whether it's through synergies or operational gains for us to seize there. But you're 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 not necessarily everybody can.

Great. Thanks, Remy. That's helpful. And I wanted to get your thoughts on, you know, in British Columbia, we've seen the government move to restrict old growth logging in some parts of the province. What impact do you think that could have on the overall lumber market?

Yeah, so I mean, we don't operate in BC, Hamir, so I'm not an expert on how things develop there. I have read some things about potentially limiting the availability of fiber. I mean, if you think about where we are as an industry, particularly in Canada, fiber availability is one of the key challenges that we as an industry have. I would tell you that on the eastern seaboard in Quebec and in Ontario where we operate, we have pretty good visibility on fiber availability, but the trend for the industry is higher fiber costs, particularly in B.C. So I think the way I would think about it is that anything that that reduces or calls into question the access to fiber could have an impact on fiber availability and fiber costs, which ultimately will get reflected into prices. And I think that if you look at where prices have trended since we've come off the peak, The trough seems to be higher compared to where the trough was, say, in the last 10 years before the peak, and I think the key difference between those points is probably Canadian fiber costs, and I would add also duties.

Fair enough. Thanks, Rami. That's all I had. I'll turn it over.

Thanks, Amir.

As a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. Your next question comes from Paul Quinn from RBC Capital Markets. Please go ahead. Your line is open.

Yeah, thanks very much. And morning, guys. Just maybe I'll start on the paper side because I'm kind of curious as to the guidance. It looks like you're guiding for the Q3 momentum to continue into Q4. Is that anticipating a higher Q4, which traditionally is a seasonal decline?

Well, we are expecting gains in prices in Q4. The conditions for paper, Paul, are actually very, very tight right now. I think what we've seen in the last year is that capacity has come out. And as the economy has been on a path to recovery, the demand has not come down as much as capacity has. So we're seeing some demand pull against a fairly tight supply, and that's pushing prices up. So yes, we see prices higher in Q4. I'll remind us, and I think this is the point of your question, that Q4 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 chemicals and freight 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 increase in costs and the higher Canadian dollars?

I think that could very well be the case for Q4, but I'm hoping that price will be sticky for longer.

Okay, keep those fingers crossed. Maybe just switching over to the lumber, you mentioned slightly higher shipments in Q4, which, again, generally is a harder production quarter. Is that because there's less overall shuts despite the holiday shuts in 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 accommodation, and also some workforce availability. So when compared to Q3, we expect our shipments to go up. You know, one of the things that we've seen is – You know, 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, you know, very well back to, I would say, pre-pandemic levels. So we think that speaks to the continued strength around repair and remodel. and also home building, which 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, I mean, we're seeing pricing really starting to come down significantly in China, and that'll resonate to other parts of the world. How bad do you think pulp markets will get over the next six to 12 months?

Yeah, no, you're correct. I mean, 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 40% of the market, and they're destocking in the last couple months, and the end-user downtime is putting downward pressure on poll prices. I think there's a couple of factors, Paul, 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. I don't know the balance between those two. The reality is that we're in an environment where the logistics are constrained. There's also, in the fourth quarter, the seasonally higher maintenance outages that play into it. And we also see, especially in North America, higher demand for tissue 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, you know, increase in Latin American capacity. So our expectation for the fourth quarter is we're probably going to lose a couple dollars, but I don't expect it to be, you know, more than... I don't expect to lose the gains that we've gained so far this year.

Okay. And then just back onto tissue, following up Sean's question. I mean, if we sit back... And look at this tissue business. I mean, you invested over $270 million back in 2017. Four years later, you know, we're happy that it's profitable in Q3. And I suspect that, you know, the total investment is probably north of $300 million. You know, Remy, you cite $17 million in EBITDA in 2020, you know, with an incredible tissue year for the market, something we've never seen before. So You know, is this a business that you can actually get back to, you know, making cost of capital, you know, and what do you think that timeline is, if that's the case?

Well, I think that there's a couple things that need to happen. And, you know, again, I'll remind us the advantages is the integration to Pulse. for us. So we do not have the vulnerability that perhaps other tissue producers might have as far as the cyclical nature of pulp. And so we can build on that. We also have a cost advantage for that integration, particularly in Calhoun. But my goal in 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 throughput. You know, I mentioned that we acquired a converting facility at the end of last year, and then 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 not just us, but a lot of people. And, you know, as far as logistics, just to put a number on it, 90% of our business is customer pickup. So it's something over which, unfortunately, we don't have as much control as we might have in another business. So, I mean, I think, Paul, that, you know, it won't be next year, but I think that we can get to respectable EBITDA for that business. We 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 measurable, and there's upside for us to go and chase. So it's just about execution, and we just need to keep driving to bring the light to value the assets.

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

We have no further questions. I would like to turn the call over to Marianne Limoges for closing remarks.

Okay, thank you. We would like to apologize again for the technical issues with the slides today. We've been able to resolve the issue within the first few minutes of the call, but I would like to remind you that the presentation is always available on our website for download 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 you to wish you a great day.

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