West Fraser Timber Co Ltd (WFG) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Company Limited third-quarter 2014 results call. During this conference call, West Fraser 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. I'm on the call today from our mill in Newberry, South Carolina, where we are about to start up two continuous kilns and a new planer over the next few months. (technical difficulty) our results.

So first of all, West Fraser earned CAD70 million or CAD0.83 per share in the quarter. Adjusted earnings for the third quarter were CAD94 million or CAD1.12 per share as compared to CAD66 million in the second quarter. EBITDA in the quarter was CAD156 million or 15% of sales, an increase of CAD10 million from the second quarter. Our lumber business generated CAD131 million in EBITDA, an increase of CAD25 million from the second quarter. This improvement was due to improved productivity, the inclusion of the results from our three sawmill acquisitions, as well as (technical difficulty).

We are very pleased with the sawmill upgrade at Edson, which was completed in the second quarter. We completed the sawmill upgrade at our 100 Mile facility in mid-October, and that impacted operations during the quarter. We're looking forward to the start up of our two energy projects at Fraser Lake and Chetwynd, which are expected to start up later this year and the first quarter of next year respectively. Our US operations produced 500 million feet in the quarter, an increase of over 100 million feet from the third quarter of 2013 due to the restart of the McDavid and our two acquisitions in Arkansas this year.

Production does continue to be impacted by our significant (technical difficulty) as we continue to modernize our US sawmills.

As I mentioned during our second-quarter call, our US capital program is quite extensive this year. By the end of the year, we'll have completed the construction of nine continuous kilns, upgraded a number of sawmills, as well as three major planer projects which will start up over the next few months.

Our panels business generated CAD29 million in EBITDA, an increase of CAD16 million from the second quarter. This is primarily due to the higher shipment levels and higher selling prices. Our pulp and paper business generated only CAD9 million in EBITDA, down CAD21 million. The lower earnings were primarily due to the extended maintenance shutdown and operational difficulties at our Hinton pulp mill as described in our MD&A.

The lumber market strengthened during the quarter, but we expect that we'll see some continued volatility. The housing recovery in the US continues to show positive momentum, albeit at a slower pace than most forecasted. 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'll turn the call (technical difficulty)

Thanks, Ted. I think we need a new telephone down in Newberry. You cut out just a little bit. But thank you 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 CAD70 million or basic earnings-per-share of CAD0.83. The table on page three of our MD&A describes and quantifies several nonoperational items which affected our results. If we adjust the CAD11 million expense related to equity-based compensation and a loss of CAD16 million related to the translation of US dollar denominated debt, the result on an after-tax basis is adjusted earnings of CAD94 million or adjusted basic earnings-per-share of $1.12 for the quarter. The equity-based compensation expense reflected an increase of the Company's share price over the quarter and the loss on the US debt resulted from the weakening of the Canadian dollar on a period-ending basis.

On a similarly adjusted basis, results of this quarter improved compared to those of the second quarter of 2014 when we achieved adjusted earnings of CAD66 million and adjusted basic earnings per share of CAD0.77. From an operating earnings and EBITDA perspective compared to the previous quarter, our lumber and panel results improved, while our pulp and paper results declined. EBITDA margin for lumber improved to 18% from 15% in the previous quarter and 14% in the same quarter of 2013. For panels, EBITDA margin reached 20%, up from 10% in the previous quarter and 8% in the third quarter of 2013. And pulp and paper EBITDA margins fell to 5% from 13% in the second quarter and 20% in the third quarter of 2013.

Cash generated by operating activities during the quarter after working capital changes was CAD237 million. During the quarter, we repurchased and canceled 993,600 common shares at a cost of CAD50 million. Under the normal course issuer bid, which expired on September 16, 2014, we purchased a total of 1,906,554 common shares at a cost of CAD96 million. We have renewed the normal course issuer bid for another year and have the ability to purchase up to 4 million common shares or approximately 5% of our total outstanding shares.

