West Fraser Timber Co Ltd (WFG) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Q1 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 the 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&A. 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 and good morning and thank you all for joining us today. With me is Larry Hughes, our CFO, and a number of our senior management team. West Fraser earned CAD42 million or CAD0.51 per share in the quarter. Adjusted earnings for the first quarter were CAD49 million or CAD0.60 per share as compared to CAD30 million or CAD0.38 per share in the fourth quarter of 2015.

Adjusted EBITDA in the quarter was CAD130 million or 12% of sales and was up CAD40 million from the fourth quarter. The primary reason for the improvement from the fourth quarter of 2015 was due to improved profitably of our lumber business. Our lumber business generated CAD100 million in adjusted EBITDA, up CAD45 million from the fourth quarter of 2015.

Lumber production was up 8% from the previous quarter due to improved operating (technical difficulty) performance. In the last few years, we've rebuilt seven sawmills, invested in 10 major planar upgrades, installed 22 continuous kilns, and build two large bioenergy plant in our lumber business. There's still more value to extract from our capital program, but we are encouraged by our operational improvements to date.

Our panels business generated CAD15 million in adjusted EBITDA, down CAD4 million from the fourth quarter. Lower plywood prices and our insurance deductible for the West Pine fire were the primary reasons for the decline.

Our pulp and paper business generated CAD14 million in adjusted EBITDA, down CAD3 million from the fourth quarter. The primary reason was a scheduled maintenance shutdown. We are pleased with the progress we're making in our NBSK operations.

Production was essentially flat with the fourth quarter, despite the Hinton scheduled maintenance shutdown in March. Again, we have more work to do, but we believe that we are turning the corner with regards to improving reliability in our NBSK business.

Our outlook with respect to lumber markets is consistent with the views we've shared over the past few years. North American lumber demand has been growing at 2 billion to 2.5 billion feet per year for a number of years. And based on steady improvement in industrial repair and remodel markets, as well as improving housing demand, we expect this trend to continue. US housing starts were 1.13 million in the first quarter.

While we are very positive in our outlook with respect to the medium term, we have been consistent in our view that until we see 1.3 million housing starts, we will experience some volatility in lumber markets. Key factors such as demographics, an improving US economy, and low new home inventories should continue to spur new home construction.

Pulp markets are expected to continue to be -- are expected to be under continued pressure as we face a combination of new capacity and slower growth in China in terms of demand.

With respect to the softwood lumber agreement, we support the efforts of the Canadian government and their ongoing discussions with the US government to negotiate an agreement. While we are unable to predict the outcome of the discussions, our Company has been working hard on those things that we can control.

We've modernized our mills and we've diversified into new businesses such as energy. Our geographic diversification in our lumber business is also very important as we faced external issues, such as the SLA.

With this, I will turn the call over to Larry.

Thanks, Ted, and thanks to everyone 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 at page 11 of our quarterly MD&A.

For the first quarter of 2016, we reported earnings of CAD42 million or CAD0.51 per share. On page 2 of our MD&A, we identify various non-operational items which we adjust from the quarterly earnings in order to more clearly reflect results solely from operations.

The result, which we refer to as adjusted earnings, was CAD49 million for the quarter or CAD0.60 adjusted earnings per share. This compares with CAD0.38 for the fourth quarter of 2015 and CAD1.17 for the first quarter of 2015. So on an adjusted basis, we saw improvement compared to the previous quarter, but the results were much weaker than those of the first quarter of 2015.

On a segmented basis, operating earnings from our lumber segment improved by CAD46 million compared to the previous quarter due to improved shipments, pricing, and a weaker Canadian dollar. Operating earnings in lumber declined by 25% compared to the first quarter of 2015, reflecting a decline in US dollar lumber prices, which were only partially offset by significantly improved shipments and continuing strengthening of the US dollar against the Canadian dollar.

For our panels segment, operating earnings declined quarter over quarter, reflecting slightly weaker MDF and Canadian plywood prices and lower plywood shipments. For the pulp and paper segment, we saw a decline in operating earnings compared to the previous quarter, mainly the result of lower NBSK pulp shipments and higher maintenance costs incurred during the scheduled minor maintenance shutdown of our Hinton pulp mill. Our jointly owned Cariboo NBSK pulp mill will have a five-day maintenance shutdown in the second quarter.

