West Fraser Timber Co Ltd (WFG) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the West Fraser Timber Co. Ltd. second-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 are subject to various risks and uncertainties. The 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 from West Fraser's website or through SEDAR, and is 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.

Okay, thank you, operator. Good morning and welcome to West Fraser's second-quarter conference call.

Joining me today are Ted Seraphim, our President and Chief Operating Officer, and Larry Hughes, our CFO, and other members of our senior management team.

In the second quarter, we recorded sales of CAD774 million, which were 14% higher than our first-quarter sales. This increase primarily reflects improved pricing in the quarter for virtually all of our products.

EBITDA in the quarter was CAD82 million versus CAD19 million in the first quarter, and EBITDA margins were 11% compared with 3% in the first quarter. EBITDA in our lumber division totaled CAD53 million, compared with a loss of CAD6 million in the first quarter.

Our Canadian lumber division ran at 100% of capacity during the period, and we produced the same volume of lumber as we did in the first quarter. You'll note that Canadian lumber production was up slightly from the same period in 2011, despite downtime related to significant capital upgrades at several of our mills.

Log costs were down 2% in the quarter, but up 12% in the first half of 2012 versus the same period last year. Stumpage costs will increase, on average, about CAD3.00 a cubic meter in the third quarter this year.

Benchmark [to] better SPF prices in Canadian dollars were up 11% compared to the first quarter and 22% versus the same quarter in 2011. Benchmark number three grade lumber prices were up 25% in the quarter.

Shipments to China are currently trending at the same rate as the last several quarters. We have not noticed any appreciable volume demand in that market.

Our SPF inventories have increased in the first half as a result of significant capital projects being carried out at several of our planing mills during the period. We expect to begin reducing these inventories this quarter.

Our US sawmill ran at about 80% of capacity in the second quarter, and production was up about 15% from the first quarter. The increased production reflects the completion of capital projects that a few of our mills missed out. Log costs were down slightly in the quarter.

Southern yellow pine benchmark prices were up about 11% in the quarter and up about 27% versus the same quarter last year.

Our panel division produced CAD12 million of EBITDA during the quarter. The increased EBITDA for this division is primarily the result of a 14% increase in plywood prices versus the first quarter. MDF prices were up slightly, while LVL prices were flat. We are running our MDF and LVL businesses on reduced schedules due to continuing weak demand.

EBITDA in our pulp and paper division declined 13% versus the first quarter. Increased pulp prices were offset by lower production and higher costs at two of -- at our two kraft pulp mills.

Our Hinton mill continued to be plagued by operational difficulties following our major capital program, which we completed at the end of last year. A scheduled maintenance shutdown at our Cariboo mill was extended by three days, which affected production and costs at that plant. Both plants are now running at or near designed capacity.

Our BCTMP plants and our joint-venture newsprint mill continue to run extremely well. Pulp prices were up slightly in the second quarter with BCTMP prices up more than NBSK prices. Our inventories are in very good shape in this division with good order files.

We completed all of our green transformation program projects and have been reimbursed for all but CAD10 million to date. We spent roughly half of our capital spending budget for the year. 80% of our capital spending this year will be in our wood products division.

The mountain pine beetle epidemic continues to seriously affect several of our BC operations, resulting in reduced grade outturn, lumber recovery, productivity, and profitability. We expect reduced timber availability to begin impacting the interior industry within the next three or four years as beetle-killed pine approaches the end of its economic shelf life for sawed logs.

On Wednesday of this week, the arbitration panel hearing the dispute filed by the US lumber industry against the BC lumber industry returned a decision that fully exonerated the BC industry on all charges.

Looking forward, we expect a slow but steady increase in US housing starts, which may be partially offset by a potential slowdown in Canadian starts. We anticipate continued penetration of our lumber products from the Chinese market and some modest growth in other Asian markets. With the slowing economy in Europe and China, combined with significant new pulp capacity in South America, we expect pulp prices to be under pressure for the foreseeable future.

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

Thanks, Hank, and thanks to everyone joining us today. Please refer to the 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.

For the second quarter, we reported earnings of CAD27 million, or earnings per share of CAD0.63.

The table on page three of our MD&A describes and quantifies several nonoperational items which affected our results. If we adjust the CAD27 million of earnings to add back the CAD9 million charge on equity-based compensation, and also add back the CAD6 million loss related to the translation of US dollar-denominated debt, the result on an after-tax basis is adjusted earnings of CAD41 million or adjusted earnings on a per-share basis of CAD0.96 for the quarter.

The equity-based compensation loss reflected a strengthening of the Company's share price over the quarter, and the loss on the US debt resulted from a weakening of the Canadian dollar against the US dollar in that period.

