West Fraser Timber Co Ltd (WFG) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Company Limited first quarter 2012 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 MD&A, which can be accessed on West Fraser's Website or through SEDAR and as supplemented by the Company's 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 and Chief Executive Officer. Please go ahead, Mr. Ketcham.

Thanks, operator. And good morning and welcome to West Fraser's 2012 first quarter conference call. Participating with me today is Larry Hughes, our VP of Finance and CFO, and several of our senior management group.

As you know, Ted Seraphim was appointed to the position of President and Chief Operating Officer at our annual general meeting a couple of weeks ago. Ted will be responsible for the day-to-day operations of the Company, which is basically what he's been doing for the past two years. Ted and I will continue to work closely together on all aspects of the Company's operations.

In the first quarter of 2012, we lost CAD16.7 million from continuing operations compared with a loss of CAD10.6 million last year. EBITDA was CAD18.3 million compared with CAD17.9 million last year -- last quarter, excuse me.

Our Lumber Division, which recorded a CAD6.2 million EBITDA loss, suffered from low prices and production disruptions at several of our mills due to construction projects. In addition, write-downs on our log and lumber inventories during the quarter reduced operating earnings by CAD5 million.

Production at our Canadian lumber mills increased by 10% over last quarter. Production was down 3% at our US mills due primarily to a boiler outage at one mill and capital tie-ins at two other mills. We ran at roughly 70% of capacity at our US division in the quarter.

While the benchmark SPF lumber price increased by 12% during the quarter, our actual mill nets were flat quarter over quarter due to the decline in low-grade pricing relating to sales to China.

Chip prices were also down about 15%, reflecting lower pulp prices in the quarter. The effects of the mountain pine beetle epidemic continue to negatively affect results for our BC operations through lower grade outturn, lower lumber recovery, and lower productivity.

Overall, our cost of production was flat quarter over quarter. Log costs at our Canadian operations were up about 4% compared with the fourth quarter and were up 21% versus the same quarter last year.

In the quarter, we billed about 50 million feet of lumber inventory due to ongoing capital improvement projects at several of our [planter] mills. In contrast to our Canadian lumber operations, our US operations showed improved results quarter over quarter due to higher lumber prices in the first quarter.

Benchmark southern yellow pine prices increased about 8% during the quarter. Log costs were flat versus the fourth quarter and compared with the first quarter of 2011.

EBITDA for our Panel Division increased from CAD3.6 million to CAD5.4 million, reflecting improved pricing for plywood as well as higher sales volumes for all products.

EBITDA in our Pulp and Paper Division increased from CAD27 million to CAD30 million quarter over quarter. Benchmark NBSK prices were down roughly CAD50 versus the fourth quarter and CAD100 over the same quarter last year.

Cost of sales in our Pulp Division was down substantially, primarily reflecting lower chip costs and the fact that our Hinton Pulp Mill took a 28-day shutdown in the fourth quarter to complete a major CapEx project funded by the Green Transformation Program. This mill is still experiencing some startup problems. But, we expect to be running at full capacity shortly.

We completed all of our CAD88 million of Green Transformation Program expenditures and expect full reimbursement from the federal government in the second quarter.

When fully operational later this year, these CapEx projects will result in higher production at our Hinton Mill, improved energy efficiency at all our mills, increased bioenergy production at our Caribou Pulp and Slave Lake Pulp mills, and reduce costs at all mills.

We are cognizant of the issues raised by the tragic explosions at two northern interior sawmills over the past four months. While we don't know the cause of the accidents yet, we've been working closely with our management team and outside experts to ensure that our plants are clean and safe for our employees.

While economic uncertainty continues to cloud the future, we are somewhat more optimistic that the US housing market is close to the beginning of a slow recovery. We are hopeful that the Chinese economy will maintain its growth in order to support lumber and pulp prices going forward.

And finally, the Company reduced AAC in the central interior BC will limit the ability of BC producers to respond aggressively to the eventual recovery of the housing market, which should help to drive prices higher.

With that, I'll turn it over to Larry Hughes.

Thank you, Hank. Thanks to everyone joining us today. Please refer to our advisory contained in our quarterly MD&A concerning our use of terms such as EBITDA, adjusted earnings or loss, and adjusted basic earnings per share.

