West Fraser Timber Co Ltd (WFG) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the West Fraser Timber Company Limited fourth-quarter 2012 results conference call.

During in 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 the statements depends on a number of assumptions and is subject to various risk 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 is supplemented by the Company's quarterly MD&As. Accordingly, listeners should exercise caution in relying upon forward-looking statements.

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

Okay, thank you, Operator. And thank you, everybody, for joining us for our fourth-quarter conference call. I just have a couple of comments to make.

First of all, as you noticed the Board yesterday appointed Ted Seraphim to be our Chief Executive Officer and President, effective March 1. I will become Executive Chairman of the Company. And what that involves basically is less day-to-day -- well, actually, Ted will be running the Company on a day-to-day basis, as a CEO would; and, in fact, has been doing that over the past year or so since he was appointed President and Chief Operating Officer. So this transition has been in the works for a fairly long period of time, as has the transition of our whole senior management team.

So, Ted has taken over a great team. And my job in the future is going to be less day-to-day involvement, but the family and me are as committed as ever to continuing to help build this Company and develop it; and most importantly, to continue to -- in my case, work with, in fact, have an opportunity to work even more closely with the employees in our divisions who have really built this Company over the years. So my job will be more working with Ted on long-term strategic issues, and hopefully getting around to the mills more than I have been, and reconnecting with our employees.

So, with that, I simply want to turn the call over to Ted, who is going to handle it from here on.

Thanks very much, Hank. Good morning, everybody. Joining us this morning is our CFO, Larry Hughes, and the rest of our senior management team.

West Fraser earned CAD22 million or CAD0.51 per share in the quarter. EBITDA in the quarter was CAD76 million or 10% of sales. Adjusted earnings for the fourth quarter were CAD53 million as compared to CAD55 million in the third quarter. Our lumber business generated CAD75 million in EBITDA, up 29% from the third quarter. Higher selling prices were the primary contributor to the increase in earnings.

During the second half of the year we completed a number of major capital projects in Alberta and the US South. On October 31, we completed the acquisition of a sawmill in Edson, Alberta, for CAD30 million. We plan to build a planer and rebuild the sawmill in Edson this year. We have a significant capital plan for 2013 which includes the construction of two bioenergy plants at our Chetwynd and Fraser Lake sawmills in British Columbia; the rebuild of the Chetwynd sawmill and the Williams Lake planer; as well as a number of large projects in the US South.

Our Panels business generated CAD12 million in EBITDA, down 52% from the third quarter. Lower plywood pricing in the quarter was the primary reason for this decrease in earnings. The plywood market strengthened towards the end of the year. Our Pulp and Paper business generated CAD24 million in EBITDA, down 14% from the third quarter. Improving results in our NBSK business were offset by declines selling prices and higher power costs in our BCTMP business.

Capital expenditures in 2012 were CAD150 million. As mentioned, we have an ambitious capital spending program for 2013. We appear to be in the early stages of the US housing recovery, as housing starts in 2012 were up 28% from 2011. Our shipments to China remain strong. Our outlook for plywood and MDF markets is fairly positive, as demand for these products continues to improve. Pulp markets are expected to be under continued pressure, as new capacity ramps up this year.

I will now turn it over to Larry Hughes.

Thanks, Ted. And thanks to everyone joining us today. For the fourth quarter of 2012, we reported earnings of CAD22 million or CAD0.51 a share. As we have done in the past, we adjust those earnings for non-operational items, which for this quarter were the equity-based compensation charge and the US dollar denominated debt; which, on after-tax basis, produced a CAD31 million favorable adjustment. As shown on page 11 of our MD&A, this produced adjusted earnings of CAD53 million or CAD1.25 per share. This result was in line with adjusted earnings for the third quarter of 2012 of CAD55 million or CAD1.27 per share. But there was a significant difference in segment contributions to those earnings.

On a quarter-to-quarter basis, operating earnings for the Lumber segment increased 40%, while operating earnings for Panels were off almost 70%, and Pulp and Paper off 23%. We analyze these changes in the MD&A, but the improvement in the Lumber operating earnings reflected a surprising strengthening of lumber prices late in the year. While a weakening of Canadian plywood prices, which had been very strong in the third quarter, was the main contributor to the Panel's operating earnings decline.

For the full year 2012 our earnings were CAD87 million or CAD2.02 per share. As shown on page 3 of our MD&A, adjusted earnings for the full year were CAD138 million or CAD3.22 per share, and that compares to CAD23 million or CAD0.54 per share in 2011.

2012 began fairly weakly, as we recorded a loss of CAD17 million in the first quarter. But overall results, with Lumber and Panel as the main contributors, improved as the year progressed. I won't go over the various adjustments, except to note that the equity-based compensation charge for the full year was CAD61 million, as the trading price of West Fraser shares increased almost 70% from the beginning to the end of 2012.

As at the end of 2012, our earnings sensitivity (technical difficulty) CAD1 increase in our share prices, approximately CAD1.7 million under the equity-based compensation.