Results in this quarter were significantly better overall than those of the previous quarter. From an operating, earnings, and EBITDA perspective, our lumber and panel segments showed great improvement from the previous quarter, but our pulp and paper segment produced lower results.

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 CAD25 million. This actuarial gain or loss will fluctuate with changes in long-term interest rates and return on plan assets. For this quarter, the main contributor to the adjustment was lower than anticipated earnings on the plan assets.

Cash provided by operating activities during the quarter, after working capital changes, was CAD143 million, which included the seasonal reduction of the log inventories at our Canadian solid wood operations. Capital expenditures for the quarter totaled CAD33 million. We completed the balance of our green transformation program expenditures in the previous quarter, but received reimbursement of CAD24 million in the current quarter. This leaves, as Hank mentioned, CAD10 million still to be received. Our balance sheet remains strong, with a net debt to capital ratio of 13%.

Hank, that concludes my comments.

Thank you, Larry. So operator, we're finished and we'll turn it over to questions.

(Operator Instructions). Paul Quinn, RBC Capital Markets.

Thanks very much. Good morning. A couple of questions here. Just maintenance on the pulp side for the balance of 2012?

Paul, it's Ted. We have no maintenance plans for the remainder of the year.

Ted, while I've got you, idling of Tembec's Chetwynd BCTMP mill, does that materially affect your Slave Lake operation?

I think it's really hard to tell, Paul. I mean, China is a big buyer of BCTMP. So I think it depends more on their buying patterns than Chetwynd running or not.

And then, just on if you could give us Chinese lumber shipments to date and what they changed year over year?

They're roughly the same, year over year, Paul. They kind of slowed down late in the fourth quarter, but they've picked up, and we're running at about the same rate as we were last year.

Okay, you mentioned operational improvements on the CapEx spend that you've done in the US. Can you sort of ballpark that delta for us, what we expect in the balance of the year and 2013?

In terms of, what, production costs, what?

EBITDA would be perfect, but costs are fine.

No, I really can't, Paul. I mean, these things -- you know, we've got an ongoing program down there, as you know, so we're going to have some plants slowed down as we do capital projects down there this year and next year. So this is going to be kind of an evolving process. I really can't talk about specifics down there.

Okay, then just a clarification. I think at our RBC conference, I made a comment in our note that you guys would consider selling your kraft pulp mills. I just wanted to get a clarification. Those are core to you, and the only way you'd consider selling them is if you had somebody that offered you an outrageous price and were going to make sure that they ran them for the future, going forward, right?

It's nice of you to bring that up, Paul, because I do think that somehow we were slightly misquoted.

We're an integrated company. Kraft pulp is core to our business. Obviously, what I said at the conference is so when we acquired Weldwood, it was the lumber assets we were really after, but we've integrated the pulp assets into our Company. They're running well, they're key to our success, and we think with the green transformation programs and other capital we've done there that we've driven the cost structure into a very good position. So we're very happy with our pulp business.

Okay. Sorry about that, and congrats on the SLA arbitration.

Thanks, Paul.

[David Goizueta], Raymond James.

Yes, thank you. My question is just on the Japan market. I understand inventories over the last couple of months have been a little elevated. Could you tell us what you're seeing in that market and when you expect to see volume start to come up a little bit from the rebuild, if at all?

David, I'm going to let Chris McIver, who runs our sales, answer that.

Hi, David, it's Chris. Yes, we've seen very little pickup due to the rebuild, and it appears that it's going to be a while before they make any real firm decisions on how much rebuilding they'll do.

Our inventories over there haven't really risen. We remain pretty steady at very similar levels to last year. So, I don't think we're going to see any material increase this year. It will probably be at least a year away.

Perfect. Thank you.

Sean Steuart, TD Securities.

Thanks. Good morning, everyone. Question for Ted or Hank. Just trying to gauge, I guess, the extent of all price correction here that we're in the midst of. I guess, from your comments, you're expecting weak markets for the foreseeable future. It feels like this is going to be a relatively hard landing.

Can you speak to maybe what you expect to see in your price realizations for the third quarter as it sounds like spot markets have come under a lot of pressure, and then maybe differentiate a little bit between NBSK and BCTMP markets?

I think -- it's Ted here. In terms of NBSK, I'll answer that part first. When you look at the list price in the US, I believe it's $870, $880 today.

But when you look at net prices in China, which I think is probably a better indicator of where the market is, those prices are $650, $630. And I think there could be some -- so if you compare that to the second quarter, that's a price decrease of $30 or $40, and that might give you some good indication of what the rest of the year looks like.

