West Fraser Timber Co Ltd (WFG) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Co. Limited fourth quarter 2011 results conference call. During this conference call, West Fraser's representatives 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 these 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 the Company's annual MDNA, which can be accessed on West Fraser's website, or through SEDAR, and as supplemented by the Company's quarterly MDNAs. 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. Good morning, and welcome to West Fraser's fourth quarter conference call. Joining me this morning is Larry Hughes, our CFO, and some of our other Senior Management Team. West Fraser earned CAD6.1 million, or CAD0.14 a share during the quarter. This includes a gain recorded on the sale of certain assets related to our Eurocan operation. We recorded a loss from continuing operations of CAD11 million. EBITDA in the quarter was CAD18 million, or 2.8% of sales. The primary reasons for our substantially lower earnings in the fourth quarter versus the previous quarter were as follows.

First, the benchmark 2x4 SPF lumber price in US dollars was 3% lower versus the third quarter. However, our mill nets were even lower than that, due to a 32% drop in the value of lower grade lumber in the fourth quarter. This had a particularly significant effect at our mills that are our processing high volumes of Mountain Pine Beetle timber. In addition, while the benchmark Southern Yellow Pine 2x4 price was up 8% in the quarter, our overall mill nets in the US were actually slightly lower than the third quarter, due to the substantial discount of wide width lumber to narrows. The very low price we are achieving for wide width lumber in the South has also had the effect of eliminating the traditional premium that Southern Yellow Pine prices have enjoyed over SPF prices. We expect the Southern Yellow Pine premium will return as markets begin to improve.

Second, the Northern Bleached Softwood Kraft list price dropped 7% in the fourth quarter. This was partially offset by a 4% decline in the value of the Canadian dollar. Third, lumber production was down 5% in the fourth quarter, due primarily to capital projects being carried out at several of our Alberta and US saw mills, as well is some market related downtime in the US. Also, NBSK pulp production was down 26%, due to a longer than anticipated shutdown and startup with respect to the modernization and expansion of our Hinton, Alberta pulp machine. Fourth, manufacturing costs in our lumber division were up, due in part to the lower production and costs associated with the capital expenditure program. Log costs were basically flat quarter-over-quarter in both Canada and the US. Our shipments to China slowed somewhat in the fourth quarter, due to high lumber inventories there. Shipments have picked up substantially in the new year.

Capital expenditures during the quarter were in CAD90 million, of which CAD25 was for our green transformation program. Most of our fourth quarter CapEx was spent in our saw mills in Alberta and the US. CapEx in our pulp division was concentrated in our two Kraft pulp mills, and was predominantly finance with GTP funding. Looking forward, we don't anticipate any significant improvement in new home construction through mid-year. We do, however, expect that the export market will at least consume the same volume as last year. Plywood, MDF, and LVL prices will also remain under pressure until we get some improvement in new home construction. We expect that pulp prices will also be constrained, at least through the first quarter. We have no planned major maintenance downtime scheduled for our Kraft pulp mills this year. I'll now turn the call over to Larry Hughes, our CFO.

Thank you, Hank, and thanks to everyone joining us today. Please refer to our advisory contained in our annual MDNA concerning our use of terms such as EBITDA, adjusted earnings or loss, and adjusted basic earnings per share. As Hank has noted, for the fourth quarter we reported a loss from continuing operations of CAD11 million, resulting in a basic loss per share of CAD0.25. There are tables found on pages 3 and 12 of our annual MDNA, which describe and quantify several non-operational items which affected our results.

For the fourth quarter, which is the table on page 12. If we adjust the CAD11 million loss from continuing operations -- which doesn't include the Eurocan industrial site sale -- to add back the charge on equity-based compensation, and then reverse the CAD9 million related to the translation of US dollar denominated debt, the result on an after-tax basis is an adjusted loss from continuing operations of CAD15 million, or an adjusted loss on a per share basis of CAD0.35 for the quarter. For the full year, as shown in the table on page 3 of our annual MDNA, adjusted earnings from continuing operations were CAD23 million, or CAD0.54 per share. We have used the basic, rather than the diluted weighted average, number of shares in this calculation.

Other non-operational items include interest, which was essentially unchanged compared to the third quarter, reflecting ongoing low borrowings, a loss on the translation of current US dollar denominated monetary items of CAD4 million, compared to a gain of CAD12 million in the third quarter, reflecting a weakening of the US dollar against the Canadian dollar. A CAD6 million recovery for income taxes, compared to a recovery of CAD4 million in the previous quarter. Year-end inventories were adjusted to the lower cost in net realizeable value, and a write-down of CAD15 million was recorded at December 31, 2011. This compares to CAD11 million at the end of the third quarter, which reduced operating earnings in the final quarter by CAD4 million.