Cash flows from operating activities in the fourth quarter were CAD21 million compared to CAD108 million in the third quarter, reflecting an increased contributions to pension plans as well as seasonal log inventory buildups in Canada. Capital expenditures were CAD44 million. And in the quarter we completed, as Ted mentioned, the acquisition of the Edson, Alberta, Sundance sawmill and related assets for CAD30 million. For the full year, cash flows from operating activities were CAD195 million, which was a CAD110 million improvement over 2011; while capital expenditures for 2012 totaled CAD150 million. We are expecting capital expenditures in 2013 to be in the range of CAD250 million to CAD300 million, which will include several major energy projects that are in progress and have been announced, in addition to the rebuild of the Edson Mill.

In note 19 of our annual financial statements, we describe loss carryforwards of CAD335 million relating to our US operations, which are not currently recognized for accounting purposes. We expect to apply these losses against future US earnings. The quarterly revaluation of our defined benefit pension plans, which flows through other comprehensive earnings, resulted in a CAD47 million gain for the fourth quarter as the discount rate increased from the third quarter and the actual return on planned assets exceeded assumptions.

For the full year, we recorded an after-tax actuarial loss of CAD52 million, mainly as a result of lower discount rates being applied. The after-tax actuarial loss for 2011 was CAD104 million. In 2012 we made contributions to our employee future benefits plans of CAD64 million, and we expect to make payments totaling approximately CAD94 million in 2013.

Our balance sheet as at December 31, 2012, remained very strong, with over CAD100 million of cash and short-term investments on hand, as we continued to build significant log inventories at our Canadian log -- solid wood operations. We ended the year with a net debt to capital ratio of 12%.

Yesterday, after we had released our results, Moody's Investors Service announced that we had once again achieved an investment grade rating. This is an important milestone for the Company from a cost of borrowing perspective, and general access to capital, which is a very important issue in our industry. And we would like to acknowledge the efforts of our over 7000 employees in achieving this result. And in particular, I would like to single out our hard-working Treasurer, Maureen Kuper, for her work. Ted?

Thank you, Larry. And now we are open for questions.

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

Good morning. First question, just wanted to talk about your lumber realizations in the quarter. Because when I just run the numbers in terms of your lumber revenue divided by shipments, I was only seeing about a CAD2 per thousand board increase from Q3 to Q4, even though your EBITDA in lumber moved up quite a bit. So I was just wondering, can you maybe give us an insight into what was happening in Q4, and how that might see some further progression as we move into Q1 in terms of the actual lumber prices realization?

Yes, sure. I think we you look at the fourth quarter, I mean there is a lag when you look at published prices versus the prices we realized. But ultimately we saw a strong market. And as everybody knows, things continue to improve in the first quarter. And we are seeing our realizations go up accordingly. So I think it was really just a lag impact.

Okay. And any update or status in terms of where your thinking is on your two idle mills in the US South?

Well, I think we continue to review those operations. And as conditions warrant, we will consider whether we start up one or the other mill, or both. But we are still looking at that, and continuing to review it on a weekly basis.

And, Larry, just on the cash taxes with some of these loss carryforwards and stuff in the US -- what is a good sort of cash tax expectation for us to use for 2013?

I am going to ask Roger. Rodger Hutchinson is here; maybe he can comment on that.

Yes. We continue to estimate cash taxes out of that BC statutory rate of 25% for the Company. I think that is a reasonable estimate at this point.

Okay. Thank you very much. And just before I go -- Hank, I just want to say congrats on the transition. 28 years in the CEO role, you have done an excellent job and left some pretty big shoes for Ted to fill (technical difficulty).

Thanks, Mark. Ted is not going to have any problem filling those shoes, I can tell you.

Sean Steuart, TD Securities.

Good morning, everyone. Couple of questions -- Ted, wondering if you can -- I just want to follow up on the net realizations at the sawmill. (Technical difficulty). Can you speak to -- was there any holdback of shipments to the states at all towards the end of the year in anticipation of the export tax falling off in January and February? Did that factor into it at all?

No, not at all. We run our business regardless of our view or its export tax. We produce and ship every day and so there was no anomalies there.

And on the CapEx program for 2013, the discretionary component of the big spend you are guiding to -- can you remind us of what return hurdles you are looking at for these projects, whether it be the energy projects or the rebuild of the Sundance sawmill?

Sure. I think our typical guidance for CapEx is about CAD150 million to CAD225 million. An our plan this year is to spend well in excess of that. And typically if you look at our average paybacks, in terms of projects that we talked about for the last couple of years and this year, we are really in the three-year range on average; some are lower. Energy projects are slightly higher in terms of payback, in terms of number of years. But on average, three years I think is good guidance.

And just finally, wondering if you or Hank can comment on -- I guess with the acquisition landscape might look like for sawmills and the US South in light of a couple of deals we have seen in recent months; is there much coming up for sale? Are you knocking on doors? How has that landscape changed at all?

