West Fraser Timber Co Ltd (WFG) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber first-quarter 2013 results conference call. During this conference call, West Fraser's representative 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&A. Accordingly, listeners should exercise caution in relying upon forward-looking statements.

I would now like to turn the meeting over to Mr. Ted Seraphim, President and CEO.

Good morning everybody. Joining us this morning is our CFO Larry Hughes and a number of our senior management team. West Fraser earned CAD67 million, or CAD1.57 per share in the quarter. EBITDA in the quarter was CAD141 million, or 16% of sales. The primary reason for the improvement from the fourth quarter of 2012 was due to improving lumber prices. Adjusted earnings for the first quarter were CAD103 million, or CAD2.42 per share, as compared to CAD51 million in the fourth quarter.

Our lumber business generated CAD146 million in EBITDA, up 97% from the fourth quarter of 2012. Shipments of SPF were down 5% from the previous quarter due to weather-related transportation issues in Canada. As a result,(technical difficulty) our production by almost 100 million feet in the quarter. We produced 1.3 billion ore feet in the quarter, an increase of 8% from the fourth quarter. The increase in lumber production was the result of the completion in 2012 of a number of major capital projects in Alberta and the US South as well as the acquisition of the Sundance (inaudible) products in Northern Alberta.

We expect to complete the construction of planer this summer and we have taken [Sommel] down at [Edison] for three months later in the year for (technical difficulty) rebuild as well.

We have a significant capital plan in our lumber business for the remainder the year, which includes the construction of two bioenergy plants at our Chetwynd and Fraser Lake sawmills, the rebuild of the Chetwynd sawmill and new planer at Williams Lake as well as the number of projects in the US South, including a new planer at Newberry, a sawmill upgrade at [Armoir] and a number of continuous kilns.

Our panels business generated CAD18 million in EBITDA, up 64% from the fourth quarter. Improving markets for all our panel products contributed to the increase.

Our pulp and paper business generated CAD8 million in EBITDA, down 67% from the fourth quarter. Our Hinton mill had scheduled minor maintenance shutdown in the quarter. In addition, we faced operational issues at both our NBSK mills in the quarter, which contributed significantly to our total production loss of 19,000 tons.

Our earnings were also impacted by lower electricity revenues in our BCTMP and newsprint business, lower shipments due to rail delays and lower newsprint pricing. Our joint venture Caribou NBSK mill is slated for a two-week major maintenance shutdown in May which will reduce our share of production by approximately 8000 tons in the quarter. The 63 megawatt power project is underway at our joint venture Alberta newsprint mill and we expect it to be concluded in the fourth quarter.

The housing recovery in the US continues to show positive momentum. US housing starts in March exceeded 1 million and new home sales continue to show encouraging results.

Our shipments to China remain strong. After very strong first quarter, lumber and plywood pricing have slipped in recent weeks. We are early in the building product cycle recovery and a fallback after such a strong quarter shouldn't come as a surprise.

Our outlook for our Building Products business continues to be optimistic for the medium term. The pulp markets are expected to be under continued pressure as (technical difficulty) capacity ramps up this year.

With this, I'll turn the call over to Larry Hughes.

Thanks, Ted. 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, and adjusted earnings per share.

The table on Page 3 of our MD&A describes and quantifies several non-operational items which affected our results. If we adjust our announced CAD67 million of earnings to add back the CAD32 million charge on equity-based compensation, and the CAD6 million loss related to the translation of US dollar denominated debt, the result on an after-tax basis is adjusted earnings of CAD103 million or adjusted earnings per share of CAD2.42 for the quarter.

The equity-based compensation charge reflected a strengthening of the Company's share price over the quarter as well as the granting of share options and units during the quarter. The loss on the US debt resulted from a weakening of the Canadian dollar against the US dollar in the period.

Our defined benefit pension plans were revalued as of the end of the quarter, resulting in a charge to comprehensive earnings net of income taxes of CAD52 million. This value will fluctuate with changes in long-term interest rates and the return on our plan assets. For this quarter, the main contributor to the adjustment was a lower discount rate as described in Note 7 of our quarterly financial statements, partially offset by higher returns on plant assets. Cash generated by operating activities during the quarter after working capital changes was CAD2 million, despite a substantial buildup of log inventories at our Canadian solid wood operations. Capital expenditures for the quarter totaled CAD49 million and we are still projecting capital expenditures this year of between CAD250 million and CAD300 million. Our balance sheet remains strong with a net debt to capital ratio of 14% at a time when our Canadian log inventories are peaking.

