West Fraser Timber Co Ltd (WFG) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Co Limited fourth 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, Mr. Seraphim.

Thank you and good morning.

Joining us today is our CFO Larry Hughes and a number of our senior management team. Larry will discuss our fourth quarter earnings shortly. I'd like to focus my comments on our performance in the fourth quarter, our key activities during the year and our outlook for 2014.

With respect to the fourth quarter, we faced a number of challenges that impacted our results. In terms of lumber markets we were impacted by higher discounts on our southern yellow pine wide sales. We expect those discounts to improve as US housing picks up.

We also had a very busy quarter with a number of capital projects in progress as well as a number of startups in both Canada and the US, most notably the start up of the Williams Lake and Edson planers, the shutdown of the Edson sawmill and the ramp up of our sawmill rebuild at our Chetwynd facility. In the US we started up a number of continuous kilns and worked through the ramping up of our new planer in Henderson.

In addition we have restarted our McDavid sawmill, which also had a negative impact on earnings. Our panel business had a somewhat weaker quarter due to lower productions and shipments, but overall this business was a strong contributor for the year.

Turning to our pulp and paper business, results were impacted by lower earnings in our joint venture newsprint mill due to scheduled shutdown to connect our 63-megawatt power plant. The power plant is expected to be start up towards the end of the first quarter.

The key contributor to the decline in our quarterly earnings was operational difficulties in our two NBSK mills. There's no question that we are all disappointed with the fourth quarter results in our NBSK business. We've invested the capital and have a good cost structure in place.

Cariboo pulp has been a very reliable performer, but we did struggle operationally in the quarter and at times during the year. The mill is running long 2014 and we look forward to better operational results going forward. Our Hinton mill has faced greater challenges, and as such our number one operational priority is to improve mill reliability at that site.

As we look back on 2013 we view the year as a turning point in the housing recovery. We still appear to be in the early stages of a US housing recovery as housing starts in 2013 were up 20% from 2012 to 930,000 starts.

Our expectation is for some volatility through the early stage of the housing recovery, but we continue to be optimistic of about the prospects for the medium-term. Improving North American demand has been supported by continuing strong lumber shipments to China. North American production increased by approximately 5% to 55 billion feet. While this is up from the trough of 42 billion feet in 2009, we're far off peak production of 75 billion feet in 2005.

Our outlook for plywood and the MDF markets is fairly positive as demand for these products continue to improve. The weaker Canadian dollar should also benefit our plywood sales given our exposure to the Canadian market. Pulp markets have remained fairly balanced, but we expect that they will be under pressure as new capacity ramps up this year.

At West Fraser we continue to grow productive capacity in Alberta and the US South while we wrestled with the impact of the mountain pine beetle in British Columbia. In October we announced our mountain pine beetle plan which included the shutdown of our Houston sawmill in the second quarter of 2014, as well as announcing capital upgrades for Smithers and 100 Mile.

We look forward to the start up of our Edson sawmill at the end of the first quarter, the start up of a number of kilns, planers and sawmill upgrades in the US South during 2014 as well as the start up of four power projects during the year. We are in the midst of the most comprehensive capital spending program in our Company's history, and, while it's creating short-term operational challenges, we're very encouraged by the quality of our projects and expect to achieve the planned paybacks.

We spent approximately CAD360 million on capital projects in 2013 and expect to spend in excess of CAD300 million in 2014. I'd like to take this opportunity to acknowledge our employees who continue to demonstrate their commitment to the effort required to drive superior long-term results.

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 the use of terms such as EBITDA, adjusted earnings and adjusted earnings per share. Also, all per share amounts that we refer to have been adjusted to take into account the stock dividend, which we announced in December and completed on January 13, 2014.

For the fourth quarter of 2013 we reported earnings of CAD118 million or CAD1.37 a share. As we have done in the past, on page 10 of our MD&A, we have adjusted those earnings for non-operational items, which for this quarter included the normal equity-based compensation charge and the US dollar denominated debt but also included a restructuring charge related to the announcement in the quarter of the closure of our Houston BC mill and a gain on the sale of tenure relating to the timber harvesting rights exchange that was completed in the quarter.

