West Fraser Timber Co Ltd (WFG) 2010 Q4 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the West Fraser Timber Company Ltd. fourth quarter 2010 results conference call.

During this conference call we will be making certain statements about potential future developments. These forward-looking statements are intended to provide reasonable guidance to investors, but the accuracy of the statements depends on a number of assumptions and is subject to various risks and uncertainties.

Actual outcomes will depend on a number of factors that could affect the ability of the Company to execute its business plans, including those matters described under Risks and Uncertainties in our Annual MD&A which can be accessed on our website or through SEDAR and is supplemented by our Quarterly MD&As. Accordingly, listeners should exercise caution in relying upon forward-looking statements.

I would now like to turn the meeting over to Mr. Hank Ketcham, Chairman, President and Chief Executive Officer. Please go ahead Mr. Ketcham.

Thank you operator. Welcome to our Q4 conference call. There is a summary presentation on our website for those of you who would like to follow a long as we talk.

Yesterday we announced our results for the fourth quarter. We earned CAD39 million or CAD0.89 a share after discontinued operations on sales of CAD719 million. Earnings from continuing operations were CAD27 million or CAD0.61 a share.

Earnings for the year were CAD166 million or CAD3.84 per share after discontinued operations on sales of CAD2.9 billion. Our earnings for 2010 represent a significant improvement over the last few years despite the continuing poor new housing market in the US.

As a result of our improved earnings, cash flows on our balance sheet and our outlook for businesses going forward, our Board of Directors improved an increase in our quarterly dividend to CAD0.14 yesterday. This brings our dividend back to the level it was before the dividend reduction announced in May of 2009.

In September and again in December, we announced that we had resumed our reinvestment program across the Company. A key element of our long-term business strategy has always been to invest in our businesses to ensure that we have the most efficient and lowest cost operations possible. We believe that this strategy allowed us to operate at higher rates and achieve higher margins through the most significant downturn in generations.

The capital programs that have been announced are directed mainly at improving our solid wood business with capital focused on high payback projects across our lumber business in Canada and the US.

In addition to the capital investments in our solid wood business were planning to invest the CAD88 million that we've been allocated as part of the federal government's Green Transformation Program and profit improvement projects in our pulp and paper business.

The funding from this program is being invested in part to increase the amount of electricity produced at our pulp operations which allow us to sell power, lower our energy consumption and our production costs.

We also have had two projects shortlisted by BC Hydro under its recent Biomass Power Call. These projects, if successful, will allow us to generate and sell electricity produced at two of our BC sawmills. This is an exciting time for our Company and our industry.

Our sawmills generally operated well during the quarter. Lumber production was down slightly, mainly due to fewer operating days in the fourth quarter. We continue to process a large proportion of beetle-killed pine in our BC Interior mills.

Lumber shipments were down slightly from the previous quarter, largely due to the year-end slowdown that we typically see. The SPF lumber market was surprisingly strong with a benchmark 2 x 4 price increasing in the quarter despite North American housing starts remaining at very low levels. With a higher benchmark price we're able to increase our average mill returns somewhat in the quarter.

Although the Southern Yellow Pine benchmark price increased in the quarter, the continuing price discount on wider width lumber resulted in a decline in the average mill returns for Southern Yellow Pine.

Offshore markets were good, with our shipments to both Japan and China increasing over Q3 levels. We estimate that our export shipments to Asia in the quarter through both direct and indirect channels were approximately 270 million forward feet or 32% of our total SPF shipments.

About 70% of the total went to customers in China. The Chinese market continues to grow and our shipments to this important market are growing with the market. Also the volume of construction grade lumber into the Chinese market continues to increase.

Earnings in our panels business came off quite substantially the quarter mainly due to significantly lower plywood prices in Canada, largely the result of increased in US produced plywood entering the Canadian market. Lower MDF prices also contributed to lower earnings in this segment.

Our plywood plants operated near capacity while our MDF and LDL plants continued to operate at curtailed levels consistent with the prior quarter.

Our pulp and paper business operated at a record level in the quarter and shipping levels improved compared to the previous quarter. Prices for NBSK were slightly lower in the quarter. But prices for BCTNP, which represented about 55% of our pulp shipments, were substantially lower in the quarter.

