West Fraser Timber Co Ltd (WFG) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Company second-quarter 2014 results 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 NDA, which can be accessed on West Fraser's website or through SEDAR as a -- and as supplemented by the Company's quarterly NDAs. 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, everyone. West Fraser earned CAD74 million or CAD0.87 per share in the quarter. Adjusted earnings for the first quarter -- for the quarter were CAD66 million or CAD0.78 per share as compared to CAD84 million in the first quarter.

EBITDA in the quarter was CAD146 million or 14% of sales and was essentially flat from the first quarter. Our lumber business generated CAD106 million in EBITDA, in line with our first quarter results. Higher shipments offset lower price realizations in the quarter. We were able to increase our shipments by approximately 500 million feet compared to the first quarter.

We shut down our Houston sawmill during the quarter. We completed the rebuild of our Edson sawmill in the quarter and startup is progressing in line with our expectations. With the completion of the Edson rebuild, we now have four very modern sawmills in Alberta and are developing our capital plans with respect to the recent acquisition of our High Prairie, Alberta sawmill. We are in the midst of the sawmill upgrade at our 100 Mile facility and that impacted operations during the quarter.

We are looking forward to the startup of our two energy projects at Fraser Lake and Chetwynd later this year. Our US operations continue to be impacted by our significant capital program as we modernize our US sawmills. As I mentioned during our first quarter call, we are building 10 continuous kilns, three major planer projects, as well as a number of major capital sawmill upgrades.

Our panels business generated CAD13 million in EBITDA, up 18% from the first quarter, primarily due to higher shipment levels. Our pulp and paper business generated CAD30 million in EBITDA, down 6% from the first quarter. The lower earnings were a result of the Caribou pulp maintenance shutdown and a strengthening Canadian dollar.

Late in the quarter, the Supreme Court of Canada released the William decision. Given that we operate on Crown land in British Columbia, we are closely following this decision. As a Company that is community-based, we have a long and valued history with the First Nations and have a number of business relationships with First Nations in the communities that we work in. We expect to continue to work with First Nations, various levels of government, and others to manage the forest resource in a sustainable, renewable, and value-generating manner.

We continue to build our energy and bioproducts business. During the second quarter, our joint venture newsprint known in White Court, Alberta started up its 63 megawatt peaking powerplant. And we are making good progress in the construction of our biogas plant in Slave Lake, Alberta.

In June, we announced our plans to construct a lignin plant at our Hinton pulp mill. We also entered into an agreement to invest in production of activated carbon, which has a potential to provide high-value margins for some of our mill residuals.

The lumber market weakened during the quarter, as excess inventory that was built due to the transportation disruptions in the first quarter were shipped. Lumber markets strengthened towards the end of the quarter as inventories moderated.

The housing recovery in the US continues to show positive momentum, albeit at a slower and more volatile pace than most forecasted. We continue to forecast volatility in lumber markets over the next 6 to 12 months as US housing starts continue to recover.

Demand from China remains strong. Our outlook for our building products business continues to be optimistic for the medium-term. Pulp markets are expected to be under continued pressure as new capacity ramps up this year. With this, I will 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 the use of terms such as EBITDA, and adjusted earnings, and adjusted basic earnings per share.

As Ted indicated, for the second quarter we reported earnings of CAD74 million or basic earnings per share of CAD0.87. The table on page 3 of our MD&A described and quantifies several nonoperational items which affected our results.

If we adjust the CAD2 million expense related to equity-based compensation, and a recovery of CAD12 million related to the translation of US dollar denominated debt, the result, on an after-tax basis, is adjusted earnings of CAD66 million or adjusted basic earnings per share of CAD0.77 for the quarter. The equity-based compensation expense reflected an increase of the Company's share price over the quarter and the recovery on the US debt resulted from a strengthening of the Canadian dollar against the US dollar in that period.

On a similarly adjusted basis, results of this quarter were weaker than those of the first quarter of 2014, when we achieved adjusted earnings of CAD84 million and adjusted basic earnings per share of CAD0.97. From an operating earnings and EBITDA perspective compared to the previous quarter, our lumber results were substantially the same; pulp and paper results declined, and our panel results were much better as a result of improved prices.

