West Fraser Timber Co Ltd (WFG) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Company Limited Third Quarter 2013 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. Ted Seraphim, President and CEO. Please go ahead.

Thank you. Good morning. Joining us this morning is our CFO, Larry Hughes, and a number of our senior management team.

West Fraser earned CAD55 million, or CAD1.29 per share in the quarter. Adjusted earnings for the second quarter -- excuse me -- adjusted earnings for the third quarter were CAD68 million, or CAD1.57 per share as compared to CAD107 million in the second quarter.

EBITDA in the quarter was CAD113 million, or 13% of sales as compared to CAD178 million in the second quarter. Adjusted EBITDA was CAD132 million in the quarter as compared to CAD166 million in the second quarter.

Our lumber business generated CAD83 million in EBITDA, a decrease of CAD42 million from the second quarter. We produced just under 1.3 billion board feet in the quarter. Lumber production was down approximately 5% from the second quarter due to fewer operating days and the impact of a number of our capital projects on production.

For the year, we've increased our lumber production by 200 million board feet compared to the same period last year, split equally between Canada and the US South. After dropping approximately CAD100 during the second quarter, lumber prices improved from the end of June to the end of September by approximately CAD50.

Last week, we announced our three-part Mountain Pine Beetle plan, which included the exchange of timber rights of Canfor, the closure of our mill in Houston, BC, and capital upgrades at our Smithers and 100 Mile mills. We completed the rebuild of the Chetwynd, BC sawmill during the third quarter. We start up the new planer at our Edson mill this month, and we expect to rebuild the sawmill over the winter, with the startup in the first quarter of 2014.

We restarted the McDavid, Florida mill on one shift in October. As we have mentioned on our calls, we have a significant capital plan in our lumber business for the remainder of 2013 and 2014.

Our panels business generated CAD9 million in EBITDA, a decrease of CAD1 million from the second quarter. Higher plywood and MDF prices were offset by higher log costs and lower MDF production.

Our pulp and paper business generated CAD40 million in EBITDA, an increase of CAD9 million from the first quarter. Improved earnings this quarter reflect improved MBSK prices, improved MBSK operational results, as well as higher BCTMP and newsprint production due to lower electricity prices in Alberta.

US housing starts were relatively flat in the third quarter. To the end of July 2013, North American production increased by 7% compared to the same period of 2012, or approximately four billion feet on an annualized basis. Lumber demand has been relatively strong in October. Nevertheless, we're still early in the recovery of the housing market and, as such, we should expect some volatility in lumber and panel markets over the winter.

All markets are fairly balanced, and prices have improved in October. With the onset of new capacity in Latin America, we do maintain a tempered outlook as we look into 2014.

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

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 basic earnings per share.

As Ted indicated, for the third quarter, we reported earnings of CAD55 million, or basic EPS of CAD1.29. The table on the third page of our MD&A describes and quantifies several non-operational items which affected our results. If we adjust the CAD55 million earnings to add the CAD19 million expense related to equity-based compensation, and subtract the CAD6 million gain related to the translation of US dollar denominated debt, the result on an after-tax basis is adjusted earnings of CAD68 million, or adjusted basic EPS of CAD1.57 for the quarter. The equity-based compensation expense reflected the strengthening of the Company's share price over the , and the gain on the US debt resulted from strengthening of the Canadian dollar against the US dollar as at the end of the period.

On a similarly adjusted basis, results of this quarter were lower than those of the previous quarter, with adjusted earnings of CAD107 million and adjusted basic EPS of CAD2.49. From an operating, earnings, and EBITDA perspective, our lumber results declined from the previous quarter due to lower prices offset partially by our pulp and paper results, which benefited from higher prices.

Our defined benefit pension plans are revalued as at the end of each quarter, and the result this quarter was an actuarial gain of CAD66 million, or CAD50 million after tax. This actuarial adjustment will fluctuate with changes in long-term interest rates and the return on our plan assets. For this quarter, the gain was due to an increase in the applicable discount rate and higher earnings on the plan assets. Cash generated by operating activities during the quarter after working capital changes was CAD128 million.

Capital expenditures for the quarter totaled CAD96 million, bringing our total to the end of the third quarter to CAD219 million. We are projecting capital expenditures this year to exceed CAD300 million, which will include approximately CAD100 million related to power production projects.

During the quarter, we acquired 32,277 common shares for CAD3 million pursuant to our normal course issuer bid. The normal course issuer bid allows us to repurchase for cancellation up to 1 million common shares during the period ending September 16, 2014. Our balance sheet remains strong, with a net debt to capital ratio of 3% at the end of the quarter.

