West Fraser Timber Co Ltd (WFG) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the West Fraser Timber Company Limited fourth-quarter 2015 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 that the accuracy of these statements depends on the number of assumptions and is subject to various risks and uncertainties. Actual outcomes will depend on other 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 from SEDAR and as supplemented by the Company's quarterly MD&A.

Accordingly listeners should exercise caution in relying upon forward-looking statements.

I would like to turn the meeting over to Mr. Ted Seraphim, President and Chief Executive Officer. Please go ahead, Mr. Seraphim.

Thank you and good morning. Joining us today is our CFO, and new grandpa, 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 and some of our key activities during 2015 as well as our outlook for 2016.

For the year the Company achieved record sales of CAD4.1 billion. We generated CAD417 million of adjusted EBITDA, a decrease of CAD204 million from 2014. The primary (technical difficulty) construction in the earlier part of the year. In addition, weaker overall demand for Canadian lumber in China impacted lumber pricing as well during the year. Particularly in the third quarter's demand fell off during that period.

We did experience improved demand from China in the fourth quarter of the year and we continue to see stable demand in the first quarter of 2016. We have had a heavy capital spending program for the last few years. Although our spending was lower in 2015, our three-year total from 2013 through to the end of last year was approximately CAD1 billion. In 2015 we completed a number of capital projects including our 100 mile sawmill upgrade, three large energy projects, three major [planer] projects and a number of continuous kilns.

We are starting to see the benefits of this extensive capital program and this will position us very well to provide industry-leading margins in the future. Our Hinton pulp mill experienced improved reliability in 2015 and its production was approximately 10% or 100 tons per day. We continue to expect further material improvements in Hinton's reliability production and cost in 2016.

In the fourth quarter we acquired Manning Forest products, which now gives us six sawmills in Alberta. We are very pleased to welcome the folks from Manning to West Fraser. The housing recovery in the US continues to show positive momentum, housing starts were up by approximately 100,000 units to CAD1.1 million for the year. Our view on US housing continues to remain positive. Key factors such as housing inventory, household formation, and demographics continue to encourage us as we look forward.

Demand from China has improved in recent months and we continue to view China as a market with strong long-term fundamentals for lumber imports. With this I'll turn the call over to Larry Hughes.

Thanks Ted, and thanks to everyone for joining us on this call today. Please refer to the advisory contained in our MD&A concerning the use of various non-IFRS terms. These are described in various tables which begin on page 22 of our MD&A.

For the fourth quarter we reported an after-tax loss of CAD[50] million or CAD0.18 per share. On page 10 of our MD&A we identified various nonoperational items which we adjust from the quarterly loss in order to more clearly reflect results solely from operations. The result which we refer to as adjusted earnings was CAD30 million for the fourth quarter or CAD0.38 adjusted earnings per share. This compares with CAD0.42 for the third quarter of 2015 and CAD1.00 for the fourth quarter of 2014, so on an adjusted basis this quarter was similar to the previous quarter and both were much weaker than the fourth quarter of 2014.

On a segmented basis, operating earnings from our lumber segment improved by CAD26 million compared to the previous quarter, due to improved shipments from our Canadian sawmills, some pricing improvements and less duties paid, partially offset by fewer operating days. Operating earnings in lumber were off significantly compared to the fourth quarter of 2014, reflecting a steep decline in US dollar lumber prices, particularly SPF, and increased purchase log costs which were only partially offset by a continuing strengthening of the US dollar against the Canadian dollar.

For our panel segment, operating earnings declined quarter-over-quarter reflecting a seasonal slowing of the Canadian plywood market, but overall our panel segment made another strong contribution in 2015. For the pulp and paper segment, we saw a decline in operating earnings compared to the previous quarter, mainly the result of lower pulp shipments and reduced US dollar prices, most significantly for BCTMP. Operating earnings for the pulp and paper segment improved slightly, compared to the same quarter of 2014, reflecting improved shipments and the benefit of a weaker Canadian dollar.