Our defined-benefit pension plans are revalued as at the end of each quarter, and the result this quarter was an actuarial loss of CAD45 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 loss was due to a decrease in the applicable discount rate, which is the effective increasing the present-day value of the pension liabilities, partially offset by higher than anticipated returns on our plan assets.

Cash generated by operating activities during the quarter after working capital changes was CAD236 million, which included the seasonal reduction of the log inventories at our Canadian solid wood operations. During the quarter, we repurchased and canceled 848,400 common shares at a cost of CAD43 million. Our current normal course issuer bid expires on September 16, 2014.

Capital expenditures for the quarter totaled CAD121 million, bringing our total for the first half of 2014 to CAD214 million. We are projecting capital expenditures this year to be in the range of CAD350 million.

Our balance sheet remains strong. With the completion of the three sawmill acquisitions in the first half of 2014 and the share buyback program, our quarter end net debt to total capital ratio was 18%.

Last week, one of West Fraser's founders, Bill Ketcham, celebrated his birthday, and today Bill Hughes, my father, turns the same age. So, to the two Bills, our best wishes, young men. And, speaking of young men, back to you, Ted.

Thanks, Larry. Larry is in Vancouver and we are up in Smithers with our general manager. So I wasn't ready for that one. But, Larry, happy birthday to your father and we are all fortunate to be down with the Ketchams this week and celebrating Bill's birthday. But, with that, we will open it up for questions.

(Operator Instructions) Daryl Swetlishoff, Raymond James.

Good morning, guys. It has been pretty damn hot in BC. I am sure it is hot in Smithers as well, Ted. What are you guys seeing in terms of changing access to harvesting and what are your log inventories like in BC today?

In terms of our log inventories in BC, I mean, we are in good shape at all our mills. You must be referring to the fire season. The fire season maybe came a little earlier than normal, but at this point in time, we really don't see any impact on our inventories or our operations.

Okay. That is encouraging. You mentioned a bit about better access to trains and trucks in the quarter. What is your outlook right now for logistics and getting your wood to market?

I think we are in pretty good shape. As you can see, we had a really, really strong quarter. And I think what we said at the end of the first quarter, our thoughts were we would have our inventories back in shape end of the third quarter, early the fourth quarter. And I don't think our view has changed on that.

Okay. And, lastly, pretty flat pulp results. How do you think the pulp mills are running currently and what do you see for the balance of the year?

Well, I think your comment is a good one; fairly flat results. Our mills are all running really as they have for most of the last six months. We are quite pleased with four out of our five mills.

Our Hinton pulp mill, we continue to put a lot of work into that. And we are actually doing an 18-day major maintenance shutdown in this September. We do one every three years. We are looking forward and we have got a lot of work to do there, and we are pretty confident that that will set us up well for the fourth quarter for that mill, and moving forward with better reliability.

But as I have been saying for a while, Hinton is really our focus to pulp mill in terms of improving the reliability. But you can tell we have a lot of confidence in the future of that mill, given the fact that we decided to make an investment there in lignin production, just in June.

Okay great. Thanks for that, Ted, I'll turn it over.

Sean Steuart, TD Securities.

A few questions. Ted, wondering if you can just give some context around the recent improvement in Western SPF lumber prices. And I guess what I am trying to gauge is, how much of that is China restocking? And what are you seeing in terms of pull from your various North American customer bases on the lumber side?

Sure. I think we don't spend a lot of time predicting where markets are going over the short-term. It doesn't really have a big influence on how we run the Company. So I think I just have got to give you that caveat, first and foremost.

But, and secondly, I think we have been saying it for a while, that until we see housing starts to get up to higher levels than they are today, we are going to see volatility and we are going to see shifts from inventory from us to our customers and back. I think what we saw in the second quarter was prices falling because we were able to ship a lot of our inventory. And now, towards the latter part of the quarter, we saw the demand being pulled. I think our customers are fairly optimistic about the next six months. I am speaking about North America here.