The Company's effective tax rate for the quarter was 35.2%, compared to the statutory rate of 26.5%. The full reconciliation of the tax rate is included in note 5 to the fourth quarter interim statements, but the two key items in the variance were the foreign exchange gain on long-term debt -- which is taxed at capital gains rates, and the equity-based compensation expense, which is non-taxable. Under IFRS, we are required to revalue our defined benefit pension plans at the end of each quarter with changes flowing through other comprehensive earnings.

For the fourth quarter, the effect of the revaluation was a charge net of income taxes of CAD14 million, and for the year-to-date a charge of CAD104 million. The actuarial gain or loss will fluctuate with changes in long-term interest rates, and the return on plan assets. Cash used by operating activities during the quarter after working capital changes was CAD51 million, compared to CAD77 million generated in the third quarter. During the fourth quarter, we contributed CAD65 million to our employee pension plans, and began building significant log inventories at our Canadian solid wood operations. As Hank mentioned, capital expenditures for the quarter totaled CAD90 million, and for the year were CAD213 million. The annual amount includes approximately CAD66 million of reimbursable green transformation program projects. Our balance sheet remains strong, with net cash on hand at the end of the year of CAD68 million, and a net debt-to-capital ratio of 14%. Hank, that concludes my comments.

Thanks, Larry. We'll now open it up for questions.

Thank you. We'll now take questions from the telephone lines.

(Operator Instructions) There will be a brief pause while participants register for questions.

Paul Quinn from RBC Capital Markets.

Thanks and good morning. Just in the release, you described Q4 as a difficult quarter. Has anything changed in Q1? And what is your assessment for the balance of 2012?

Paul, Q1, I think we are seeing an increase in the price of low-grade lumber. That's going to be a positive, particularly for us -- that's going to be a positive for us, particularly because we do have, in our Beetle - in our Mountain Pine Beetle operations, we are getting a significant amount of low-grade. That had a real negative effect, the drop in Q4, and we are seeing that come back in Q1. I think prices have firmed a little bit in Q1 versus Q4 for lumber. We don't expect to see much more of a drop in pulp prices. Fundamentally, we expect to benefit from the CapEx that we spent in 2011, and we are going to be spending more in 2012. We don't really -- can't anticipate the housing market, but I think there is a little bit of an improvement in Q1.

Okay and just on the CapEx, it looks like you spent about CAD90 million in CapEx in 2011. What part of that was maintenance? What was under your capital program? What's left to spend under your capital program? If you could give us some specifics on some of these projects that you have been encouraged by the results from, that would be great.

CapEx was around CAD213 million, and that was primarily in -- part of it was GTP funding for our pulp mills, and those are energy related projects, and a significant project at our Hinton pulp mill which, reduced costs, expanded our pulp production. We had a difficult time about starting that plant up, but it seems to be going pretty well now. That was a major project in our - on our pulp side. On the lumber side, which is where we've concentrated, we've expanded production in 3 of our mills in Alberta. Some of those projects are still underway. And we have done some significant CapEx in 4, 5 of our Mills down in the US, and we expect that to result in improved - primarily, in improved lumber values, and also in improved production efficiencies.

Just last question, you've got a chart in your MD&A showing North American lumber production, which looks like it will shake out somewhere around 50 million board feed in 2011. Just wondering what your assessment of the average operating rate is, and where do you think that operating rate has to be to get some significant pricing structure?

We've been into this for 6 years now, so it's hard to know -- I can't give you a good answer Paul. But we are operating at about 75% of capacity in the US. I would suspect that's roughly what the US is operating at, maybe 70% to 75%. In Canada, there is - the operatings are significantly reduced from where they were, but we have cut reductions coming in the British Columbian Interior, and certainly there's been a reduction in available timber in the East. I don't really know what it's going to come back to, Paul, but fundamentally, with lumber - housing starts at 600,000, 650,000 units, I think, really, what we have to look at is, when is that new home construction going to start to come back. When it does, pricing will probably be somewhat restrained by more capacity coming on, but I don't know much there is to come on.

(Operator Instructions)

Sean Steuart from TD Securities.

Thanks. Good morning everyone. Couple questions. The Q4 pulp and paper overall average mill nets, they were down, but they actually held up better than we would have guessed. I'm wondering if you can speak to, not just NBSK price trends that you saw, that you touched on, but what you're seeing in the mechanical pulp market right now.