For the full year our earnings declined by CAD155 million compared to 2014, and on an adjusted earnings basis decline was CAD151 million, largely attributable to a much weaker operating earnings from our lumber segment. We used CAD28 million in our operating activities in the fourth quarter compared to cash flows of CAD89 million in the third quarter, reflecting seasonal Canadian log inventory buildup.

Capital expenditures in the quarter totaled CAD51 million. For the year capital spending was CAD220 million. We also completed the purchase of the Manning, Alberta sawmill during the fourth quarter for CAD76 million. We are expecting capital spending in 2016 to be in the range of CAD300 million. We revalued our defined-benefit pension plans as of the end of 2015, the rate of return on assets held for more than discount rate resulting in an after-tax actuarial loss of CAD12 million, which was included in other comprehensive earnings.

In 2015, we made contributions to our defined-benefit pension plans of CAD61 million and we expect to make payments of approximately CAD51 million in 2016. Our balance sheet as of December 31, 2015 remains strong with a net debt to total capital ratio of 22% which includes operating borrowings of CAD181 million as we build Canadian winter log inventories.

As Ted alluded to this is my fourth day as a grandpa, and it's been a very exciting week for our family. And it does remind you what is really important in life. So, with that, I will pass it back to Ted.

Thank you, Larry, and I hear Larry is sleeping through the night already. That's pretty impressive. So with that we will open it up for questions.

(Operator Instructions). Mark Wilde, BMO Capital Markets.

Good morning, Ted, and congratulations, Larry. To start off, I was just curious, Ted, when I looked at the volume and pricing numbers, the sales volume in the US was down quarter-to-quarter, and that was despite kind of prices being up pretty sharply. I was wondering if you could give us some background on that?

I think largely as we went into the quarter with relatively low or low inventory, that was probably the main factor. It wasn't really any market issues, just we have had low inventories going into the quarter.

Where do you stand kind of inventory-wise right now?

I would say inventories are balanced for our dressed inventory in both Canada and the US. Pretty balanced.

Okay. Can you give me a sense in 2016 within that CAD300 million number, what are the big capital projects for you guys?

Okay. We've got two fairly significant sawmill upgrades that we will be progressing this year. One in Canada, our high Prairie Mill that we bought in 2014. And also we are looking at -- we are in the beginning of a major sawmill upgrade in our new very (technical difficulty) mill in South Carolina. And then we have a number of continuous kilns.

We are looking at -- we are not having quite finalized yet but we are looking at a fairly major energy process in our pulp business. And then, just a number of other upgrades throughout the Company. Given the size of our Company now we kind of tend to project somewhere in the order of CAD200 million for average capital spend. CAD200 million to CAD225 million. So, really CAD300 million is not extraordinary, given that we still got a couple major sawmill upgrades this year.

Okay. Is it possible to get some sense of what kind of improvement you expect at Hinton in 2016, because you said you expect pretty significant year-over-year there.

Yes. We want to be conservative, but we still -- we know there's another 200 tons a day to achieve. So our target is to kind of get there, one third last year, one third this year, one third next year. And once we achieved that we will be where we need to be.

Larry, any inventory charges in the fourth quarter in lumber?

Our overall inventory charges were pretty modest in this quarter. Let me get the numbers for you. We've got a rate of CAD21 million compared to CAD37 million a quarter proceeding.

Okay. And then, no repurchase of stock in the fourth quarter?

No. We were out of the market in the fourth quarter. But we -- our normal course issuer bid is effective until mid-September, and we have the ability if we choose to (technical difficulty) 4 million shares.

And Ted, maybe some thoughts on the US-Canadian trade situation.

There's really not much we can say at this point. We understand the two governments are having some preliminary discussions, and that's really all we can say at this point. You know we are at a standstill until the middle of October; we'll just wait and see.