These items produced on an after-tax basis a CAD33 million favorable adjustment. However, we had an additional significant adjustment for the recognition of US loss carry-forwards, which produced a negative adjustment of CAD101 million resulting in a cumulative after-tax negative adjustment of CAD68 million.

After all of these adjustments our adjusted earnings were CAD50 million, or CAD0.58 per share. This represented a decline in adjusted earnings compared to the third quarter of 2013 of CAD18 million, a decline of 26%.

On a quarter-to-quarter basis operating earnings for each of our three segments declined with lumber off by CAD25 million, although that was substantially the effect of the Houston restructuring charge, panels off by CAD4 million and pulp and paper off by CAD16 million. We analyzed these changes in detail in the MD&A, but in general results were affected by lower lumber and plywood shipments, a weakening of live wood southern yellow pine prices, and continuing operational difficulties at our NBSK mills.

For the full year 2013 our earnings were CAD349 million, or CAD4.07 per share. As shown on page 3 of our MD&A, adjusted earnings for the full year were CAD328 million, or CAD3.82 per share, and this compares to CAD128 million, or CAD1.50 per share in 2012. This CAD200 million improvement reflects the gradual improvement of lumber markets and the progress that we had made in upgrading and making more efficient our operating platform.

With US housing slowly mending, our outlook for the future is positive. I won't go over the various adjustments for the year except to note that the equity-based compensation for the full-year was CAD54 million as the trading price of a West Fraser share increased almost 48% from the beginning to the end of 2013.

As of the end of 2013 our earnings sensitivity to a CAD1 increase in our share price is approximately CAD1 million. Cash flows from operating activities in the fourth quarter were CAD33 million, compared to CAD128 million in the third quarter, reflecting seasonal log inventory build up. Capital expenditures in the quarter were CAD119 million. And for the year capital expenditures were CAD358 million, including the Houston Cornell timber exchange valued at CAD20 million.

As Ted mentioned we are expecting capital expenditures in 2014 to be in the range of CAD300 million, which will include the completion of several energy projects that are currently in progress. We recognize CAD101 million of deferred income tax assets in the quarter.

These relate to non-capital loss carry-forwards of CAD261 million generated by our US operations in previous years. We are required under applicable accounting rules to me recognize the benefit from the full amount of the tax assets, although for tax purposes, we are permitted to apply the loss carry-forwards only as we generate positive earnings from our US operations.

For the full year the revaluation of our defined benefit pension plans which flows through other comprehensive earnings resulted in a CAD113 million after tax actuarial gain as the discount rate used to present value pension liabilities increased from the previous year and the actual return on plan assets exceeded assumptions. In 2013 we made contributions to our defined benefit plans of CAD92 million and we expect to make payments totaling approximately CAD40 million in 2014.

Our balance sheet as at December 31, 2013 remains strong with CAD162 million of cash and short-term investments on hand as we continue to build significant log inventories at our Canadian solid wood operations. We ended the year with a net to debt -- net debt to capital ratio of 8%.

Ted, that concludes my comments.

Thank you, Larry. And now I think we're ready for questions.

Thank you.

(Operator Instructions)

Sean Steuart, TD Securities.

A few questions. Ted, maybe just go into a bit of detail on what happened at the NBSK mills. In your MD&A you broke out expected maintenance downtime versus unexpected hits. Maybe a little bit of detail what happened at both of the operations, how things are running into the first quarter, and I guess expectations for the maintenance schedule for 2014 at both mills?

Sure. I think, first of all, in terms of 2013, I'll talk about Cariboo first, and then Hinton. Really at Cariboo we really had no large major issues. We just had a number of reliability issues around the mill. We had spent a lot of capital there, previous to that. We put in a new co-gen facility. We put in a new chlorine dioxide facility.

And then, I think to some degree, and I think this also affects Hinton, is with all those projects I think it did affect our mill reliability programs. And I think we payed the price there. So, nothing significant, Sean.

And moving to Hinton, the issues we talked about -- and I've got to be honest with you, I don't like having to talk about this because we really expect these mills to run well -- but the issues we had in, say, 2012 were more around the machine upgrade. We did a complete upgrade of that machine. And so, we had a lot of issues there.