As Hank has noted, for the first quarter, we reported a loss from continuing operations of CAD17 million, resulting in a basic loss per share of CAD0.39. There are table on page three of our MD&A describes and quantifies several nonoperational items which affected our results.

If we adjust the CAD17 million loss from continuing operations to add back the CAD17 million charge on equity-based compensation and then reverse the CAD6 million gain related to the translation of US-dollar-denominated debt, the result on an after-tax basis is an adjusted loss of CAD11 million or an adjusted loss on a per share basis of CAD0.26 for the quarter.

The equity-based compensation loss reflected as strengthening of the Company's share price over the quarter as well as the issuance of share options and units during the quarter.

The gain on the US debt resulted from a strengthening of the Canadian dollar against the US dollar in the period.

Results of this quarter were generally consistent with those of the previous quarter. From an operating earnings and EBITDA perspective, each of our operating segments showed slight improvement from the previous quarter.

Inventories were adjusted at the end of the quarter to the lower of cost and net realizable value, and a write-down of CAD20 million was recorded. This compares to CAD15 million at the end of the fourth quarter. So, the result was a reduction of operating earnings of CAD5 million.

Our defined benefit pension plans were revalued as at the end of the quarter, resulting in a charge to comprehensive earnings net of income taxes of CAD14 million. This actuarial gain or loss will fluctuate with changes in long-term interest rates and the return on plan assets. For this quarter, the main contributor to the adjustment was a lower discount rate, as described in note five of the quarterly financial statements.

Cash used by operating activities during the quarter after working capital changes was CAD77 million, which included a substantial buildup of log inventories at our Canadian solid wood operations.

Capital expenditures for the quarter totaled CAD42 million. During the quarter, as Hank mentioned, we completed the balance of our Green Transformation Program expenditures and received reimbursement of CAD16 million. That leaves CAD34 million still to be received.

Our balance sheet remains strong with a net debt-to-capital ratio of 19% at a time when our log inventories are peaking.

Hank, that concludes my comments.

Okay. Thank you, Larry. Operator, we'll open it for questions then.

Thank you, Mr. Ketcham. We will now take questions from the telephone lines. (Operator Instructions). And the first question is from Sean Steuart from TD Securities. Please go ahead.

Thanks. Good morning, everyone. Just a few questions. I guess a question for Larry or maybe Ted, when you think about the Green Energy Transformation Program and all the capital you guys have been allocated under that, can you provide an overall incremental EBITDA contribution you're expecting from all that capital?

Sure, Sean. It's Ted. I think when we talked about this in prior calls, we basically said we were looking at somewhere in that -- about a three- or four-year payback range on the capital. So, I think we're still very confident that we'll achieve those results.

Okay. And then, Ted, maybe if you can, just can you give us an idea of what the pulp mill maintenance schedule looks like through the remainder of 2012? Should we expect it to be Q4 weighted? Is that a safe assumption?

No. We have a small shutdown that we just concluded at our Caribou joint venture mill. And we'll lose 3,000 tonnes through that. And we have no other major maintenance plan this year.

Okay. And then, Hank, just one question for you, wondering if you can speak to I guess M&A opportunities in the US on the solid wood side. You get asked about it a lot, but can you speak to the current opportunities out there and maybe the IP assets that are presumed to be available post the (inaudible) [One] deal.

Well, I can speak to what we're doing in the US South, which is really concentrating on modernizing the mills that we acquired in 2007 from IP, Sean, required 12 and a lot of work to be done on some of the. So, that's where our focus is.

Certainly, like everybody else, we always look at everything going on. But, our focus right now is to make sure that the base we have in the US South is modernized and efficient.

Understood. That's all I had, guys. Thanks.

Thank you. (Operator Instructions). And the next question is from Mark Kennedy from CIBC World Markets. Please go ahead.

Hi, good morning. I'm not sure who's best to answer this. But, Hank, I had a question I guess on the beetle kill wood you're processing in BC. Do you have a guesstimate of the average age of that wood? And is that going to be a factor in your lumber recovery factors for the balance of this year, because my understanding is that, if you're dealing with wood that's sort of less than five years dead, you get one level of recovery. If it's eight to 10 years dead, your lumber recovery drops again. So, just wondering if you could comment on that.