Last week we announced the Mountain Pine Beetle plan, which includes the closure next year of our Houston, BC mill. The financial implications of the closure will be reflected in our fourth quarter results.

And Ted, that concludes my comments.

Thanks, Larry. So, Operator, we are now ready for questions.

(Operator instructions.) Daryl Swetlishoff, Raymond James.

Thanks, and good morning, gentlemen. First off, I'd like to say congratulations on the bold news dealing with the dead pine. Ted, now obviously this is difficult decision that affect employment, and I know how important employee culture is to you. First off, what measures is West Fraser taking to mitigate some of the impact?

From an employee standpoint?

Yes.

Well, Daryl, thanks for asking. And again, it's a decision that we had to make, but I've got to tell you, we don't feel very good about it. But, in terms of where we're going, I mean, we were up -- a number of us were up in Houston last week talking to our employees. And as you can imagine, it was quite a shock for them, even though people knew something was coming with the Mountain Pine Beetle epidemic.

So, our focus now is really on transition. And first of all, we're going to run the mill probably into May of next year. That's seven months, gives the employees some time to think about what their options are. We are putting out relocation packages to all our employees this week [so that], if they apply for jobs and get them in our mills, whether it's salary, trades, production employees, that we will be providing some assistance for them as they look to other West Fraser locations.

And we are working with government. In fact, the provincial government is in Houston today. We already met with them yesterday. And I expect we'll have job fairs and a number of other events that will help employees look for other opportunities in the area, and probably within British Columbia. Obviously there'll be issues around retraining [and] a number of different things, and I just think we're going to be very active.

One other thing we're doing, and we did this -- and we don't want to get good at this, by the way, but we did this when we shut Eurocan down -- is we put together a productivity and safety bonus incentive plan for all our employees, whether they're hourly or salary at the mill. And we'll be communicating the specifics of that probably in the next week or so to our employees, and again, that will help people keep their eye on the job, keep safe, and hopefully give something in addition at the end of when we shut the mill down.

So, there's a lot of activity. We've got people up there, and we're going to be very, very engaged. And given the fact that we've got over 70 jobs just open on our job website today, we're hopeful that a number of those will be filled by folks in Houston. But again, one thing is having a job open, second thing is having to move your family. So, we're not kidding ourself. This is not going to be an easy thing to do. But, I appreciate you asking the question.

That's great. Thank you, Ted. Now, when we redirect employment, and obviously you have new tenures, the first [run] impact is somewhere around 3% of your capacity, just -- if you just shut the mill. What sort of mitigation do you see in terms of just your volume as you ramp up production at other mills?

Well, I think earlier in my comments we have increased production, I guess, on a annual basis by close to 300 million feet this year versus last year. And we are going to be further increasing our production in Alberta, and we've completed our projects at the three large mills, and we'll be completing the project at Edson. So, we'll be getting increased capacity there next year. Our production in US South is going to be up this year over last year by 130 million, 140 million feet, and we expect that to continue to increase by about a similar amount next year with the ramp-up from our capital projects, as well as the startup of the McDavid mill.

So, as a company, I would expect that our production overall at the end of next year -- once we shut Houston down, our overall production [rate] will be higher in 2015 than it was in 2013. Maybe that's the best way to answering that.

Okay, that's helpful. And then, lastly, you mentioned the US South. A lot of the timber [REITs] are reporting their third quarter, and some of them are suggesting that they're starting to see signs of tightening saw log prices in the US. So, are you experiencing that in any of the timber [dreams] in which you're operating?

We've really seen -- really very flat pricing for us overall. There are one or two exceptions to that where we've seen a slight increase, but we're talking CAD1 a ton, that kind of thing, Daryl. So, it's been very, very modest.

Okay. Thanks for those comments, Ted. I'll turn it over.

Okay. Thanks, Daryl.

Sean Steuart, TD Securities.

Thanks. Good morning, guys, a few questions. Ted, can you speak to your lumber sales mix this quarter and I guess how it might have changed from Q2? And I ask because lumber price realization pressure was a little more significant than we expected, but costs were also down at the sawmills, and I would assume some of that's related to mix. Maybe you can just offer some context there.

Well, Sean, I think there really wasn't any major shift in our mix from quarter to quarter. Our volumes in [Khatan] and China continue to be strong and held up very well. So, I think part of it is likely the lag that you see in terms of what reported as the cash price versus when we ship the product. So, it's really more a lag if anything, Sean.