And I think, again, we put so much focus on the machine, and we were counting on the rest of the mill -- the front end of the mill, the digester, the recovery and recovery boilers, et cetera, to run well. And we really had no issues with those in 2012 of any magnitude. And once again, I think our reliability program overall for the mill suffered, and that's really where we had most of our issues last year. And again, nothing major, but very frustrating.

I don't think I can sit here and tell you that we have a magic bullet here. I think it's really about focused reliability, and I can tell you that our Group is very focused up there. And we just got to keep working at it, and -- because we do have a good cost structure -- both those mills run well, we have a very good cost structure. And so, from my perspective, it's just about focus, focus, focus.

In terms of how the year started, Cariboo's ran well. Hinton's ran a little bit better than last year, but it's still not where we want it to be.

In terms of our maintenance shutdowns, we have a short one in Cariboo in May; that's about six days. And then we have our major shutdown in Hinton in September. That will be 15 days.

Okay. But I guess, I know it's been a recurring story for you guys, intermittently, pulp downtime and unexpected, but Q4 just seemed relatively pronounced, certainly to what we expected. But okay -- so, maybe just a series of small issues on top of the regular maintenance stuff?

I've got to tell you that it was just, as you say, it's a series of issues, but they all added up to a terrible quarter. We're not happy, and I can tell you our folks at Hinton aren't happy. And I think we are putting a lot of effort in terms of trying to develop long-term mill reliability at that facility.

Okay. Last question for me. On the sawmill side, the volume pressure you saw there, wondering if you can break down whether it's sequential volume weakness or relative to your capacity. The Q4 pressure you saw there, can you give us a rough breakdown of how much of that was tied to all these discretionary projects that you're in the process of or finished off during the quarter? And how much might have just been related to normal seasonality and/or poor weather in the fourth quarter?

We did experience a little bit of poor weather; a little bit more than normal. But I think the primary reason is all the capital upgrades we're doing. I just mentioned the major ones. We have an extensive list, and we're in the process of upgrading just about every mill in our system.

So, I think it's really a matter of a lot of short-term pain. And you can imagine, as you're trying to run a mill and you're trying to rebuild it, you're going to have some impacts. But I think we're very encouraged about our projects, and we're going to continue to see progress in terms of our operations.

Okay. I'll get back in the queue. Thanks, guys.

Paul Quinn, RBC Capital Markets.

Thanks for the color on the issues at the NBSK mills. I was wondering if you could quantify the impact of the ANC shut in the quarter, just to try to understand how big the NBSK issues were.

Well, I think the NBSK issues would have been, I don't know -- it's definitely the majority. I'm not going to give you a number, but it's definitely more than 50%. But ANC did impact us, maybe, 20%, 25%. So, I'm basically giving you the number. (laughter)

Yes. That's helpful. Keep up the good work.

Maybe a question on production gains. You've got a bunch of CapEx that you're spending this year and next year and probably the following year. What can we expect to see in terms of 2014 production in each of the regions off the 2013 base, in terms of percentage change, if you could give that?

Well, I think in terms of Canada, I think you will see our production increase over the year. We're starting up the Edson sawmill at the end of the first quarter. We continue to see improvements in our three other Alberta mills. We did major capital upgrades, and we completed most of them late 2012, early 2013, and we continue to see improved production there. Our Chetwynd mill has ramped up very well this year from its sawmill upgrade.

So, I think the main negative for us this year will be the shutdown of our Houston mill mid-second quarter. So, I think overall we'll see Canada up. And in the US, we expect, with the McDavid start up, we're still going through that. The benefits of some of our capital upgrades, we'll see -- I think our expectation in terms of production is probably in the area of another 15% or so, potentially maybe a little bit more in terms of increase in the US. So, over the year -- although the start of the year has been a challenge with weather down there, but on a run-rate basis, we expect to be up in the US.

Okay. That's helpful. And lastly, just on the energy side, if you could remind us of the major projects that you've got, and what your expected EBITDA contribution to be from those projects by the end of the year?