And, Ted, that concludes my remarks.

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

(Operator Instructions) David [Gazetta], Raymond James.

I wondered if you guys could give us an update on what your thoughts are around the two idle mills in the US South.

Sure. We continue to review markets and these mills are still down, but we continue to take a hard look at whether we should be restarting one or both of the mills, but at this point, we haven't made any decisions.

Okay. That's helpful. And then just on fiber costs in the US South, I know that they're -- they haven't really picked up the way they have in BC, but how do you see that kind of developing or when will they start to go up?

Well, I think your comment, first comment, is correct. I mean, fiber costs in the US have been very flat and I think for us to really predict where they're going over the next year or two is -- just like lumber markets, this may be a little difficult to do. I think the key point though is that we all know that the US South has been significantly undercut over the last five years. So we do expect, if we are going to make a prediction, I think our expectation is that if there are going to be increases, they would be fairly muted at least over the remainder of this year.

Great. Thank you very much.

Sean Steuart, TD Securities.

With respect to the pulp operations, Ted, maybe if you could just go into a bit more detail on what went wrong with the NBSK mills this quarter and what's the extended downtime. And then other than the maintenance shut at Caribou this quarter, did any of that downtime extended into Q2 that you had the issues in the first quarter? Any context you can give us there?

Sure, Sean. I think first of all the Caribou shutdown is actually scheduled for May. So that's starting in about 10 days.

In terms of the loss in the first quarter, I think, fundamentally, we have a three-year duration between our major shutdowns at our Hinton pulp mill and two years at Caribou. Hinton is three years because we have to recovery boilers. But every year and a half, we have to do some inspections of our recovery boilers. So we basically had a small down schedule for the quarter. But unfortunately, just before the shutdown, we had a failure in our digester, and so we were dealing with that. And that issue really has been different than the issues that we faced at Hinton over 2012 when we were trying to ramp up the production on the pulp dryer because that's where we spent the capital.

So as I think, as we look at the quarter, we are very disappointed with our operational results in our NBSK business, but -- and those issues have not carried forward into the second quarter, by the way. But where we have our confidence is that those mills are well capitalized. The projects we did are good projects. And we've got good cost structures there, but the mills need to run well. So I can tell you there is a significant amount of focus in terms of improving operational reliability, and we have to prove ourselves is -- I think is all I can say about the future here.

Okay. Then just following on that, Ted, the lower power sales I guess from the mechanical pulp mill and AMC, can you quantify how much that was and what set into that if that's an ongoing trend?

Well, I don't think we would like to quantify it, but we don't see it being an ongoing trend at this point.

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

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

Just following up on Sean's question on -- Ted, you described the issues at Hinton. What was the issue at Caribou?

Well, again, we had some operational issues at Caribou, nothing that is significant. We've had to run the mill a little bit slower over the quarter because we had an issue in our digester, and so it had an impact on our production. But it's fairly minor and we will correct it during our shutdown. So, there's no long-term issues from an operational standpoint at Caribou. The bigger issue was at Hinton in the quarter for sure.

Okay. And then just on transportation, you flagged that a couple of times on whether it was (inaudible) availability, or [FCC] TMP or (technical difficulty) lumber site. That behind you now?

Well, I think deliveries have improved, but we've got a ways to go to get that 100 million feet shipped. I mean, we've been able to produce it a little bit week by week as weather has improved, and we are hopeful that we'll be able to take care of that probably over the next, I'd say, three months. I mean it's not going to happen in a month. It's going to take us a few months to get that behind us, but things are improving.

Okay. And then just on the panel side, you referenced a slowdown at the end of Q1. Just what you are seeing in Q2 here.

Well, I think it's particularly really on the plywood side still. Plywood markets were quite strong in the first quarter, and I think generally I think our customers may have overbought a little bit and we saw a bit of a slowdown. But it's almost a week-by-week thing, Paul. And this week, we've seen a bit of a recovery in plywood demand. So we don't think it's anything systemic, but we have seen a bit of a slowdown, just as we've seen in our lumber business, as well as you guys I'm sure are well aware of.