And, really, our demand in China -- I can't really say -- I know people are looking for us to talk about things being volatile there, but at least for West Fraser, we have seen steady demand all year. It really hasn't changed to any degree month to month. Yes, we had issues in shipping in the first quarter, but that wasn't order based. That was really shipping based. So, really, we have seen good steady demand out of China and that continues to be the case as we look out to the third quarter.

Okay. And, on the pulp side, it seems like in China bottom setting NBSK for the near-term, can you give us any context on what is happening with BC TMP markets? I know there has been weakness for prices for that grade in China since the beginning of the year. Are you guys seeing that bottom out as well?

Yes. I think BC TMP is somewhat of a unique grade, but it also is impacted by hardwood kraft. And we have seen, obviously, the hardwood kraft market fall with the new capacity come on board. Although, we have been able to hold onto our price levels much better than they have. And, over the last, I would say, 30, 45 days, we have seen a flattening out of pricing for hardwood as well as for BC TMP. So I think our outlook for the remainder of the year, for at least our BC TMP business, is fairly flat in terms of our view on the market.

Paul Quinn, RBC Capital Markets.

Just following up on Sean's question on China, have you noticed the difference in your customer mix? We have all read reports about slowing residential construction in China. Just wondering if it is going to differ in end markets.

No, we are not really seeing it going to end market. We are seeing a little bit more growth in the West as new markets develop, but it is still primarily -- a lot of it is going into concrete form, so not a big shift at this point. Although, we are seeing more applications for tooling better, but the prime -- 80%, 85% of our lumber is still going into the same -- into concrete form. So it really hasn't changed dramatically at this point.

Okay, then, just on the -- you guys have been pretty active on the acquisition side the last, say, six months. Have you got the position limit that you want? Or is there further acquisitions that you anticipate, and how does that market look right now?

Well, we don't really comment specifically about acquisitions. I mean, we are we like delighted with the three acquisitions we have made. Again, it further diversifies our production base out of British Columbia. We have been able to grow in Alberta and grow in the right spots in the US.

So, we want to grow this Company, and our primary focus is on lumber. And obviously, the US south is a key region that we are looking at. But, ultimately, we are also focused on our capital program.

And, frankly, we are also putting a lot of effort in terms of really maximizing profitability out of each and every one of the mills we have today. So, really, kind of a three-pronged approach and we see tremendous opportunity to increase shareholder value through our capital program.

But we also see it in terms of -- as once we get these capital projects behind us, we have seen the benefit of once we get the mill -- the capital and get the mill up and running, we are able to also get back to it. We have always done very well, which is really to drive cost and productivity. So, growth is important, but we are very focused on the other two: operational excellence and capital execution.

Okay. And then, you guys mentioned the William decision. Have you guys noticed a change in your relations or conversations with First Nations since that decision? And is that decision -- does that decision affect your capital plans in BC? It sounds like you are underway on 100 Mile. Or is it just where you are at on Smithers?

I think, first of all, no. We have had -- with our Company, we have had a long-standing relationship with First Nations. We have a lot of business relationships. It really hasn't changed anything to date. I mean, we are talking with our First Nations partners all the time.

In terms of how we look at capital, I mean, fundamentally, the number one driver in terms of making capital decisions in British Columbia has been the Mountain Pine deal. And so we made our decision a year ago in terms of our Mountain Pine deal plan. We have moved forward on our 100 Mile project. We are still working through the evaluation of our Smithers project.

And, at this point in time, it is still early in terms of understanding what that decision means, but we are really still very committed to our plan. But, in terms of all our mills, the last mill that we really need to modernize is Smithers. And that being said, it still is a very good mill. So we are just going to work our way through that process.

Mark Kennedy, CIBC.

First, just a couple questions on the cost side. You mentioned in your MD&A a reference to expecting higher log costs through the balance of the year. Is that regional specific or is that spread across all of your operating areas?

I think, as we look at log costs, we are seeing stumpage in British Columbia increasing maybe CAD1 or CAD2 since July 1. We are seeing very modest -- flat to modest increases in the US sales. So overall, I mean, we are going to see a slight increase in log costs, but it is not going to be a significant increase, Mark.