Yes, I mean, as the -- the whole thing really started in the mid '90s. So, obviously, there's various stages of decay and dryness in the wood we're harvesting. I can't quantify, Mark, the age of the wood we're putting into -- or the age of the beetle kill wood we're putting into the mills I'm afraid.

But, suffice it to say that it's getting -- that it's deteriorating. In general, it's getting worse. And in general, that is affecting our -- the three things I mentioned, which is lumber recovery factor, productivity, and quite importantly as well great outturn, which affects our mill [nets].

Great. Okay. And just a couple of comments, I think you made a couple comments in your release that, A, you're starting to see the premium on southern yellow pine reestablish itself versus western SPF. And secondly, you're starting to see the discounts narrow on your economy grades versus the [number] (inaudible) sort of give us updates on where that's looking for the second quarter?

Yes, we're seeing lumber prices in the US strengthen. And one of the issues up here in -- or, one of the issues down there is wide widths are particularly two by tens, are at a -- aren't at their traditional level. So, that pulls down prices. But, we're seeing strengthening prices in the US South, which is starting to reestablish the more traditional difference between SPF and southern yellow pine.

In respect to low grade, for sure, we're seeing a narrowing of the difference between high-grade lumber and the lower-grade lumbers. There was quite a drop in the price for low grade in the kind of the third, fourth quarter last year, primarily the fourth quarter. And that's -- and those prices are coming back.

Okay. And then finally, just a comment in terms of -- or, are you able to sort of make a prediction on your export volumes this year? Like, do you see them being flattish to 2011 or up 10% or any guidance on that front?

Well, they're pretty strong right now through the first quarter and going into the second quarter. The strength is very strong again. My anticipation would be, if the market stays -- the export market stays strong, my anticipation would be that we will export more than we did last year.

Okay. Thank you.

Thank you. The next question is from Paul Quinn from RBC Capital Markets. Please go ahead.

Yes, thanks. Just a couple questions. One, just following up on Mark's on the export, can you quantify that strength, I mean, and what you expect year over year? What are you up quarter over quarter, or what are you up year over year in Q1 on exports?

In terms of volume?

Yes.

In terms of volume, we're kind of back to the levels that we were kind of mid last year. So, I think that we're running at a rate that's at least as good as it was early in 2011. And we expect that to pick up a little bit.

Can you talk to your change in lumber marketing plans on the export side?

Change in the lumber marketing plans? No, I don't think there's any change to our plans. We continue to sell through the channels we've always sold through. Am I getting the question right?

I thought that you guys had changed the way that you're going to the market through wholesalers and taking a lot more of that sales internally.

We have -- .

-- (inaudible) -- .

-- Yes, we have done more of that. But, that's been an ongoing thing over the last year or so.

Okay. And then just on cost, you mentioned that, on the Canadian operations, that costs were up 4% quarter over quarter, 21% year over year if I caught that correctly. Is that cost pressure a concern? We definitely notice costs come up at other companies as well in the last couple years. And do you see that continuing at that rate going forward?

Those are log costs. I think our manufacturing costs were flat. Our log costs were up. And in terms of log costs, that's primarily reflecting -- in Canada, it's primarily reflecting the very tight labor market, the fuel, significant fuel (inaudible) and the tightness both in the contract logging side and also in the trucking side. So, it's -- cost pressures have been pretty strong there.

Okay. And then just lastly, you mentioned Hinton down 28 days in Q4 and still having difficulty. Is this something that -- I'm just surprised because we're now in May here, and you're still talking about difficulties on the startup. And what's the issue there?

Paul, it's Ted. Maybe I should answer that. I think we have a goal of (inaudible). It's running at a much higher rate than it ran prior to the upgrade. We've seen tremendous potential there. We're just not getting there consistently. So, we're pretty demanding in terms of the results we want from that mill. And we expect to get there this quarter. That's this quarter or shortly thereafter. But, the potential's definitely there. We're just not getting it everyday.

Okay. And so, there's no maintenance downtime for that mill in 2012?

No, none. None whatsoever.

Okay. Great. Good luck, guys. Thanks.

In terms of major maintenance, of course, yes.

Right.

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Ketcham.

Okay. Well, thank you very much. We appreciate your attendance, and we'll talk to you next quarter. Thank you.

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