West Fraser Timber Co Ltd (WFG) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Q4 conference call. During the 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 very much and thanks for joining us today. Today we're taking to a slightly different approach. I will make some broader comments about the Company's progress, our view on markets and the SLA and then we'll open up for questions. If you have any detailed questions pertaining to our financial statements feel free to contact Rodger Hutchinson after the call. After undertaking an unprecedented capital expenditure program over the past 5 years we are very pleased with the progress we are making improving operational results. Just a few highlights. We have had six major saw mill rebuilds, ten new planers, 24 continuous kilns and 6 major energy and bio product projects over that period.

Record adjusted EBITDA in 2016 of CAD674 million despite US housing construction still at relatively modest levels and continuing BC interior log cost escalation. Lumber shipments were up 380 million feet despite a challenging weather related fourth quarter. Improving operational performance in all our segments including improved production at our Hinton Pulp Mill. One thing I really want to emphasize here is that we've invested heavily in recruiting and developing our people and I think it's really starting to show.

We've also received a number of awards over the last number of years. Canada's top 100 employers four years in a row and in 2017 we were also recognized as one of Canada's top employers for young people and I think we're extremely proud about that. We still see significant opportunity within our 40 mills to improve operating results. Our expectation is that we'll continue to see material operating improvement in 2017. We expect to increase lumber production by another 250 million feet and optimistic about continued cost and margin improvement in all three of our business segments.

A few other points on our cash flow and capital allocation. In 2016 we repurchased and cancelled CAD190million of our shares for a total of CAD361million over the last 3 years. Our debt to total capitalization ratio declined to from 22% at the end of 2015 to 14% in 2016. With respect to lumber markets, we continued to be encouraged by improving demand for lumber. China remains strong and fundamentals in the US continue to support continued growth in lumber demand. Yesterday it was reported that housing starts were at an annualized rate of CAD1.246 million in January.

For many years West Fraser has been saying that at 1.3 million housing starts demand and supply would be in good balance. We still believe this to be the case. While we do expect modest increases in overall US lumber production over the next few years, it's likely to be in the CAD1 billion per year range given that the US has already seen a strong recovery in production over the past three or four years.

And now on the current soft lumber dispute. As you know we've been preparing for this many years and have invested significant capital throughout our Canadian and US operations to improve our competitiveness. At this point we can't comment on the process or project the outcome regarding the dispute other than to that say we believe there is a strong alignment between the Province of BC, Alberta and the Federal Government as well as industry and as such the outcome will depend largely on the willingness of our US neighbors to reach a reasonable resolution of the dispute.

What is also important to remember is that the US construction industry is very dependant on the importation of Canadian lumber. North American lumber demand is expected to be approximately 57 billion feet in 2016 which is still far below the previous peak of 75 billion feet in 2005. Demand has been growing at approximately 2.5 billion feet per year over the last five to six years and we expect that to continue. As such, we don't believe that the full recovery and growth of the US housing construction a key driver of the US economy can support an entirely by growth in the US lumber production.

With that we'll open it up to questions.

(Operator Instructions). First question is from Mark Wilde from BMO capital markets. Go ahead.

Good morning, and very nice quarter, Ted.

Thanks, Mark. Good morning to you.

I'm just curious, are there any other kind of elements other than, you know, kind of price and productivity that drove your fourth quarter lumber margins which might not be obvious to an outsider? Because your spread to your large peers was uncommonly wide this quarter.

I can't really comment on our peers.

Right.

We thought we had a decent fourth quarter. We've still got a lot of room to improve our margins and reduce costs. So you know, I can't comment on our spread with others, I just know that our results are what they were and I appreciate the kind comments but we still believe we've got a lot more room to improve our results because with all this major capital behind us . And frankly, you know, I've said this a few times our most senior group probably our mill managers and up have gone through a lot of transition over the last 3-4 years given the retirements and that group has been solid for the last year and a half. I just think the experience of our leaders the capital behind us that we've still got a lot of runway to improve your results. And I can tell you I'm somewhat pleased with our results but I'm more excited about the focus of our senior leadership. I guess at the end of the day here the results speak for themselves and we got to make them better.