Capital expenditures for the quarter totaled CAD107 million, bringing our total for the first three quarters of 2014 to CAD321 million. The rate of capital investment was slow in the fourth quarter as several of our energy-related projects near or reach completion. We are projecting total capital spending for the year in the CAD375 million range.

On October 15, 2014, we successfully completed a $300 million debt offering in the form of fixed rate senior unsecured notes due in 10 years. The notes bear annual interest at 4.35%. We use the proceeds of this offering to repay our $300 million notes which bore interest at 5.2% and matured on October 15, 2014.

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 capital ratio was 16%.

And Ted, that concludes my report.

Thank you, Larry, and operator, I think we are open for questions, and I do apologize if I'm cutting out. If I do get cut out while a question is being asked or answered, then please just ask me to repeat the answer. Thanks.

(Operator Instructions). Sean Steuart, TD Securities.

I'll start with a few questions and get back in the queue. Have you, Ted, dialed in your 2015 CapEx budget yet, and I guess what I'm trying to get at is your ability to find accretive discretionary projects and sustain spending at the sort of level we've seen over the last couple of years now?

Okay. I think just to remind the group, last year we spent about -- we spent CAD358 million. This year will be around CAD375 million. And we still have a lot of carryover into next year, and we expect it to be (technical difficulty) this year, but it will probably be in the area of about CAD300 million in CapEx for 2015.

Okay. And then your activity in the buyback program in the last couple of quarters, is there any readthrough with getting more aggressive on the NCIB relative to M&A opportunities for you out there? If accretive sawmill acquisitions dried up a little bit and that's why you've been more aggressive on it? Maybe just a little bit of context on that part of the capital allocation?

Well, I think we really have kind of a three-pronged approach in terms of using our cash flow. The first one is obviously capital. The second one, our acquisitions we made three this year. We are continuing to look at smaller acquisitions, Sean, and then the third one is a share buyback. So I don't think one is mutually exclusive of the other. We are really looking at all three, to be honest with you.

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

Daryl Swetlishoff, Raymond James.

I'm just wondering about southern yellow pine price spreads. We saw narrows moving up quite a bit higher relative to the wider width. Can you give me a little bit of West Fraser's exploration for that? And also how the southern yellow pine Western SPF spread, how do you think that will normalize over time?

Sure. I think Chris is on the line. So Chris, if you are able to answer the question, please go ahead.

It's Chris here. I'll ask you to repeat the second part in a minute, but the first part around the price spreads around SYP this year. You know we really saw a huge spread between the wides and the narrows. And really our explanation for that, really we don't expect to see a great recovery on the wider widths until we see more normalized housing starts. So, the 2X4 is being used a lot in R&R and treating. And so, it certainly has held up very well compared to wides. But as housing recovers, we expect to see that spread begin to narrow and sort of a more normalized spread. And I missed the second part of your question, Daryl.

Just then comparing southern yellow pine to western SPF. So that spread is opened up, too. How do you see that resolving over time?

Well, again, that's mainly on the 2X4s you saw the spread widen. I think that will tighten back up to more historical. Our view is that SPF will be under more price pressure going forward than SYP just because of supply.

Okay. Thanks for that. That's all I had, Ted. Thank you.

Mark Wilde, BMO.

Ted, I wondered if you could give us just a little more color on what you're seeing in the Chinese markets. Your commentary actually sounded a little more optimistic than we've heard from some other people recently.

Well, I'll start if you'd like a little bit more color. I'll have Chris help out as well. But fundamentally I think we have been slightly different point of view than many of our competitors over this year. We get asked the same question that you asked in this call and previous calls, and from our perspective, we've seen strong demand this year. In fact, our overall demand is stronger this year year to date than it was last year.

So, we continue to see strong demand. We continue to see a very good market for our lumber in China. So, that's really -- it really hasn't changed at all from the first or second quarter, and our outlook continues to be the same.

Chris, you going to add anything?