We used CAD23 million in our operating activities in the first quarter compared to CAD28 million in the fourth quarter as we continue to build seasonal Canadian log inventories. Capital expenditures in the quarter totaled CAD49 million, and we continue to expect capital spending in 2016 to be in the range of CAD300 million. In the quarter, we repurchased just over 1 million shares under our normal course issuer bid at a total cost of CAD50 million.

One of the nonoperational adjustments to our earnings relates to the termination of our Alberta power contracts. Over the past 18 months, we have seen a dramatic change in the Alberta electricity market as the decline in oil-and-gas related activities has substantially reduced demand for electricity.

During the quarter, we took steps, along with other parties, to terminate our interest in two power contracts. And this resulted in a loss of CAD19 million, which was recorded as other income. Our energy group will continue to monitor this market and consider steps to help insulate our Alberta operations, particularly Slave Lake Pulp and Alberta Newsprint, from future electricity price volatility.

We revalued our defined-benefit pension plans as at the end of the quarter. A combination of a decrease in the discount rate, which has the effect of increasing the present value of planned liabilities, and a lower rate of return on our planned investment assets resulted in an after-tax loss of CAD60 million, which is included in other comprehensive earnings.

We ended the quarter with a net debt to total capital ratio of 26%, which included operating borrowings net of deferred financing costs of CAD294 million as we accumulated Canadian winter log inventories. We expect our operating borrowings to steadily decline over the second quarter as we consume the significant Canadian log inventories.

And Ted, that concludes my comments.

Great. Thank you, Larry. And operator, we are ready for questions.

(Operator Instructions) Mark Wilde, BMO Capital Markets.

I wondered if starting at that, if you could just put a little more color around the current state of the lumber markets, both in terms of North American demand, but also what you're seeing offshore.

I could do that, but I've also got Chris on the line. So I think we'll have Chris jump in on that, if that's okay.

Thanks, Ted. Yes, you know I would say domestically, we are certainly in a stronger position today than we were a year ago. But you know, as Ted said, there's still a fair bit of volatility. We saw a pretty good run in March. Things have been slow recently. The second quarter could be a bit tough and then we'd improve for the balance of the year domestically.

And then offshore, inventories are way down from a year ago. There's certainly a lot less SBF in the market in China than there was a year ago. But saying that, there's a fair bit of Russian lumber and timber there as well.

So I would say they are balanced. The market is somewhat soft in China. But our shipments are steady and I think we'll stay on that sort of slightly reduced level from last year for the balance of this year, depending on pricing and opportunity. Kind of what's going on now, Mark.

And Chris, do you have any read on just sort of what the pipeline looks like within the North American lumber business?

It depends who you talk to, Mark. What I'm hearing is that many of the large distributors are really not carrying a lot of inventory. There are some -- the odd analyst will tell you that there seems to be a lot of inventory in the pipeline, but we're not seeing it.

And the way that they are coming back more quickly than they did a year ago tells me A, that they are getting good takeaway and they are not carrying a lot of inventory. So that's kind of what our read is.

Yes. And is it possible, Chris, to get a sense of sort of your volume and Canadian volumes into the US since the expiration of the SLA?

I don't think it's significantly different than prior. It would be up a bit because of the fact that China has slowed a bit. So some of that low grade is now going back into the US. But other than that, Canada has remained relatively strong and so our volumes would be similar to what they were, [yes].

Okay. And just generally, Chris, when you look across Canada last year, shipment -- or production volume was pretty much up across the country, which is kind of counter to what the conventional wisdom has been about sort of production dropping in many regions of Canada over time. Can you talk about that issue?

Maybe I'll handle that, Mark, if that's okay. I think as we look at -- we are focused on BC and Alberta, primarily, of course. And we have seen some increase in Eastern Canada. You know, when we look at British Columbia, we are starting to see the end of the economic shelf life of Mountain Pine Beetle.

So there are going to be more challenges in British Columbia as we look at the next couple of years. And given where lumber markets have been over the last 12 months or so, I think that's coming home to roost, particularly as log costs go up.