I wonder just kind of turning over to kind low supply low cost, first, can you talk about sort of the reductions that are going on and in allowable cut in BC and how that might effect West Fraser?

Is that a comment or a question? (laughter)

That's a question. Any impact if we look over the next couple of years for you guys.

The fact of the matter is the AEC is coming down. The mountain pine bill we are really near the end of it and we're getting close to the economic shelf life for some of this wood. We do expect the interior to be smaller. I guess the question is who shrinks and who doesn't. We have invested significantly to improve our competitive position in the interior. With that being said, we do expect to see decreases in our production. We just can't predict how much and when. And a lot of it may depend on what our competitors decide to do with their production.

Okay. And then moving on from that, Ted, do you have any expectation or any guidance for us in terms of what we might expect for log cost in the interior in 2017 over 2016?

Not really. A lot of it has to do with the purchase wood market. I think we probably see similar increases as we did last year. That's probably a safe forecast.

Alright. And what would that be, kind of order magnitude?

Somewhere around 4% to 5%.

And then one other thing on log because I just noticed in your commentary that your log costs in BC were up quarter-to-quarter for the saw mills but down for the plywood mills. I don't understand why that would be the case.

Well, this is way-- I think I'm going have to have Rodger understand that because I didn't think we gave that type of disclosure. Maybe Rodger could help you out with that one. (laughter)

It's in the commentary.

Hi, Mark. It just was a function of the purchase market for the higher valued peeler logs in the fourth quarter. There's nothing kind of indicating a trend at all in that. And normally, Mark, like you, I would expect those to go in the same direction and I think directionally that's what will happen next year.

Okay. Last thing I want to do, Ted, is touch for a moment on the trade issue. I'm curious, you mentioned a negotiated settlement, but is a negotiated settlement which incorporates some kind of a quota feature is that necessarily a bad agreement?

Well, until you have something to look at it's hard to comment, Mark. The Canadian government last offer was a 31% market share. And that's a lot different than using the word "quota." There are so many details that have to be worked around that. What the conditions are, what about third country imports, how does that get spread across Canada. So I think at this time for us to make a definitive comment of what would work and what wouldn't work I think we're waiting to get legitimate counter offer from the US and until that happens it's just speculation from our point.

Okay. I'll turn it over and get back in the queue. Thanks, Ted.

Okay. Thanks, Mark.

Thank you. The next question is from Hamir Patel, from CIBC Capital Markets. Please, go ahead.

Good morning. You mentioned log cost inflation of about 4% to 5% in BC. Curious what you're expecting for Alberta and the US south this year?

Obviously we'll see some cost inflation in Alberta and the US. We're expecting it to be continue to be relatively flat as it's been really over the last couple of years.

In your outlook for pulp kind of sounded like you were still so cautious but looks like producers both MBSK, BCTMP price (inaudible) slated in China for March. When you see that pricing rally in China coming to an end?

We're always are relatively conservative as we project pulp markets. And really they are two slightly different businesses, MBSK and BCTMP. And I think about six or nine months ago I think what we've said is we expected the gaps to close between BCTMP and MBSK. Primarily because of supply and demand for BCTMP is not going to grow much and the stability of the primary users for BCTMP in China their businesses are quite good. So we still see some potential for further compression between those two grades. In terms it of the overall market, which obviously drives MBSK drives (inaudible) and ultimately has impact on BCTMP. There's a lot of capacity coming on and it has been delayed but it is coming and we expect things to be challenging probably towards the second half of this year. And I think we've all been surprised to the upside in the last three or four and primarily because the capacity has been delayed coming on.

I also wanted to ask about Hinton. I know in your remarks you referenced operational issues at the mill that weighed on Q4. You have a big (inaudible) planned later this year. When do you see that mill getting to a targeted steady state production?