I would just add that we are really seeing easing our business continue to move inland. And so, while the coastal cities may not be experiencing great demand, we are seeing the growth everywhere.

So, just to echo Ted's comments, we have not seen a slowdown. And I was just over there a couple of weeks ago, and certainly I think it's pretty steady as it goes for now, so.

Okay. And there has also been talk about more exports to China out of the southern US. Can you talk about what you're doing there now and where you think that market could move over the next few years?

Chris, do you want to answer that?

Sure, Ted. I'll give it a try anyway. We're not doing a tremendous amount out of the south. We are hearing that there is more happening. I think a lot of that product is being used in furniture, for example, where SYP will work very well there. So, I suspect it will grow. I don't see it by any means in the magnitude of SPF.

And Chris, I don't believe we are really doing much business from our mills in China. Our focus is really primarily out of our Canadian mills. You know, if the market develops, we'll be there, but we are putting a lot of our investment and continue to build and really maintain our presence in China from our Canadian mills, Mark.

Okay. And then just the other question I had, just the trajectory, Ted, between this year and next year in terms of CapEx going into those southern US mills?

I'd say when we bought the mills and what we've talked about for the last little while is that we needed to spend CAD250 million to CAD300 million down here. We should be completed with that phase of our capital spending down here by the end of next year. I'd say by the end of this year we are probably 70% through that spending, and these are projects that we've had to go forward with for next year for some time.

But that all being said, we continue to see even greater opportunities down here for great payback projects. So I don't think we are going to -- we are not going to stop spending capital after next year. I think we'll want to take a little bit of a pause, make sure that our mills are running the capital that they have got, and so far we've been very pleased -- let the mills run and get back to normal, and then I think you could see us look at even spending more capital down here going forward even after next year. So, we really don't see a -- we see it slowing down, but we see a lot more opportunities.

Okay. That's helpful. Thanks very much.

Paul Quinn, RBC Capital Markets.

Good morning, guys. Just a little bit of conference call overlap. So I missed the beginning part of your presentation, but just wanted to focus on Hinton, and you probably addressed it but I missed it. But what were the operational issues on startup, and how do you expect to solve those going forward?

Actually you are the first one to ask that question, and thank you for doing that, Paul. So, you can say today that Hinton it is running well. I mean, it's been running well for the last week or 10 days. This was a major shutdown. We do one every three years, and so we hit a variety of difficulties. Nothing -- no one specific issue, to be honest with you Paul, and I think as I've talked over the last few calls, we continue to focus on improving that mill's reliability. We're not where we want to be. We have a plan to get there. And really I think just coming through the shutdown is sort of more evidence that we've got more work to do there. But the mill has been running well for (technical difficulty). But, also as I've said before, we'll talk in terms of being happy when we've had a few good quarters put together, and we have not done that for a while.

Okay. And just on your pulp outlook, it seems to be pretty cautious, and I guess you are referring to hardwood mill expenses. But it seems like softwood pricesm just on the NBSK side, you seem to be pretty stable here, and we've got a lower Canadian dollar. What is your concern around pricing? Is that more in the BCTMP side?

Well, I think it's BCTMP and NBSK. The price gap between NBSK and hardwood kraft is pretty large. You know, at this point it's sustainable, but we don't see significant upside to that spread, Paul. So we are concerned about that to some degree.

We also in terms of BCTMP, it's affected a little bit by hardwood kraft, but to some degree, it's also affected by supply demand dynamics for that particular grade. But I think we just see overall that with the capacity growth, it's only going to do one thing, and that will probably put some downward (technical difficulty).

That all being said, I think we have been saying this for a while, and we've been, frankly, pleasantly surprised that the markets have performed better than we thought they would. So let's hope we are wrong this time as well, but I think it's prudent to be cautious.

Okay. I understand that. And just on the panel side, you had a great quarter. Is there any expectation that these very high results can't continue going forward?