Our newsprint mill ran well and we were able to maintain shipments and pricing consistent with the previous quarter. Overall, we had a pretty good year compared to the previous few years despite the continuation of the very soft housing market in the US. With our improved earnings and cash flows, we have been able to significantly improve our financial position and reinvest in our business.

As we look forward we see the export lumber market, particularly China, growing and we will fully participate in that growth. We also expect that there will be some small level of growth in the North American housing market.

Plywood prices are expected to remain under some pressure as long as US plywood continues to be shipped into Canada. And indications are that pulp prices should be maintained or increased in the near-term.

On January 18, 2011 the United States requested arbitration with Canada under the provisions of the Softwood Lumber Agreement over its concern that the Province of BC is charging too low a price for certain timber harvested on public land in the BC Interior. The results of the arbitration are not determinable at this point in time.

I will now turn it over to Gerry Miller, our Executive VP and Chief Financial Officer.

Thanks Hank and good morning everyone. In the quarter we earned CAD39 million after discontinued operations on sales of CAD719 million. EBITDA in the quarter was CAD75 million, representing an EBITDA margin of 10.5%.

EBITDA and earnings were lower in the quarter compared to the third quarter mainly as a result of lower prices for pulp, plywood and MDF and a stronger Canadian dollar. Our EBITDA and EBITDA margins in this quarter compared to the previous quarter were lower in each of the lumber, panels, and pulp and paper segments.

Our lower consolidated EBITDA and earnings compared to the third quarter were partially the result of higher selling, general and administrative expenses which relate mostly to an increase in equity-based compensation costs. The equity-based competition cost was CAD20 million in the quarter, representing about CAD0.33 per share, compared to CAD8 million in the previous quarter. This higher expense reflects an increase in our share price which closed the quarter up 24% from the beginning of the quarter.

Amortization costs in the quarter and for the year were lower than in comparable periods as a result of changes in the rates of amortization for certain groups of assets, and because certain assets became fully amortized in 2010.

In the quarter we were able to renegotiate our committed revolving line of credit to extend the term to December 2014, adjust future borrowing limits and take advantage of more favorable borrowing and standby rates. In the quarter we recorded a foreign exchange gain on our long-term debt of CAD10 million or CAD0.20 per share. Again as the result of the strengthening of the Canadian dollar by just over CAD0.03 from the beginning of the quarter to the end of the quarter, and the translation effect on our US$300 million denominated debt.

Our quarterly results reflect an increase in the income tax provision of CAD10 million or CAD0.22 per share from a legislative change that prevents a deduction for certain payments related to share options.

Diluted earnings per share after discontinued operations were CAD0.89 in the quarter compared to CAD1.04 in the third quarter. And diluted earnings per share for the year were CAD3.84.

In the quarter we made an adjustment to our segmented reporting. That adjustment relates to the allocation to each of our business segments of certain and administrative of costs that were previously reported in corporate. The allocation in the fourth quarter resulted in a charge of CAD4 million, CAD1 million and CAD2 million respectively in each of our lumber, panels, and pulp and paper segments and a recovery of CAD7 million in corporate.

Our earnings from continuing operations resulted in a positive cash flow from operations before working capital changes of CAD23 million in the quarter, down from CAD79 million last quarter. The working capital increase during the quarter of CAD63 million reflects the seasonal building of log inventories for our Canadian solid wood products operations.

In the current quarter we invested CAD13 million in property plant and equipment. This compares to about CAD10 million in capital investment in the third quarter.

In December we announced a CAD230 million capital expenditure program to be implemented over the next 18 months. The program will be directed to strategic profit improvement projects mainly in our lumber business. This capital is in addition to the Green Transformation Credits that have been earned by our pulp and paper business.

Overall we used CAD56 million in the quarter from continuing operations, again mainly the result of building log inventories.

From discontinued operations the closure of the Eurocan mill and the associated linerboard and kraft paper business we generated cash of CAD8 million in the quarter, as we sold two paper machines and continued to reduce inventories and collect accounts receivable. The closure of that operation is proceeding as planned with the expected total cost of the closure to be approximately CAD45 million compared to the CAD70 million guidance we provided in Q4 2009. In addition we're moving forward with other potential asset sales related to the business which we expect will occur in 2011.