In Alberta, while we have seen some increases again, as we look to the future, with issues like, you know, we do have some Mountain Pine Beetle in Alberta. There is a surge cut. That will eventually come down. And we are also dealing with issues such as species at risk, caribou files, etc., etc.

And we expect to see some longer-term cut reductions in Alberta. Not material at this point, but we don't really -- in Western Canada, our outlook is that it's going to be balanced to down over the next couple of years. Eastern Canada -- not our area of expertise, but we don't see tremendous growth from today there.

Okay. And then Ted, is it possible we could just give some commentary around the log cost situation for you across the southern US? That's a big chunk of your production now.

Yes. I think generally, we see log costs as being fairly flat in the South. There's always a few regional places where there's some upward pressure and there's a few places where we are seeing some minor downward price adjustment. So overall, really flat in the US.

Okay. And the last one I had is I noticed that your LVL volumes were up between 55% and 60% if we look on a year-over-year basis. You guys are pointing to kind of a pickup in the housing market, but there's no way the housing market is up 55% to 60%. So what's going on that explains that?

I think fundamentally, we are a small producer. We obviously have added hours at our Rocky Mountain LVL plant, but ultimately, you know, we are probably getting a larger market share than others as housing demand is slowly improving.

Okay, I'll turn it over. Thanks very much.

Hamir Patel, CIBC Capital Markets.

Ted, given the 7% production growth you guys are expecting in 2016, if you were to face countervailing and antidumping duties next year, how much SBF volume would you be -- would you expect to be impacted by duties?

It's hard to answer that question. At the end of the day, it comes down to are we making more cash producing lumber than not, and it has to do with log costs. It has to do with lumber markets.

Let's remember in the last period of countervail and antidumping in the early 2000s, lumber markets were strong, and we continued to operate. But we're not extremely concerned about that. I think from our perspective, our biggest challenge around running our operations will be log costs in British Columbia.

Okay. Thanks, that's helpful. Just a question for Chris. On the lumber market, we see very strong prices for some of the wide width grades in the South. What do you think is driving that and how sustainable are those premiums?

That's a very good question. You are right. We've been noticing that recently, and our view is that that is a pickup in housing. That is primarily a single-family housing item, the wides, and that's why they've been hit so hard.

But again, we do think that's sort of marginal improvement. Plus aside, we think some mills have switched away from heavier wides to heavier narrows if they can. So that would obviously help a bit as well. Right now, we see this just on the margin. We don't see it as a trend yet.

And then Chris, can you remind us what is your sort of mix of narrows versus wides in the South?

I don't think we usually comment on that, but obviously we are much heavier to narrows in Canada than we are in the US.

Right. Fair enough. Just a final question for Larry on the pulp side. Could you maybe quantify what the maintenance cost was in Q1?

We don't break that out. So I don't have any comment on that.

Fair enough. That's all I had. I'll turn it over. Thanks.

Paul Quinn, RBC Capital Markets.

Just following up on the pulp question. Outlined five-day shut at Cariboo. Is that going to be a similar cost impact to the Hinton shut and how long was the Hinton shut in Q1?

The Hinton shut was a few days longer. It turned out to be seven days or so. Cariboo is five days. And again, we own 50% of that mill, so, you know, we'll have probably quite a bit less than -- somewhat less than half the financial exposure as we had at Hinton.

Okay. And then just I saw the pulp stats out this morning. It looked like big revisions for earlier month shipments and it looks like there's lots of pulp out there. How do you view the markets overall and the grades that you are producing?

I think there are some differences between BCTMP and NBSK. I mean, we are seeing more pulp capacity coming on this year. And as I said in my comments, while demand has been up this year, capacity is growing at a faster pace than demand.

So, you know, I think the Canadian dollar has strengthened quite a bit in the last 30 days and I think that's what's driving some of the price increases. But they are not enough to adjust for the strengthening of the Canadian dollar. So we are fairly -- I think we've got a pretty muted expectation about pulp markets for the remainder of this year in terms of the broader markets.

BCTMP, we've seen over the last 12 months a bit more price decline there than we have seen in other markets. And I think that is primarily because we've seen a bit more BCTMP capacity come on out in New Zealand and a little bit out of Europe. And it takes a little while to absorb that because it's not a big market.