Okay. And then just lastly, just on the lumber business itself, Ted, you referenced prices coming off a little bit, which is not unusual. Maybe you could just give us some additional color on what you're seeing in the Chinese market as well as do you expect prices -- or the fact that prices are weakening, is that a function of demand has been less robust than expected, or is that more supply coming into the market?

Well, I think, maybe I'll try and answer your question in a few ways. I think, first of all, China has continued to be very strong for us. I just want to speak for West Fraser there. So we haven't seen a fallback in demand there. And we had a very good quarter in China.

In terms of demand in the United States, I think what we're seeing here again (technical difficulty) very strong (technical difficulty) as everybody knows in the first quarter. And customers have probably overbought a little bit. And then weather definitely was an issue towards the end of the quarter. I mean it was a very, very tough winter. And so I think that's had an impact.

But when we look at underlying demand, you know the statistics as well as we do. I think they're all very encouraging. And we are early in this recovery, so we expected there to be some bombs in the road.

And in terms of the actual demand for lumber, that can change a week from today. I mean, anything can happen. We don't think there is a huge oversupply of lumber up there in the marketplace. We don't really see this as a bit of a pullback and we are fairly, let's say, cautiously optimistic about the rest of the year, but right now, it is a bit slow.

Great. Thanks.

Mark Kennedy, CIBC World Markets.

Just wondering if you can -- if you have any better feel, especially with respect to the BC interior, what's likely to happen to your fiber costs, especially driven by [Sampich] here. And if the move going to be more in Q2 or is it more in July where we're going to see a good step up in Sampich?

I think we will see some modest increase in the second quarter, and we expect to see a further increase in the third quarter. And I can't really quantify what that will be, but obviously, given rising lumber markets and the demand for logs in the interior, we're going to see rising log costs, definitely, as this market improves.

And can you just sort of just put that in context with Alberta as well? Like we're not going to see the same degree of movement there, I don't expect, right?

We'll be seeing increases in Alberta as well, but probably not to the same in that extent as British Columbia. But we will see some increases in Alberta as well.

Okay. Thanks.

(technical difficulty) Prudential Investments.

I had a couple of questions. You talked about the two (technical difficulty) projects that you're working on. Have you talked about how big those projects are from a cost perspective and when they might come online?

Sure. Yes. When we announced them last year, one is at our Fraser Lake Mill and the other one is at our Chetwynd mill. They are $45 million each, and we expect them to come on late second quarter of next year.

And any idea what the EBITDA contribution could be or payback period?

We have no idea. No, of course we do. These projects are 20-year agreements with BC Hydro. And they are very strategic projects. When we talk about our overall return on capital, we tend to look at three-year type returns. These are a little bit longer, but very strategic projects for both mills.

Just a question of the upcoming bond maturity. I guess it becomes a current maturity in the fourth quarter. Just curious what your plan is there. Is it really just to kind of hold this thing until the end and then refinance it at that point. If you have any color on that, that would be helpful.

I think I will ask Larry to provide the answer to that one.

Yes, we have been watching that and your observation is quite right. But you know, we are looking at our cash generation and that's going to play a role in our decision making, but we are looking at it now and we will look at it for the rest of the 18 months, and we will deal with it probably closer to its time to maturity.

But it doesn't sound like you're necessarily concerned if it becomes a current maturity on the balance sheet.

Not a big concern. No.

Okay. And can you just clarify for me the -- it looks to me like in the MD&A there was a talk that the collateral had been dropped from the nodes in the credit facility. And I thought when you guys got the amendment back in 2010, the way I read it, I thought both Moody's and S&P would have to upgrade you to investment-grade before that collateral could be dropped. Could you just clarify that for me?

Yes. No, we don't need both. We just needed one and we got Moody's and so the security has come off.

Okay. Great. Appreciate it. Thanks.

We have no further questions registered at this time. I would now like to turn the meeting over to Mr. Ted Seraphim.

Well, again, thank you very much for joining us today. And if you've got any further questions, feel free to give us a call. We will be here all day. Thanks very much.

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