Well, I think first of all, our Company's goal is to continue to grow. We have got a lot of work to do with our -- the assets we have got here in terms of adding value. But we continue to look at growth areas. We are comfortable with the US South, but we can't really speak about any -- what others have done, or what we are looking at or not looking at. But we do want to grow the Company, and we like the US South. I think that is all I can say.

Got it. And I will echo Mark's comments. Congrats to both Hank and Ted. Thanks, guys.

Thank you.

Stephen Atkinson, BMO capital markets.

Good morning. Question one -- can you talk about the private mix in BC, what does your private look like? And how much beetle of this is non-beetle, and status of the beetle? Or the beetle wood, I should say.

Sure. Good morning. I think in British Columbia, we continue to face this challenging issue. And we are moving slowly into some greenwood, but we are still predominantly beetle-kill in British Columbia. I am not sure if that answers your question. But one of the benefits that we have of being -- over 50% of our lumber today is outside of British Columbia. And I think that is going to bode well for us as we go through these challenging times.

In terms of the -- I know you are doing a lot of work in the mills in the US South -- are you where you want to be? Or is there still a lot of work to do to optimize them -- this being the existing mills.

Well, we just started this capital program late in 2011. And we see this as really being probably a 3.5-year program. So by the end of this year we will be a halfway through. The projects that we have done, we have been very pleased with them. And that gives us the confidence to continue down that path. But we are still a few years away from being where we want to be, which is to have all of our mills first or top second quartile, but we think we will get there in a couple of years.

Okay. In terms of the US South last year, 2012, was there downtime taken? I'm assuming that you would be running virtually flat out this year.

Well, our capacity in the US South is about 2 billion feet. So we ran at about 75% of that last year, with two mills being down, as was discussed earlier. The rest of our mills pretty much ran full hours, with the exception of a few places where we had some minor log shortages during the year. And remember, we were doing a fair amount of capital spending last year. So that impacted our production as well last year. So we expect to incrementally improve our production in US South this year with our existing mills. And as we said earlier, we are -- continue to review what our plans are for the other two mills.

And in terms of the pulp mills, I noticed you have done a lot of work at Hinton. Are you where you want to be?

Well, I think -- we've just completed all of our green transformation projects overall. We just completed -- we just started up the Co-generation plant at Cariboo Pulp in the fourth quarter. And also, our new chlorine dioxide generator started up early in January. And that was another good project for our Cariboo Pulp mill, our joint venture pulp mill.

In terms of Hinton, I think we have talked about Hinton quite a bit. And we have started to develop some confidence in terms of how that mill is running. That mill has run very well, really just from the middle of December until -- through February. So we believe we are going to get the results that we expected to get. But it is -- two good months of production is not a track record yet.

No, but that's not two bad ones (multiple speakers). Thanks a lot. That's great. Thanks.

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

Just a couple of questions. One -- just on a log pricing pressure that you are seeing, specifically whether that is showing up at all in the US South; and how that is affecting your operations in BC and Alberta.

Sure. We will talk about the US South first. Basically we are -- log costs in US South there have really been flat for the last year, year and a half, and they continue to be that way. In terms of Alberta, log costs really -- our stumpage is based on the price of lumber. And really until you are well over CAD400 a 1000, there is really no significant movement in log costs in Alberta in terms of stumpage. Of course, we are seeing higher contractor costs, as throughout the industry.

In terms of British Columbia, I think every quarter there's an adjustment based on the market price and CPI and exchange rate. And we expect that to be about CAD2 in April. And then every July there is a review of pricing based on BC timber sales. So we expect another increase in July, as well, in British Columbia.

Okay, that's great. And just the plans for your new Alberta mill in terms of eventual capacity that you want to run there, and then the timeline on when that mill will come up?

Sure. So we are looking at putting in a new planer, and that should be up and running early in the summer. And then we are going to rebuild the sawmill, and that will be complete probably late third, early fourth quarter; or, at this point, that is what we are looking at. And we will have -- our capacity that we have announced at that mill -- we expect to be at about 180 million feet.

Great. And on China in 2012, it looks like Canadian industry stats should show that 2012 was pretty flat versus 2011. I wanted to know what that specifically -- was that of volume gain for you in 2012? And what is the expectation for 2013?

I think, just overall, China was flat last year. Remember it started out slow in the year. The first part of the year was fairly slow. So the second half of the year was quite strong. And Chris McIver could probably give you a better answer than I could, and he is on the phone if you want a bit more detail.

But as we look at it, we see growth in China -- not growing at the rates that it did for the first four or five years of our efforts in China; but we still see it growing at kind of a GDP rate, and the market continues to be strong for us. We did see growth in our shipments to China last year, and we continue to see growth.

And just a comment, congratulations to Hank on your retirement. And best of luck, Ted.

Thank you.

Thank you, Paul.

Daryl Swetlishoff, Raymond James.

Thank you and good morning. Actually all my questions have been answered. I will just pile on and congratulate Ted on his promotion and Hank on his retirement. Although, Hank, it does look like you are topping out just when things are starting to get fun. (laughter)

You are right about that. I will be around.

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

Thank you very much, everybody, for joining us today. And we will talk you next quarter.

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