Great, I'll turn it over.

Sean Steuart, TD Securities.

Morning, guys, and congrats, Larry. A couple of questions. Just want to follow up on Hinton and the kraft pulp mills in general. What are you doing to get these productivity gains, and I'm just trying to gauge how much of this is capital-related versus just debottlenecking what's there, and maybe some specific examples of initiatives that are planned this year to get those extra (technical difficulty).

Okay. So I'll give you a fairly short description, and so -- I'm sorry I might bore a few of the other folks on the line here. But Hinton used to produce 1,200 tons a day on two machines. In 2007 we shut down the old dryer but we kept all the front end of the mill of the pulping capacity. And we were producing 1,000 tonnes a day. Then with the green transformation credits, we were able to do a number of things, some energy projects but we also set a fair amount of money into that, to the pulp dryer.

And our expectation was to get back to maybe not 1,200 tonnes a day but say 1,150 tonnes per day. And we have that capability today. There are many days when we are running 1,150, 1,200 tonnes per day. So really it comes down to issues over mill reliability. Probably (technical difficulty) way too much focus on getting that pulp dryer to run, and we just ran into reliability issues and we are crawling our way out of it.

So it's really, today, there might be some minor maintenance capital, but very minor. It's really about reliability, and we also have to remember that we went through a period of time with the oil and gas industry where we had significant turnover of employees. We have -- that's obviously not the case today, and we've also bolstered that mill with a very strong management team.

So it's a real prime focus for us. And I'd love to say to you that we would be at 1,150 or 1,200 tonnes every day this year, but we are kind of working our way back step-by-step, and I think that's really maybe the best way I can describe it for you.

That detail helps. Larry, just want to confirm, you said CAD51 million in pension and benefit payments in 2016. Is that above and beyond expense?

Yes. That's the contribution that we are going to make in 2016 (multiple speakers) statement.

Okay. I think that's all I have for now, guys. I'll get back in the queue.

(Operator Instructions). [Amir Patel], CIBC Capital Markets.

Good morning, congratulations, Larry. Ted, the first question on the export front, your offshore volumes in 2015 fell 31%. I look at the BC industry data, it looks like BC was down about 13%. I would figure that you would have less flexibility to overall industry to redirect into the US. Any thoughts on what maybe drove that difference?

Actually, Chris McIver is here with us today, so I think he could probably give you a lot more detail than I can.

Yes, it's firstly -- we've got really good flexibility between what I would call our three or four big markets in the US, Canada, China and Japan to move product around as we see fit. Really by midyear last year, it got very tough in China. And some of the customers ran into some trouble. We pulled back quite heavily, and diverted production to the US. But by the mid-fourth quarter we were back and things were stabilized, and we see pretty good demand over there today -- tougher pricing but certainly good demand. So we have at least a quarter, quarter and half where it was very tough over there. and we chose to reduce our volumes, now we are back there.

In a measured way, we're still pretty significant over there, but it's just more of our market. So, hopefully, that helps.

Thanks for that and the other question I had on the lumber side was the production increase in 2016 of 400 million board feet that you guys are pointing to. How much of that is from this other platform?

I think it's probably 60% in Canada, 40% in the US. We've got full-year Manning the 100 mile sawmill upgrade is well behind us, and so it's probably 60/40.

Final question on the plywood business, given the slowdown you're seeing in the Canadian economy and the weak loonie are you taking steps to perhaps grow some of your volumes into the US and what's that percentage figure of what you currently sell into the US?

It's not a material figure today in terms of what we're doing in the US. We continue to look at all markets. But again, we have some flexibility, first of all, because of currency but ultimately, we have always been frankly pleasantly surprised by the strength of our Canadian plywood market. The fourth quarter was not much different than the fourth quarter of 2014 for us. So I don't think we're sitting here today alarmed about what's going on with the Canadian plywood market. So we're very committed to it and we'll continue to look at other markets but we're still very committed to the Canadian plywood market.