Well, I think a couple of things. When we look at our production of that mill from 2014 to 2016, production is up almost 20% on a daily basis. And I think from a production side we're about two-thirds of the way where we want to get to. The challenge we have is the volatility. With kraft pulp mills it's better if you produce say 1100 tons a day and it's plus or minus 5% or 7%. We're dealing with some variability. Our peaks are really high but we have some poor days and that's effecting our cost.

But we're getting better and better on a run rate basis of getting higher production and getting similar operations. Again, our major shut down which is every three years is in September of this year but I'm pretty proud of the group at Hinton. We've made a lot of progress, we've got more to make, but I'm quite confident we're on the right path today. I don't think I could have said that a year ago. I'm confident we're on the right path but we still have more to prove.

Thanks, Ted. That's all I have.

Okay. Thanks, Hamir.

(Operator Instructions). Sean Steuart, from TD securities. Please, go ahead.

Good morning everyone.

Good morning, Sean.

Ted, the CapEx guidance of CAD300 million is a little bit of a step up from 2016. Can you speak to any updates on specific discretionary projects you're looking at and many thoughts on pay backs for though those types of projects?

I think what I can say is that given the size of our Company, and you know CAD300 million is not an excessive amount. It's still 1.5 times our depreciation. We've got two relatively large projects that are included in that plan. We have not approved them yet, Sean, I don't really want to talk about them yet. Let's put it this way they're saw mill related. But the rest of it is a lot of smaller quick pay back projects.

We don't normally comment on our pay backs for individual projects but they're pretty much in line of what we've been seeing in the last three or four years in terms of our pay backs. Somewhere in the three plus year range. We've got a number of good projects and again in our Company, particularly in the saw mill business, with 28 saw mills we find something that works well at one mill we'll try to do it at 28 of them. We'll continue to look for those value added projects, those CAD1 million or CAD2 million projects you do that 28 times you're at CAD50 million before you know it.

Got it. And second question, just on the recent price spike in western Canada. Your thoughts on what's contributed to that and specifically if West Fraser has managed shipments to the states in anticipation of potential retro active assessment of counter bailing duties?

Well, I think number one it's very hard for us to predict what's going to happen with respect to CBD and ADD. I think everybody knows we're one of the four respondents and we can't predict what will happen in terms of the potential of critical circumstances and retro activity. But fundamentally we entered this year with low inventories and we're not changing the way we sell or where we sell. We've always been a Company that tries to be very consistent. And so, I think that's really our plan.

Given our cost structure and given where markets are today if that issue occurred, the retro activity, I don't think it would change our behavior at all. In terms of what's happening in the market, I think at the end of the day we're in a period of uncertainty and uncertainty does always create interesting market conditions. You didn't ask the question, but the key thing for us is not what's happening this month or this quarter. As usual we focus on the long term trend and we see lumber fundamentals being very strong as we move through 2017 into 2018. We expect volatility in 2017 given the (inaudible) lumber dispute, but we're still very encouraged about the medium term.

Thanks for the context. That's all I had.

The next question is from Paul Quinn, from RBC Capital Markets. Please, go ahead.

Just a question, you referenced you're one of the respondents for the US Department of Commerce and make a point in here about substantial time commitment and cost. Maybe you could just give us some color around what's involved in that and what the expected cost is?

Let me put it this way. We expected that we were going to be an ADD respondent. CBD this is new at least for soft wood lumber where they're picking specific companies. We've been preparing for this for quite some time. And Rodger could probably quantity it better than I can because he's spending a lot of his time and Chris McIver is with me as well. We're spending a lot of time in our organization. We've had lawyers in our offices, we've got ten or 15 people spending a significant amount of their time. I don't know if Rodger want to add more to it. Financially, depending on how long it goes it could be a material amount in total but on an annual basis it's not a material amount, but it's definitely a cost. I don't know, Rodger, if you want to add anything to that?

Ted, I think basically you've got it covered very well. The biggest constraint on us as a Company is the time commitment. We've got a lot of people that are working very hard on a number of projects and the ADD and CBD investigations just add to the load. So we've got a lot of commitment people spending a lot of time they could be putting elsewhere. That's the biggest cost to us.