So we actually expect -- and it's starting to get absorbed now. So our expectations about BCTMP is we are maybe more hopeful than predicting, but we are hopeful that we'll start to see the price differentials between BCTMP and craft pulp start to narrow a little bit. But overall, I'd have to say that we don't have great expectations around pulp markets over the next -- over the remainder of the year.

Okay. And then just switching over to lumber, you made an interesting comment about SLA supporting a reasonable negotiated settlement. But also you are prepared for alternative outcomes. And I'm just curious how you prepare for that and what alternative outcomes you are foreseeing?

It's one of two things: it's either a negotiated settlement or we are going to see litigation. And so when I say we've been preparing, I mean, there's a number of reasons we grew our business in the US. So the SLA was one of them. So given that about 40% of our lumber production is in US, so that's part of it.

The second part of it is we've been working hard to modernize our mills on both sides of the board over the last five years. So at the end of the day here, we also believe that our relative cost position is very important as we deal with potential litigation or a potential settlement. And frankly, we've also been putting a ton of effort into our other businesses, whether it's panels or our pulp business or our energy business.

So I mean, yes, it's going to be an issue, but I think we perceive it as less of an issue than potentially a lot of folks outside our Company perceive it to be. And that's about it. In terms of the outcome, I can't predict what's going to happen, Paul. It really is a government-to-government negotiation right now and our Prime Minister and I guess the President of the US on March 10 said let's see where we get to in 100 days. I guess we are halfway through that. We'll have to see.

Great. Thanks very much. Good luck.

Sean Steuart, TD Securities.

A couple questions. You touched on your comments and also on the MD&A about expected log cost inflation in BC as we really make the transition away from the beetle wood. Can you guys talk to any expectations midterm in terms of expected inflation on that front?

Sure. I mean, I think given what we've seen in the -- in BC timber sales in that market and the bid prices, we've seen log costs move up quite a bit. And we're probably going to see another CAD4 to CAD6 a cubic meter in July, and that's on top of the CAD1.50 that we receive in terms of stumpage increase on April 1. So that's not insignificant.

And as we go forward, as I said earlier in the call, I mean, the industry in BC -- we don't have enough timber to support the capacity that's -- that the industry has. So we really do see that log cost inflation will continue as -- because we do have a view that lumber markets are going to continue to improve.

So I think we are going to continue to face margin pressure in the BC interior. But at least through July, I think we're pretty certain where costs are going.

Okay. And I saw you guys reiterated your 2016 CapEx guidance. Any thoughts on spending into 2017? And I guess I'm wondering about your thinking around scaling back spending to preserve balance sheet strength in the event that the US does proceed with countervailing antidumping duties. Do you have any initial views on how 2017 spending is shaping up?

Let me just back up on the second part of your comment. I think we've got a very strong balance sheet. The SLA is one issue, and of course there are things that happened that are beyond our control. That's one of the reasons we manage this Company with a very conservative balance sheet.

But we are very focused on looking at capital projects. And unless something materially significant occurs, we are going to continue to invest capital and get projects. You know, our run rate should be around CAD200 million or so on a long-term basis, but given the size of our Company, we have 40 operations. We are going to continue to have a fairly robust capital program. We haven't really got our mindset around 2017 yet, but I think it will be likely at CAD200 million or probably more.

Okay. Thanks very much, Ted.

(Operator Instructions) Daryl Swetlishoff, Raymond James.

Most of my questions have been answered. Just following a bit on Sean's question on capital, if you look at the roughly CAD300 million that you intend to spend in 2016, is there any guidance with respect to kind of large buckets where it might go versus segments or regions?

I think we are -- again, there's capital that we are completing. We've got more kilns going in. We've got some energy projects we are looking at, and we've got some sawmill upgrades in the South. We're looking at least one.

But we haven't finalized or approved some of those projects yet. But I expect we will in the next few months. So it's really throughout the Company, but primarily in our wood products business.

Thanks, Ted. That's all I had.

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

Okay. Thank you very much. If you've got any follow-up questions, feel free to give Larry or me a call today. Thanks very much.