I think they're getting to price levels which are starting to impact some of the high-cost producers. So where it goes from there, I don't know, but if we look at past history, we would think that we're looking at a challenging period over the next six to 12 months, but we're not too sure if it would go much further than where it is today.

In terms of BCTMP, really BCTMP prices fell dramatically in 2011, and they've been fairly flat, plus or minus, over the last 12 months, so we don't anticipate significant downside there. So on balance for the Company, we'll probably take less of a hit going forward than a pure NBSK producer would, as we look to the second half of the year.

Okay, thanks for that, Ted. Hank, on the discretionary CapEx program for the sawmills, can you just go through how much of the CAD230 million is left?

And then, following on Paul's question, just trying to understand how the benefits roll out. How much of the expected cost savings is really related to getting the operating rates up and running these mills close to full capacity?

So the CAD230 million you're referring to is what?

The CAD230 million total program, I guess, when you initially announced it.

Okay, correct. So it's kind of a rolling program. So I'd say -- let me put it this way, Sean, we would expect to be spending -- as long as our cash flow allows us, we'd expect to be spending between CAD150 million and maybe somewhat over CAD200 million per year on our CapEx. Our maintenance CapEx is significantly lower.

So we're going to continue doing this, year in, year out, at least for the foreseeable future, and it's going to hit our US divisions, our Alberta divisions, and our BC divisions at different times.

You know, we're a long ways through our CAD230 million, but we've got significant capital plans in the next two or three years as well. So I think you can just think in terms of maybe CAD150 million to CAD200 million per year for the next two or three years.

Got it. And then, Hank, just one clarification. In your initial remarks there, did you say you expect western Canadian log prices to be up [3.00] a cubic meter in the third quarter? Is that the number?

We expect the average in the BC interior to roughly be around 3.00 a meter. It's going to be some higher, some lower.

Got it. Okay, that's it for me. Thanks, guys.

Bill Hoffmann, RBC Capital Markets.

Thanks. Just a question -- and I apologize. I missed part of your comments before, but when you talk about the BCTMP markets right now, can you just talk about what you're seeing as far as demand levels there? And with the Chetwynd closure, is that business that is interesting or worthwhile for you all to look after?

I'll answer the first part. I think, and Hank's commented on that, we have very good order files overall in our pulp business, and BCTMP, we have very strong order files.

So as I said earlier, Chetwynd hasn't shut down yet and we've got strong order files. Where it goes from here is primarily dependent, as I said earlier, on Chinese demand.

And I wasn't too sure about the second part of your comments around -- are you asking our view on the BCTMP business? I wasn't sure what you were referring to there.

Yes, just given all the hardwood capacity that's coming on globally, just wondering whether you think the BCTMP market can just decouple a bit, or whether it's going to just follow the same pricing pressures.

And then the other thing is, my understanding was that Chetwynd sales were mostly into Korea, as opposed to China. That's why I was very curious whether there was -- whether you guys were in that market or whether you're interested in being in that market?

We're a large BCTMP producer. I guess with Chetwynd down, we will be the largest in the world, so we're obviously in all the markets, including Korea. When they pull out, there will be some rebalancing.

In terms of price -- relative pricing with hardwood and other grades, BCTMP tends to follow hardwood, but not always. It's a bit of its own unique market, and it really comes down to the supply and demand for that product. We've seen times where BCTMP is sold at a discount and we've seen it when it's sold at a premium.

So our job at West Fraser is to manage our costs, but also to manage our efforts in the marketplace so that we continue to increase market share for BCTMP. If we do that well, then we'll be able to combat some of the impact of the new hardwood kraft supply, and I think our folks have done a pretty good job over the last five years doing that. So I think we're pretty confident going forward in that business.

Thanks. That's helpful. And then, just a quick question on the lumber side. I guess, Hank, you mentioned a minute ago that you didn't want to give any details on the China sales staying basically flat year over year. Could you just give us some sort of sense of what percentage of sales that might be in your business right now? Is it sort of 10% of sales or --

Asia, for our lumber business, would be roughly 30%, maybe a little bit more.

And where is that versus five years ago?

Sorry?

Where is that versus what it was five years ago?

Well, and this is all SPF, by the way, versus five years ago, 2007, I mean this really started in, say, 2005 when the BC government helped open up markets for us over there. So I would say it started from, in our Company's case, almost zero.

Okay, terrific. Thank you.

Sorry, I should amend that. We've been a steady shipper to Japan for 30 years, so the Japanese portion has been roughly the same over the last four or five years, so it's China -- the difference in our shipments to Asia has all been China, and a little bit elsewhere, but mostly China.

How much was the Japan piece, then?

Japan would be roughly 8% to 10%.