Thanks for that. And just maybe a question for Chris because he's there with you. Export markets strength of those relative to where they've been in the past, you know, we expected duties to come in at some point at the end of April and I imagine most western based producers will turn to export markets for at least some relief. What's the status there now?

Yes. Good morning, Paul. You know, they're pretty strong right now, Paul. We're certainly not shipping as much as we could if we chose to. I suspect by April there will be a lot more people on the market. That could affect it a bit. But China in particular, and Japan, are both really pretty strong right now. We're happy with where they're at and we haven't changed our shipping patterns. Can't speak for others but certainly we're finding demand staying pretty robust. Came through the end of last year pretty strong and so far first quarter is good as well.

All right, that's all I had. Good luck, guys.

Thanks, Paul.

Thank you. The next question is from Mark Wilde, from BMO Capital Markets. Please, go ahead.

Just to come back on a couple of things on the pulp mills. Rodger, can you just help us, we've pretty much seen pulp prices go up every month. Can you help us think of any lags in terms of how we should expect that to roll through to your earnings over the next couple of quarters?

You're expecting Rodger to answer this question? (laughter)

Rodger, Larry, whoever. I just want to understand--

Rodger hasn't sold a ton of pulp in his life. You kind of hurt my feelings there. And Chris just as well. Because Chris is responsible for that so maybe I'll pass it along to Chris.

Thanks, Mark. There is usually a couple month lag in pulp pricing typically is what you see. Because you've got the deliveries down to the docks and then offshore. So, I think you see a couple months usually on the lag side which is a bit longer than lumber.

That's helpful. And then, is there a significant year-over-year delta in sort of maintenance cost and kind of lost volume from the two MBSK outages in 2017 versus 2016?

I think the Caribou shutdown is 12 days (inaudible) 14 days, and that's in September. Last year we took a mini shut at Caribou at four or five says. The impact's there but frankly, our expectation given our improved production particularly at Hinton is -- our goal is to produce at least as much pulp this year as we did last year with fewer operating days.

Okay. I think that you mentioned that Hinton will be in September. I'm just trying to think about how the pattern kind of these costs lands in 2017.

Well, Rodger may need to correct me on it, but fundamentally we amortize the maintenance shut down costs between the maintenance shut down so with Caribou we amortize it over two years, Hinton we amortize it over three years. The big impact is the loss production during that period of time when the mill is down.

That's really helpful. Let me see if I have anything else here. You had a big increase in LVL volume. Like 29% year on year. Can you help us understand what was behind that?

You always ask about LVL--

Yes, I do.

It's one little mill but I'll pass it on to Chris and our folks up in Rocky are happy you're asking the question.

LVL is directly linked to new housing. So as new housing has come back we have really seen a pick-up. Canada's been a really good market for us as well on the LVL side. With housing ticking along pretty good in Canada, you're right. We're seeing more strength in the first quarter that than we did in the fourth quarter as well. We're pretty happy with the way it's going there.

The last question I had is it possible to get a sense where you're lumber operating rates were BC, Alberta, southern US?

Lumber-- well, we get lumber rates against capacity?

Yeah.

For the year or for the quarter?

For the quarter. Quarter end year if I can get them.

Why don't you give Rodger a call later. Ultimately we try to run our mills full. Impact in the fourth quarter primarily by poor weather and a major capital upgrade at our Newberry saw mill. I don't know if you want to add more.

Just add, Mark, I don't have kind of the operating rates by region in front of me, but they'd be pretty proportionate to our capacity rates which we disclosed, and we do operate as full as we can and various regions are impacted by weather events and other capital projects at various times. But the proportion is pretty close to capacity.

Okay. All right. That's helpful. I'll touch base with you later this afternoon, Rodger. Thanks guys and good luck in 2017.

Appreciate it, Mark.

Thank you. There are no further questions registered. I'll turn the meeting back over to Mr. Seraphim. Please, go ahead, sir.

Again, thank you very much for joining us. If you have any further questions please give Rodger a call and we'll be talking to you. Thanks a lot.

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