Thank you.

Paul Quinn, RBC Capital Markets.

Maybe you could give us some color on US south production and the (technical difficulty) mix that you have, whether you're more skewed to the wides or the narrows. We're seeing a huge difference in pricing between those two. Your expectation going forward between the two -- if you could just give us some color on that one.

First of all, that's a really important question for us to answer. Because we have a larger mix of wides than many others in the US. So, when housing comes back, we expect to see that gap shrink considerably between wides and two by four.

That being said, we have some flexibility, we have flexibility with our capital program. But we cannot make a significant scale change in terms of our product mix.

So we are working on it, we are continually looking for opportunities to get more flexibility in our mills, but it's something that -- in this -- in terms of the current housing environment where it's a bit of a challenge for us.

Okay. And just on the growth side, you seem to be picking off a couple mills a year. Should we look for that to be sort of the status quo going forward? And has there been any change in terms of what the current mill-owners are looking to monetize their mill for, i.e., are there weakening prices reflective in some of the values you're seeing out there in some of the offers?

I think, in terms of the second part of your question, I don't -- there doesn't seem to be that much activity today in terms of M&A, in terms of small mill or individual mill purchases. That could probably change, but it does -- have slowed down over the last 6 to 8 months. And ultimately for us, we are a growth company for the long term, but we are really focused on value.

And so at the end of the day here, depending on values we could buy one mill, two mills, five mills or no mills. So we've got -- we've done a lot of analysis on a whole bunch of opportunities out there, and if there is a good fit for us, we will go after it. But we've been fairly -- I'd say fairly disciplined over the last four or five years with what we've purchased -- only two mills in the US, so we felt they were good synergies with our other mills in Arkansas, and we purchased three mills in Alberta, which, as you know, is a very strong fit for our company.

So it's really for us -- is not going to move the ball significantly. So we just really want to make sure whatever mill we buy it's not about growth, it's about fit with our Company.

Okay. And just lastly on the pulp and paper side, I had two questions. One on Hinton, just to clarify. It sounded like you were targeting 1,150 tonnes per day, and it sounded like you thought there was another 200 tonnes per day to achieve, which sort of suggests that you're at a production run rate of 950, just want to clarify that.

We are a little higher than that. 970 -- 965, 970 last year. So you can see that in 2014 that was a really bad year for us.

So we've made progress, I think everything I said to Sean is how we look at it. We've got a ways to go, but we are making progress, and we are doing better. It's only February 12 today, so it's early in the year. But we are running at a better rate today than we ran we are running in 2015 as well again.

Just -- we saw a lot of pulp capacity coming in, I know you've got some of the low-cost BCTMP assets. How do you look at that, what's the outlook for that grade going forward, given the capacity you have?

I think there is some additions to BCTMP. You also see that there's some mills that we are expected to start up and they didn't. We've got a very good plot form, we are the largest BCTMP producer in the world, we've got an excellent customer base that gives us a fair amount of stability.

And the other thing that's of note is China produces a lot of BCTMP. And they have their challenges. So we don't just look at BCTMP produced in Canada and Scandinavia, we look at it in China which again is the largest market for BCTMP imports. And given that most of our BCTMP is going to very modern paper machines, we suffered like everybody else that was selling commodities into China in the second half last year. But we've seen these bumps in the road many times in our BCTMP pulp business over the last 30 years, and our outlook is still very positive.

And again, the investments we've made a flight lake in terms of our Biomet definition pump which is running very, very well, and investments that we are looking at making in our cue RP mill will just continue to think put us in the position of being a low-cost producer. And at the end of the day, that seems to be if we do that, we seem to be able to win the fight. I hope I answered your question.

That was good. Solid quarter, thanks guys.

Daryl Swetlishoff, Raymond James.