Despite the use of cash in the quarter, our balance sheet continues to be very strong. At the end of the quarter the net debt to capitalization ratio was approximately 8%, up slightly from the previous quarter and largely due to the seasonal inventory increases.

I'll just make a few comments on IFRS. In the 2010 financial results for the -- are the last results we will report under current Canadian accounting principles, which have been replaced with International Financial Reporting Standards. The quarter ending March 31, 2011, will be the first quarter we will report under IFRS, and at that time we will also restate the comparative 2010 figures to comply with the new reporting standards.

In our MD&A under the heading New Accounting Pronouncements we have provided IFRS disclosure intended to assist analysts and investors and understanding the impact of IFRS on our reported figures.

Equity on the transition dated January 1, 2010 is expected to be reduced by CAD195 million under IFRS. The details of the reduction are detail explained in the MD&A. The change to IFRS will not impact cash flows and will not have a significant impact on our debt covenants.

At this point we believe we're fully transitioned to the new accounting and reporting standards, and we will be fully compliant with the new standards for the first quarter reporting period. With that, Hank, I will turn it back to you.

Okay, thank you Gerry. And I think we're now ready to take some questions, operator.

(Operator Instructions) Rick Skidmore, Goldman Sachs.

Good morning Hank and Gerry. Had a couple of questions. First, Gerry, just on the unallocated corporate costs, is that largely just the share-based comp being so high in the quarter?

No. The unallocated in corporate is the share-based, equity-based compensation. We have not allocated that to the other divisions.

Okay. So the CAD14 million in the quarter, [20] of that is share-based comp, is that right?

Yes.

Okay. So as you think about that line going forward, it is a couple of million dollars a quarter, that corporate and other?

The remaining?

Yes. Thinking about it from a modeling purpose as we go forward, that corporate and other line excluding changes in the share-based comp, how -- what will that look like?

Maybe a couple of million dollars.

Okay. And then maybe shifting, Hank, to the lumber business. On the beetle-killed wood, how long does -- how long into the future do you expect to be able to be harvesting beetle-killed wood and to be processing it in the lumber mill?

Obviously it is deteriorating. So we expect that -- we're still harvesting at fairly high levels. We expect that to continue for an indeterminate period of time.

The province is reducing the annual allowable cut. There's been an announcement in our Cornell and Prince George operating areas of reductions.

But it partly relates to the market. The higher the price, the more and longer you can salvage the stuff. So we see a gradual reduction in the production of beetle-killed timber over the next five to ten years.

Okay. And then lastly, Hank, just in terms of operating rates in the lumber business, did you run full across the system? Or was it full in BC and less so in the South?

Yes. We ran full in Canada and we ran somewhere between 70% and 80% in the South.

Thank you very much.

(Operator Instructions) Sean Steuart, TD Newcrest.

Thanks. Good morning guys. A couple questions. Hank, you touched on what you're seeing in pulp markets in general with [resilient] pricing.

I was wondering if you could did trade differentiate a little bit between what you're seeing with NBSK, which is obviously quite strong right now, and BCTNP. I guess it is our impression there is still some slack in that market. Can you touch a little bit more on the dynamics in BCTNP?

Fundamentally BCTNP is more related to hardwood kraft. So hardwood kraft is under pricing pressure and as a result so is BCTNP. The opposite is the case for softwood, which is in high demand and inventories are in good shape.

It looks like you drew down your BCTNP inventories quite a bit this quarter. Are you are comfortable with where those inventories are now?

Yes, definitely.

And then, Hank, just one other question; you touched on higher percentages of construction grade lumber going to China. Can you put some numbers around that to help give us context of the percentage now where versus where it might've been a quarter ago or six months ago?

In our case, and I'm only speaking from West Fraser's case, but in our case probably somewhere between a 20% and 30% increase versus earlier in the year increase over what we would've shipped earlier in the year. So a significant increase.

Okay, that is helpful. Thank you.

Paul Quinn, RBC Capital Markets.

Thanks. Maybe you could give a little bit more color around the CapEx spend of the CAD230 million, where that is directed sort of on a -- maybe a segment or country basis.

Well, you know well over 50% will be in Canada. And so significantly under 50% will be in the US.