I'm going to let Ted Seraphim answer that question, Sean.

Good morning, Sean. In terms of our different businesses, everybody knows what's happening with the NBSK pricing, but BCTMP pricing actually fell much earlier in the cycle, really towards the end of 2010, into the first half of '11. Second half of the year BCTMP pricing, on average, was pretty darn flat, and going forward we seen the - we believe we've seen the bottom of the market there, and we start to see some small price improvement. I think when you compare Q3 to Q4, the reason the drop isn't as much as you may have anticipated is because of our BCTMP pricing.

Thanks, Ted. Larry, I'm wondering if you can give us any guidance on pension contributions in 2012, given different discount rate assumptions, those sorts of things.

Yes, Sean, I think that we are looking at something that is similar to what we saw in 2011. We made a pre-payment in 2011, and I think our expectation is that there will be another payment over the second half of 2012 in that same order of magnitude.

Okay.

We are not expecting any significant changes in discount rates. We are at a very low rate right now. We shouldn't see any increase in contribution requirements upcoming.

Okay. Thanks for that, Larry. Last question, the two biomass projects, you addressed it in the MD&A. I think it was the last quarterly call, you weren't quite ready to put any parameters around construction costs and expected EBITDA benefit. Are you any closer to giving detail on that front?

Yes, I think those 2 plants are going to end up between CAD80 million and CAD100 million, probably, something like that.

Okay. I know you've got the EPAs in place, and there are some general figures around what we can expect in terms of pricing, but can you disclose that yet?

No, I don't think we can, Sean. Sorry.

Mark Kennedy from CIBC World Markets.

Good morning. First of all, just a couple questions, again, just on guidance issues for this year. What was your total capital guidance fee for 2012, between both maintenance and discretionary capital?

I think we are going to be roughly the same as where we were in 2011, Mark. CAD180 million to CAD200 million, something like that.

Okay. And you've had a lot of fluctuation, obviously, in that corporate and other category, but as a baseline, looking forward, what sort of a baseline we should use in that category?

Corporate and other? I wouldn't think it would be much different than last year.

Hank - maybe I can add to what Hank said. In corporate and other, Mark, for the most part we allocate our corporate costs out to our segments. It's only unusual items that end up in there, for example, our equity-based compensation, which depends on our share price, primarily. We can't really predict that. Essentially, with allocating everything out, we should be flat, barring unusual items.

Okay. Just a question on the - just a couple questions on the Southern Yellow Pine front. Firstly, if you're seeing wider discounts on the wider dimension lumber, are there solutions to that in terms of cutting it up into more stud-like products, and secondly, in terms of these design changes, do you have additional capital to do MER or MSR lumber there? Or is that already in your budget?

Mark, on the first question, we continually look at the cutting patterns to extract the most value. If - we do that all the time. It's not just on the wide width 2 by 10, but it's on all the products we make. If we feel that value would be enhanced, margins would be enhanced by doing that, we will do it. We are looking at that all the time. With respect to the strength values, we do have MSR available at some of our mills, and we just have to see this thing play out. We will - if we need to spend capital at certain mills, we will. But we are capable at some of our mills right now in MSR.

Daryl Swetlishoff from Raymond James.

Thanks, good morning guys. I just had one question with respect to logging conditions in the BC interior and US South, and just maybe give us an idea of where you are on your winter logging program.

In the US South, it's quite geographic, in the US South, specific. In some areas it's been quite wet, and in some areas, we are under pressure because pulp mills are bringing in inventory, because some of them are low on inventory. That is creating, in certain specific areas, a tightness in supply. I think we are going to be okay.

We have taken a little bit of downtime in certain US South mills, due to lack of logs. But nothing really different the last year. In the BC Interior, I think our primary concern is availability of contractors, both logging contractors and truckers, just because of the very tight labor market in the interior. That is making things tight in some of our operations, but we expect that we will bring in our required log inventory.

Are those - is that tightness leading to any sort of cost pressures?

Yes it is. We are under cost pressure on the logging side, yes.

Anything you would do - could you hazard even a percentage change year-over-year what we might expect for modeling purposes there?

I could hazard it, but I don't think I should at this point in time. But I think there is going to be - there will be some cost pressure there.

(Operator Instructions)

There no further questions at this time. I would like to turn the meeting back over to Mr. Ketcham.

Again, thank you very much for joining us, and we will talk to you in three months. Thanks. Bye.

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