Okay. And then, you did see the stumpage hikes in the BC interior flow through as expected. You talked about the five to seven per cubic meter starting July, at -- that was what you guys saw in your results.

Well, again, there's a bit of a lag there as well, but those increases have gone through.

Okay. And then, Ted, just lastly, I guess with respect to growth ambitions beyond your CapEx program which, as you guys have detailed, is going to be very aggressive the next two to three years, wondering if you have any updated thoughts on, I guess, scope for potential M&A activity. And I guess specifically, I know you guys are focused on growing in the US South, but if the opportunities aren't there, can you speak to your appetite for anything beyond lumber in the wood products space, and maybe speak to potential scale you might look at?

Well, generally, as Hank has taught me, we don't talk too much about M&A activity . But, in all honesty, I think what we're looking at today, [you] comment on our capital, we're always looking to grow. But, our focus is really on solid wood, whether it's lumber or other solid wood products. We're continuing to look at growth, but it's definitely a real challenge. I mean, everybody's got very strong balance sheets. Valuations are strong, and people's expectations in terms of sellers are very, very high.

So, we are going to continue to look at it, and whether we can grow over the next year or over the next five years, that's our goal. But, we can't tell you when or how, but we're definitely focused on trying to grow this company at the right valuation.

Got it. Okay, that's all I had, guys. Thanks.

Okay. Thanks, Sean.

Mark Kennedy, CIBC.

Good morning.

Morning, Mark.

So, first question, just in terms of pulp price increases heading in here into Q4, we've got a couple of announcements on the MBSK. Do you expect to see similar movements on your BCTMP? Just wondering if you can give some context there of what you're expecting in Q4 on those grades.

Well, thanks, Mark. I think fundamentally -- in fact, today I think you saw that the world inventories came out for chemical market pulp, and they're down I think by about four days, so I think that's pretty encouraging, at least in the short-term. And we've seen the same type of price movement in our BCTMP business as we've seen in MBSK. We've [gotten] very strong BCTMP order books at this point.

Okay. All right. And then, coming back to your lumber segment, you talked a little bit about this defect on your -- possibly on your log cost, as well. So, does that suggest then that your fiber costs, your log costs, will be as high, if not a bit higher than in Q4 compared to Q3?

We expect them to be relatively flat I think, Mark. I think there's been a small drop in stumpage. Well, there has been in BCC in the fourth quarter, CAD2 to CAD3, depending on where you're at. So, I think, overall, we're expecting flat.

Okay. And then, any CapEx guidance yet on 2014?

I think fundamentally, as Larry said, we're expecting to be over CAD300 million this year, and I think we'll be in a similar ballpark next year.

Okay. And then, finally, as far as the Houston closure goes, can you give [us sort of] what your book value or carrying value was there, and have you determined sort of other closing costs, or is that going to come later?

I think we'll be reflecting that in our fourth quarter results.

Okay, that's it for me, thanks.

Thank you, Mark. Have a good day.

Stephen Atkinson, BMO Capital Markets.

Good morning.

Good morning, Stephen.

Thank you. In terms of overall BCC production, how do you see, like, 2013, let's say going out a few years with the beetle progressing as it is? How do you see your overall BC production?

You speaking of just West Fraser's production?

No, I mean West Fraser, yes.

Yes. Well, I think as we look at it, I think as we look at 2015, because Houston will be running next year, so I think that's what you really want to compare it to. I think, fundamentally, our plan is [subtract] Houston's production, and I think we'll be -- we'll see some slight increases in Chetwynd as we ramp that mill up by maybe 100 million feet over the next year or so. But, I think overall, we'll be flat to slightly up once you take Houston out.

Okay.

I mean, we're going to be spending money on Smithers and 100 Mile. So, overall, we're going to have -- basically all our mills will be fairly modern, and a lot of them -- we'll hopefully have completed our capital spending at 100 Mile and Smithers late next year or early the year after.

So, in terms of the beetle, what is your percentage right now of beetle wood?

Well, it is dropping, Stephen. I think it depends where you are in the province. But, I don't want to be too specific, but I think we're probably 10% or 15% lower beetle as a percentage of our fiber than we were, say, two years ago. So, it is dropping fairly quickly.

Okay. And can you talk about sales to China, how that is going, lumber?

Well, actually, we just completed -- I wasn't able to go on the tour. I went to Japan. But, Chris McIver was in Japan and China, and he was with the rest of the industry there, and demand is very strong in China. We've continued to see strong demand there, particularly through the summer and through the fall this year or so, very strong at this point.