Okay. And then in terms of lumber, panels, not really too much in panels and expect the bulk of that in the lumber segment?

Yes. It is almost entirely in the lumber segment.

Okay, then. Just turning to panels, the weakness in the quarter - you mentioned the increased imports from the US. Also I guess slowing Canadian housing market going forward is a factor.

But what do you see about that business going forward? Is it going to be sort of weak? Do you expect 2011 like Q4?

I think what it is -- we're not expecting strength. The issue is a strong Canadian dollar allows the Americans to divert plywood up here given the fact that housing is so weak in the US. With -- if housing falls off up here as well, that will create further weakness.

And just on the Softwood Lumber dispute ongoing, do you see that as a material impact to the Company, in that it sounds like you feel pretty strong about the Canadian case? And then the timing of that is still -- it seems to be well off into the future.

Yes. I mean, you know, it is really very, very difficult to predict both timing and the effect if any. We believe we do have a strong case. And so I can't give you anything more than that. I can't put any more color around it than that, but we do think we have a very strong case.

That's all I had. Thanks guys.

Joe Licursi, BMO Capital Markets.

Steven Atkinson. Can you give us some color on Kitimat as to what is being sold?

We are selling a couple of -- well, there were two paper machines there. We're selling them, other peripheral assets and of course we have -- we're still working on a couple of other more major assets up there, Steven.

Okay. So I can assume it is relatively small?

Yes.

And are you able to give a bit more color on the schedule for the projects, or should we say upgrade of the US South lumber mills in terms of timing and spending, things like that?

I think predominantly that is going to happen second half of this year and first half of 2012.

Okay. And so we'll see the benefits, obviously, 2012 and 2013 -- well, more like 2013.

Correct.

Okay. And in terms of the -- China, do you see any -- well, obviously it is growing very quickly. What is your experience in 2011 so far?

As you said, it is growing very quickly. It has really been a -- it's just growing significantly and what we see that growth continuing.

Okay. And are there -- were there any -- usually in the winter time there are some hiccups in terms of freight transportation and so on. Have you seen [anything] unusual on that site in terms of being able to ship lumber?

I wouldn't say unusual. I would say usual. And you're right; there are hiccups during the winter as bad weather causes problems in the supply chain. But it is not unusual and we have built a little bit of inventory due to current supply and so forth. But nothing we can't solve over the next couple of quarters.

Okay, thanks. That's great. Thanks.

(Operator Instructions) Rick Skidmore, Goldman Sachs.

I just had a couple of follow-ups. In terms of the returns, what type of returns do you anticipate on that capital spending that you're going to be doing?

I think in general there is going to be -- it's a big program. Some are very, very fast -- under one year. We kind of look at two to three years. I think you can count on the bulk of it.

And then, there is some of it would be somewhat more than that because it would be some strategic capital.

And then lastly, just coming back to the beetle-killed discussion, how does that impact your lumber production in Canada over time? Do you -- is the -- will the beetle-killed kind of continue in terms of the amount you can harvest at a relatively steady state? Or is that declining over time? And how does that impact your lumber production in Canada over time?

Well, so we are very heavily into beetle wood in our Central Interior British Columbia operations, very heavily. And over time we will cycle out of that into a more balanced diet of beetle wood and green wood. That is going to happen over time.

The cut is going to be reduced, so in general production in the Interior of British Columbia will be reduced. We believe that over time -- we peaked at 15 billion of production out of the Interior British Columbia -- not West Fraser; wish we had. But it was the whole industry. And we believe that over time we're going to be more like around 10 billion feet, which is kind of where we're at today.

Great, thank you.

(Operator Instructions) Benoit Laprade, Scotia Capital.

Thank you. Good morning. Gerry, a quick one for you. Depreciation was down Q4 versus the prior quarter. Is CAD37 million we saw there a good proxy going forward? Or I assume it is going to be ramping up as you spend the CAD230 million. How should we think about depreciation in 2011?

I think for 2011 around CAD180 million. And as we get the capital spent, that number will be adjusted accordingly. It will probably increase a little bit.

But CAD180 million for 2011 is a good number?

Yes, I think so.

Thank you.

There are no further questions registered at this time.

Okay, thank you operator. And thank you everybody for joining our call and I guess we will talk to you next quarter. Thanks. Bye.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.