Well, you know, our panels business has been a strong performer for a number of years. And you know, the big driver is Canadian plywood prices in Canada still seeming to be resilient. With that weaker Canadian dollar, that helps our competitive situation. So we don't -- our outlook for panels is really quite positive as we look over the next three to six to nine months. So we are feeling very positive about our outlook for our panels business.

Okay. And just lastly, just turning to the lumber side and M&A, you referenced the three acquisitions you've done this year. Can you give us an idea of what that overall pipeline looks like within North America and where your focus -- whether your focus is still on the US South and Alberta?

Well, you know, we are a large player in Alberta. We have about 35% of the lumber production in Alberta. So we see -- the growth there will be fairly marginal going forward. The US south continues to be our focus for growth. And we can't really -- we don't really like to talk about specific opportunities. I think it's safe to say that when we do look at growth in the US south, we look for a couple of things. We look for good timber drains. We look for to either buy or build a first or top first quartile or even top second quartile mill in terms of spending capital. And finally, we look for synergies with our existing footprint.

So, I think that's why we bought the two mills in Arkansas. It fit all three criteria. And we are going to continue to look for mills that fit that criteria. But we don't plan to grow just for the sake of growth in the US south. We want to make sure it is profitable, long-term growth. And so it's got to meet all three of those criteria.

Great. Best of luck. That's all I had.

Mark Kennedy, CIBC.

Good morning, Ted, and again I apologize like Paul. I was late getting on the call. But I know there was just this recent trade mission over to China and Japan and Korea, and on the back of that, just wondering you may have already covered this, but just your outlook for your export markets, for 2015, especially on lumber.

Well, actually we did cover that Mark, so I'll be brief, and if you'd like to follow-up with a little bit more, maybe you could give Rodger a call in the office. But fundamentally our outlook is positive for China. Our business is -- has grown (technical difficulty) last year, and our outlook continues to be very optimistic. But if you'd like more, maybe give Rodger a call after after this call.

Okay. And then just in terms of your EBITDA margins in lumber, which did improve this quarter, is that just evidence of your discretionary capital starting to show dividends in your numbers?

Yes, that's a good part of it, and we expect that to continue and expect even more EBITDA margin improvement next year versus this year for sure.

Okay. That's great. That's it for me. Thanks.

(Operator Instructions). Sean Steuart, TD Securities.

A couple of follow-ups. You guys have your downtime schedule for maintenance for the kraft mills set for 2015?

Yes. We have -- we don't have any major maintenance for our Hinton mill, but we will have some maintenance. It will probably be five to six days over the period of next year. And then in terms of Caribou, we are down every two years, and we're scheduled to do that next year. It will be kind of late second quarter, and that's a 12-day shutdown.

Okay. And with respect to potential sawmill growth in the south and you touched on I guess the acquisition pipeline, at what point do you guys maybe consider greenfield as an option in that region if you can find the right drain in a specific region?

I think there's a couple of things before that. First of all, we have a significant capital program down here, which is taking a significant amount of time of our folks.

Secondly, when -- just acquiring one mill, in terms of integrating it in West Fraser and ensuring that it follows the values and the business principles that we want to run our mill, takes a tremendous amount of time and effort by our senior management. So that's really where our primary focus is.

And then when we look at greenfield, we look at where the timber drains are, and as you can see, there's only one company that's building a greenfield plant, that I'm aware of, in the US south, and that's [Quasire]. And so, we just don't see significant opportunity to do that. We'll do it at some point, but we just do not see significant opportunity. It won't be something at least from a West Fraser perspective where we'll see material growth for greenfield if at all.

Okay. Thanks, Ted. I appreciate it.

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

Well, thanks for joining the call, and I do apologize if we cut out a few times. Again, I'm calling from our mill in South Carolina, so I do apologize for that.

Thanks for joining our call, and if you have got any further questions, I know Rodger is in the office. So I think that would -- give him a call and I'm sure he'd be happy to speak to you. Thanks very much, everybody, and we'll talk to you in a few months.

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