Alex Ovshey, Goldman Sachs.

Good morning. Thank you taking my questions. On the lumber side, that business is starting to make money. It appears the US housing market is finally showing some signs of life. So [is this] a more normalized environment in lumber? I'm curious if you have some thoughts on how to think about the profitability per unit for your businesses, and whether or not you expect to see a meaningful divergence between the profitability on the Canadian side and the US South assets?

You know, that's a -- to start with, we do see -- I think we are anticipating a slow, maybe uneven, but a slow and steady improvement in housing. It could be very slow and it could be very unsteady, but I think definitely, in our view, anyway, we've seen the worst of it.

So what's going to happen in BC is there's a -- we're going to see a decline in wood supply and we're going to see, we think, an increasing demand from North America for the product. So, in general we're going to see -- we should see margins improve over time in lumber. I can't really -- I don't really want to talk about the difference between the US and Canada at this point.

Okay, that's fine. And broadly speaking, I'm curious, what are your thoughts on the price rise that we've seen in lumber year to date? Do you think it's more demand or supply driven?

I haven't -- I would assume supply is relatively constant, so I think it's probably the -- you know, we generally have seasonal rallies in lumber in the spring when the building season really gets going. I suspect it's primarily that.

Okay, that's helpful. Lastly, just on pulp. I think there's a lot of paper-based packaging capacity that's coming online in China specifically, on the boxboard grade, and do you have a sense for how that ultimately will get fibered, and would there be any potential impact on the demand for BCTMP from that new capacity?

It's Ted here. I'll try and answer that. I think, first of all, there's always new capacity in paper coming on in China. But you also have to be cognizant that they're also shutting down a lot of old capacity.

So at the end of the day when it comes down to China, what we need to focus on is will the demand be growing for that packaging? And if it does, then it won't be supplied by fiber within China because there is -- appears to be a -- I don't want to say a fiber shortage in China, but fiber is very tight, so it will be largely -- any growth in demand will be largely based on imported wood pulp. And BCTMP plays a big role in packaging, and that's where we have a fair amount of optimism. I hope that answers your question.

It does. Thanks very much, guys. I appreciate you taking the time.

(Operator Instructions). Mark Kennedy, CIBC World Markets.

Good morning, guys. Just a couple of questions. First of all, Hank, you had a chart there where you showed that with respect to lumber grades, we've seen that Southern yellow pine premium get to about 40 dollars over SPF, and likewise you've seen the economy grades come to within about 40 dollars of number two. I'd just like your views going forward. Do you sort of see both of those spreads sort of being maintained in that range or do you see any change in the next few quarters?

Mark, I think Chris McIver might want to answer that question.

Sure. Hi, Mark. Yes, I think you have to look at a couple of things. One, we did show -- those are #2 & better 2x4 pricing.

So in the South, we've seen significant decreases in spread between the wides and the narrows, and that's still a bit of an anomaly. And we think as housing comes back, those spreads will again come back. So today you're seeing a spread in 2x4, but you've actually got a discount in the wides, and that obviously affects us. So going forward, we expect to get more normalized where the wides will also help us on that.

And then the low grade, I think that's a relative spread that's more traditional.

Okay, and then just a follow-up, Chris. With the euro now at an all-time low, I think it's EUR1.22 here today against the US dollar, are you seeing or do expect to see any more competition, either from Scandinavian lumber coming into the eastern US or China as well?

Mark, yes, we're not seeing any -- or I shouldn't say any, but we're seeing very little European wood come into the US, which tells me at current pricing they're not competitive.

So we certainly don't know exactly where they are competitive, but it isn't going to be at these levels. We're hearing numbers substantially higher before they come back. But when the market normalizes, we expect the Europeans will come back, at least partially.

And they are in China. It's not a significant market for them. They have a freight disadvantage. They're bigger in the Middle East and so forth.

Okay. And then, one last question. Hank, I think you'd mentioned that on Hinton, or maybe Ted wants to take this, but you'd said that you're running at relatively full capacity there now. So that bit of hiccup you had there in Q2 on production, do you think that's behind you and do you sort of see Hinton more or less maintaining its current pace, then?

I think Ted and I would both agree that it was a very, very long hiccup. It was kind of a two-quarter hiccup. So I would say that we need a two-quarter interlude between hiccups to tell you for sure that we've got it behind us.

But we do feel very comfortable that the fundamental issues -- they were identified and worked on during the first half of the year. We feel they have predominantly been corrected, and I hope in the third quarter we're going to be able to confirm that.

Okay, that's great. So thanks very much.

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

We appreciate everybody joining us, and I think that's the end of the call. Thank you very much. Bye.

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