Thanks and good morning, guys. Just one question that it's for Chris McIver. I was wondering -- you are suggesting and your competitors are suggesting that the Chinese market is looking up. Can you tell me about what you're seeing in terms of the competitive landscape on the ground in China, specifically what are the Russians up to and how is that manifesting itself with respect to low graded and to and better?

I would say early in the year last year, the Russians came in and took a pretty significant piece of market share. And they did it with price. Both in logs and lumber. In the fourth quarter I would say that the Canadians really did take quite a bit back. Obviously, currency is (technical difficulty) [playing] a big part of this. And the whole industry needs to transition into a -- higher grades over there. and that's part of what's going on as the demand for lower grades is reduced, we are all looking for opportunities and working hard to increase that higher grade market share.

So, I think 2016 is going to be -- look a fair bit like 2015 did. And I don't believe the Russians are going away. But we've all got very good connections over there, good customers, and I think we are in a pretty good spot.

Do you have to change your customer base much, like move more than interior or look to different end uses or is it pretty much the same in 2016 as it was in 2015?

We probably won't change our customer base a whole lot, because a lot of that [sells to] distributors and remanufacturers. But where our geographic footprint will change we begin to -- and we see it every day. We go further (technical difficulty) every time I go over there. So we are just growing, which is -- the encouraging part about China is there's a lot of China we are not in yet. That we've still got a lot of room to grow in. And I think that's where our growth will come from. So --.

Is there any other markets aside from China and North America that is interesting to use -- you look out, maybe not this year but over the next five years?

I would say we are going to have a little focus internally on India and the Middle East. Now is that the next China? No. But each little piece -- 2%, 3%, 4% -- whether it's from the US sales or Canada, it all helps. Every year, it seems like the business gets more and more international on the lumber side.

So. But is it going to be a big changer in our market, I don't think so for the next couple years. But maybe in five years.

Thanks, Chris, I hope Ted lets you (technical difficulty) air miles.

Mark Wilde, BMO Capital Markets.

Just as a follow-up, I wondered if we would get some sense of just quarter-to-quarter maintenance expense as we go here into the first quarter, and maybe even a little further out through the year, what the sort of modulation of the maintenance is going to look like.

Are you thinking more on the pulp side? Or overall.

Yes, I am.

In terms of pulp, we have two shutdowns this year, but they are minor ones. We've got a five-day shut at Hinton, and I think a three- or four-day shut at Caribou. Our major shuts will be in 2016, sorry, 2017. 2017, we will have our major shut in Caribou in the second quarter of next year, and at Caribou we do a major shuts every second year. And the alternate year, which we did this year we do a minor shut.

In Hinton, we do a major shut every three years because we have two recovery boilers there. And so that will be the third quarter of 2017, so some minor impact this first half of this year, but primarily second and third quarter next year.

That's really helpful. Also, I noticed just in looking at your volume numbers that your LDL was up pretty nicely. Can you give us a little color on that?

Sure. Chris is willing and able to answer that question, too.

LVL is very tied to (technical difficulty) and so we haven't seen the recovery in starts that we would like to in the US yet, but saying that, we are beginning to see a significant interest in LVL. It actually -- probably feels better today than it has in the last two or three years. Still very early, and our forecast for housing isn't fantastic for the next year, so we expect we'll see kind of a slow growth in LVL.

Chris, how much of that LVL that you produce ends up down in the States?

We would sell roughly half our production (technical difficulty) Canada and half into the US.

And the last question, just back on kind of China and kind of Russian suppliers into the market, can you talk about what you guys see over there in terms of more investment in sawmill and capacity on the Russian side of the border? If anything?

We are certainly not Russian experts, but I wouldn't want to comment too much on what's going on there. we haven't seen a whole lot, but again we are not the experts there.

Sounds good, good luck in 2016. guys.

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

Thank you very much, Operator, and thank you everyone for attending, and we appreciated the questions and we will talk to you next quarter. Take care.

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