Okay. And then, likewise, on freight, we have seen your freight costs bump up a bit this quarter. Do you expect that to normalize as you look out over the next couple of quarters?

Well, actually, if you look at our freight costs year to date as a percentage of sales, they're basically almost identical to the first half of last year. We did see an increase from the first quarter to the second quarter, but overall, we don't really see -- we see things normalizing through the remainder of the year.

Okay. And then, these two recent new acquisitions or benchers you have undertaken -- the lignin plant at Hinton and then the activated charcoal opportunity -- is that something that is still going to be a number of years away before there is any meaningful revenue or EBITDA contribution? Or how should we think about that front?

I think, first and foremost, these are not significant capital or acquisition in terms of our total capital plan. So, in terms of dollars, they are quite small. So what we look at is, it really helps us create a base for looking for more alternatives for our residuals and adding value to our mills.

So I would say that we are developing confidence. We want to build that business and these are two ventures that we are working on. But I think if you are trying to put something in your model, I wouldn't really put a lot in there at this point in time. It is really a development business.

Right. Okay. And then, finally, those two bioenergy projects at Chetwynd and Fraser Lake, just timing on those, you referenced toward the second half of the year. So we are still looking at early fourth quarter kind of timing on those?

Yes. I think one is late third quarter; the other one is early to mid-fourth quarter.

Kittan Mandoora, BMO.

Just looking at your lumber results, it looks like you have gone down about half of your Q1 in inventory build in lumber. Can you just talk about how you feel about current inventory levels and how much of an impact just generally this is having on lumber pricing?

Well, I think in terms of the impact on lumber pricing, I mean, I am not really an expert. It is hard for me to comment on that because the market moves for a whole bunch of different reasons. It is just not inventories, as you know. It is demand from China, as others have referenced; housing starts. And it is the people's outlook.

But, I think from a producer standpoint, if we are a proxy for the industry, we have more than reduced our inventory build by half. And, as I said earlier, we expect our inventories will come into line at the end of this quarter, early fourth quarter. So I think it was a very unusual first 3 to 4 months of the year, but I think that is pretty much behind us now.

Got you. Thanks. And then, one quick one. In your panel segment, LVL shipments were quite strong, up about [32%]. Can you talk about what you are seeing in that market?

Well, LVL demand really moves, really, with North American housing starts. So we have seen -- builders are more optimistic today than they were three months ago and, despite the June housing start results, I think if you look at building permits and all the major statistics, I think there is just a higher level of optimism. And that is where we have seen improvement in. But, let's remember, LVL business is not a big business. So, for us to increase those it shipments, part of it is the market and part of it is the hard work by our salespeople.

(Operator Instructions) Sean Steuart, TD Securities.

One follow-up. Wondering if you could quantify, if it is possible, the effect that lower power prices in Alberta had on Q2 margins? And I know it is a potential volatile factor for you guys and you had the peaker at ANC starting up this quarter, but is it -- can you give us any sort of context on how much that might have affected your Q2 results?

You know, Sean, I don't think it is material to any degree, and it is not really a number that we share. But it wasn't really material in the quarter. But, obviously, we earn more money selling power in the first quarter than in the second quarter. Sorry I can't give you more than that.

Benoit Laprade, Scotiabank.

Just curious, could you refine your CapEx number for the rest of the year? And would you have a preliminary number for next year?

I think the guidance we have given for this year is around CAD350 million. So I think CAD213 million or CAD214 million in the first half of the year. I think our run rate CapEx is CAD175 million to CAD200 million. Next year will still be higher. I think the guidance that Larry and Roger have been giving folks is probably in the order of about CAD300 million for next year. And I think that is a good number.

There are no further questions at this time. I would like to turn it back over to Mr. Seraphim.

Well, again, thanks for joining us on the call. Enjoy the rest of your summer and, if we don't talk to you before our third quarter results come out, take care and we will talk to you soon. Thanks. Bye.

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