And in terms of your major projects, the power projects, are you able to give me an update of where you are and where you would like to be, or where you plan to be, let me put it that way?

Well, I think we are where we'd like to be.

Yes, I agree.

And actually, we're starting up the -- at our joint venture, Alberta [Eastburn] mill in Alberta. We're starting that up late this year, probably late December, early January we're going to be starting up the 63 megawatt gas fired power plant.

In terms of our two power projects at Chetwynd and Fraser Lake, I think we're looking at May or so, June. Peter Rippon's right here beside me, correcting me. Peter runs our pulp and energy business. So, we're looking at June of next year, and then the Slave Lake -- what's called biogas project, we're looking at starting that up kind of mid next year. Yes, he says towards the end. I'm more ambitious than he is.

That's great. Thanks so much.

Okay. Thanks, Stephen.

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

Yes, thanks for (inaudible). Just a question on -- well, I guess a tough decision on the Houston closure, but with your -- would it be fair to say, under your Mountain Pine Beetle plan, that that's -- have you accounted for all the potential closures that you're going to have, or is that just what you can see at the current moment?

Well, first of all, good morning, Paul. I think, in terms of that, I thin we've basically -- we've made our plan. That doesn't mean that all our problems are behind us. We still have significant competitive issues as we look at the Cariboo. So, we've decided where we're going to invest. We've invested in Quesnel. We've invested in Williams Lake. We've invested in 100 Mile. Our Chasm mill, I think we modernized that eight or nine years ago.

So, a lot of it is going to really depend on how our competitors react in their competitive position vis a vis ours. We think we have a strong position, but I think, Paul, there's no guarantees, that's for sure, but I think that's what our plan is for now.

Okay, perfect, fair enough. In terms of the US, now that you've got McDavid up, what's the plan on Folkston?

Well, I think in terms of Folkston, we continue to assess that. We've got a lot on the go in the US South. I think we want to get McDavid up and going, and then we'll look at Folkston. Part of that is market, part of that is fiber availability as well. We have to get very comfortable around that. So, we haven't -- we're not ready to make a decision on that, and I don't see that being something we'll look at this year.

Okay. And then, just you signaled higher log costs for the panel side. Is that a temporary issue, or is that something that's going to recur, going forward?

Well, I think it's just overall -- it's all really due to stumpage, movements on stumpage still. I think it'll really follow where overall stumpage costs go.

Okay. And just on the pulp and paper side, if you could give us an indication of maintenance schedule, going forward?

Sure. We're looking at a mini-shut at Cariboo next May, six days, and then we're doing our large shut at Hinton, which we do every three years, the large shut. We do a mini-shut every 18 months, but we'll do a large shut 16 days next September.

And you can confirm that Peter's in agreement with that?

Yes. He hasn't hit me too hard on these questions. He hit me hard on Stephen's, but this one -- I'm doing a good job on that one.

I'm just kidding. Okay. And lastly, we expected some pretty significant cost inflation, especially on your lumber side. I mean, taking a look at those lumber costs, you did a great job keeping them down. Is that -- and it kind of surprised us. Is that what you're expecting, going forward, that your CapEx spend will offset any kind of cost inflation you're seeing?

Well, I think we're hoping that it will more than offset that. I mean, when we're looking at spending the kind of capital we're spending on our lumber business and the types of paybacks we're looking at, it should more than offset any inflation.

Great, that's all I had. Best of luck. Thanks, guys.

Okay. Thanks, Paul.

Pierre Lacroix, Desjardins.

Okay, thank you. Good morning, everybody. Ted, just one follow-up on what you commented on your growth. Going forward, you said that you'll try to grow at the right valuation. I just -- I was hoping to get a bit more comments versus what -- the transaction we had in the industry in the last 12 months versus where do you stand versus the valuation that is being paid right now in the market.

I'm not sure what transactions you're referring to, if you're referring to the acquisitions by Canfor and [Intercor] in the US. So, just want to remind you that we've been there for a long time, and we've been very focused on spending capital down there. Those valuations look appropriate to us, but expectations I think probably from the independents are maybe a little higher than they should be today.

Okay, that's good. Thank you very much.

Okay, thanks.

Thank you. There are no further questions registered at this time. I would like to return the meeting to Mr. Seraphim.

Well, again, thanks for joining us, and we'll look forward to talking to you next year. Thanks. Have a great day, everybody.

Thank you. That concludes today's conference call. Please disconnect your lines at this time, and we thank you for your participation.