Well, we've basically got, as I said, four. Actually, there's probably five. But two of them are the start up of the -- our two energy systems at Fraser Lake and Chetwynd. Those will be starting up in late-second quarter and then mid-third quarter.

And as we said, on those projects, we expect 4.5 type payback. I think we said something around that for all our -- 4.5-year type payback. So, we announced CAD90 million. I think you can do the math there. There's about CAD20 million there.

And then, we're starting up the Alberta Newsprint 63-megawatt project at the end of this first quarter. Again, that's a peaking plant, so really all we can do is estimate what that will be, but that will be a significant return. Slave Lake -- we're starting up biomethanation plant at the end this year.

Quesnel River pulp -- there was another project where we're reducing our energy consumption there. At the front end of the mill with -- I'm not going to bore you with the details, but we're reducing our energy consumption there.

All in all, I think if you look at the money we're spending in energy, I think by the end of this year, from late 2011, we're probably in the area of a couple hundred million dollars. So, I think guidance on that would be somewhere 4-, 4.5-year payback, CAD40 million to CAD50 million of EBITDA generated on a run-rate basis by the end of this year.

Great. That's very helpful. Best of luck, guys. Thanks.

Mark Kennedy, CIBC.

First question: I think there was a discussion in your release that with your Alberta mills, ANC and Slave Lake, that, at times of high power prices, you may actually take shutdowns. Now, obviously there's going to be an offset here when this peaker plant at ANC starts up. So, I guess my question is: Do you see that as being a net gain at the end of the day; that whatever you lose on the shut, you make up on the energy side, or is it a net loss if that happens?

Well, the peaker plant for us isn't really any different than what we've had with our power purchase agreements for a number of years, affected both Alberta Newsprint, Slave Lake, and to a lesser extent our MDF plant in Alberta. But at the end of the day here, we are making decisions on a minute-by-minute basis whether to produce pulp or to produce power.

And we've also built in capacity at the front end of these mills so that when power prices are low, we can run the mills harder. And when power prices are high, we slow down or shut down the front end of the mill, and continue to produce pulp. So, I actually think high power prices are a good thing for us in Alberta.

Okay. All right. That's helpful.

And then, just a question: Obviously, we've heard a lot of chatter recently on rail-car reliability and availability. So, I just want to see how much of an issue is that proving to you in Q1? And are you seeing any issues related to having to look at downtime or anything else because of transportation reliability?

Well, I'll answer the second question first. We don't expect any impact on our production, given rail service or weather. It has been a challenge. We don't see it as having a material impact on our results for the first quarter, and definitely, whatever we can't ship in the first quarter, we'll be able to ship in the second quarter and third quarter.

So, I think -- and we don't really look at our Business on a quarter-by-quarter basis. So, as we look at the whole year, we don't see this as being really an issue at all. We have to work through it, but we don't see it as being a material financial issue.

Okay. And my last question, Ted, when I look at your segment and lumber earnings, like your realized lumber price was up about CAD35 from Q3 to Q4, but your EBITDA margin was only up about CAD10. Is that a reflection again of a lot of the capital projects, like, also impacting your overall cost performance as well?

Mark, I think -- I'm not sure where your question's coming from, because really what we looked at is -- I think you're talking about the benchmark price. But the big issue for us is really the discount on the southern yellow pine whites.

Okay. So, that would have been impacting your numbers more than -- ? (multiple speakers)

Exactly. Yes.

Okay. That's it for me. Thanks.

Thanks, Mark.

(Operator Instructions)

Daryl Swetlishoff, Raymond James.

A question more for Sean McLaren. Just looking at your operations in the US south, especially focusing on the south coast region, we're hearing reports from timber REITs that those areas are experiencing less timber cost inflation. Is that what you're seeing as well, relative to the rest of the US south?

I don't think we have Sean on the line. We can't afford to have him on the call from a cost standpoint. Yes. So, I'm going to have to handle it, Daryl. And again, good morning.

I think, fundamentally, overall, whether it's in the southeast or throughout our southern regions, we're really not seeing any material cost inflation at all on log costs.

That's good. Thank you. All the rest of my questions are answered, Ted. Thanks.

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

Okay. Well, thank you very much, and we look forward to talking to you in a few months.

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