West Fraser Timber Co Ltd (WFG) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Co. Ltd. Second Quarter 2017 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 depend 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 to everyone joining us today on this call. Chris and Rodger are with me as well.

In our press release yesterday, we highlighted record sales, EBITDA and operating earnings. We also highlighted that we ended the quarter with a net debt to capital ratio of 6%.

It was a busy quarter, and as a company, we faced a number of challenges that our employees have risen up to. With respect to operations, we continue to make progress in improving performance across the board. The one exception in the second quarter was our NBSK business. Our joint venture, Cariboo pulp mill, had an extended maintenance shutdown, and we also experienced a number of operating issues at that mill through the quarter and at our Hinton pulp mill during April and May. Compared to Q1, approximately 50% of our higher cost/lower production was due to the impacts of Cariboo's maintenance shutdown. The good news is that Hinton has been running ahead of plan in June and July, and Cariboo is running better as well.

The softwood lumber dispute has also been taking significant time and effort from many of our employees as we are a mandatory respondent on both CVD and ADD investigations. During our first quarter results call, we discussed our CVD rate and made it clear that it was completely unwarranted and wholly without merit. We share the same view regarding our preliminary ADD rate of 6.76%. We understand the behavior of the U.S. Lumber Coalition and have seen this play out a number of times before. In the long run, their efforts are damaging to U.S. homebuilders and home buyers. At West Fraser, our preference has and continues to be to litigate as we are confident that the same arguments from the coalition that were rejected in previous rounds of litigation will be rejected again. That being said, we understand the rationale for the Canadian government to put their best foot forward to attempt to find a solution, and we support their efforts and those of our provincial governments.

Finally, I should comment on the impact of the interior forest fires on our operations and our employees. We have had 3 sawmills and 1 plywood facility down since July 6, 7 as a result of the fires. Currently, conditions are improving, but we can't say when we will be able to resume operations until evacuation orders are lifted and employees are able to return to their communities. Approximately 800 West Fraser employees and their families have been impacted. Through all of this, we have seen the resilience and the spirit of our employees and the communities they live in.

And with that, I'll open it up for questions.

(Operator Instructions) Your first question comes from Hamir Patel from CIBC Capital Markets.

Ted, there were reports yesterday that Tolko was curtailing their lumber mill in Cornell due to log supply shortages caused by the fires. Can you maybe speak to how is log supply looking for your various operations in Cornell? And is there maybe a risk that you may have to temporarily idle operations there as well?

Our log inventories in Cornell are in good shape, and we are actually about to resume logging in some areas because of -- the weather has really improved. I think in the South Cariboo, it varies. And again, it depends on when we start up, and it depends on our ability to log. We have decent log inventories, but again, we're not sure how this is going to develop over the next little while. But Cornell is in good shape, and we're relatively confident about the mills to the south at this time.

Fair enough. And Ted, I just want to ask you about Hinton. I know it seemed in recent quarters that -- we weren't talking about it all that much, but obviously, this recent quarter, you had a bit of hiccups as well. How do you view the progress there and what's the sort of production or operating rate are you targeting there in 2018?

Well, I think -- to put it in perspective, since the beginning of October, we've -- our top 25 daily production records are in the last 9 months. That mill is running at about 200 tons a day, better than it did 2.5 years ago. I'd say where we are year-to-date on production, we're probably 90% of the way there. We were much -- we were probably 95% of the way there at the end of the first quarter. So a bump in the road. We've got a big shutdown coming in our -- we do a maintenance shutdown at that mill, a big one every 3 years. That's coming up in September. And I think some of the issues are going to be addressed through the maintenance shutdown. And then the other issues are just improved reliability and improved focus. And I've got to tell you, on both those counts, we've seen really good improvement there. I mean, when we have a bad day, it's much better than a bad day 2 years ago and we recover much quicker. So we're playing a long game here with Hinton, and our expectation is that we're going to continue to improve. And I think, yes, April and May weren't great months. But as I said in my comments, June, July were very good months. So it's -- I think we're on the path. April, May were quite disappointing, but I think we're on the path, and we're confident that we're moving in the right direction.

And Ted, just a final question I had was on the softwood lumber pile. If and when we do get an agreement and if there were to be a quota, do you have a view as to maybe how the government should divide up quota amongst the provinces? And then also how it should be divided up between the companies?

Well, I think it would be inappropriate for me to comment on that. I think at the end of the day here, all I would say is that the Western provinces have accounted for about 98% of the export shipments offshore. And there's no reason that the rest of the country can't step up. I mean, it happens on the pulp side. There's no reason the rest of the country can't do that. And so our hope is that, ultimately, we will get credited for that. And the other question in my mind is we want to make sure that as allocation is divied up, we keep the Canadian industry competitive. And that means, frankly, from our perspective, companies that invest capital. We've invested well in excess of $1 billion in Western Canada in the last 5 years. Companies that keep their employees employed through the good times and the bad times, we expect to be rewarded for that. We expect to be rewarded for developing offshore markets. So at the end of the day, our determination, whether it's a good deal for West Fraser, will depend on 3 things: One, what's the quota deal look like? What's the allocation amongst provinces? And what's the allocation going to be for West Fraser. Because I've got to tell you this, we are going to stand up and defend our communities and our employees when it comes down to allocation. So I guess, maybe I said too much, but that's about all I will say.

Your next question comes from Sean Steuart from TD.

Follow-up question on the forest fires, Ted. Can you speak to, I guess, broader infrastructure headwinds related to it beyond the downtime you're taking specifically. And I guess, I'm thinking in terms of rail delays and how that might affect your ability both to get logs into the sawmills and products to your customers as well.

Well, I think, first of all, in terms of bringing logs in our sawmills, and that's all done by truck. And those loggers will be ready to go once we're allowed to log and transport logs. And we are starting to see things open up for us a little bit in terms of our ability to slowly get trucks in and in terms of shipping product out. And I think it will just be a matter of time. So I mean, I don't think this is a major issue for us, Sean. It's a huge issue for our employees and for their families. But I think for us, we'll figure out how to manage our way through it. But it really comes down to having full access to those communities. But I don't see it as a big issue. I was wondering how we would do for our pulp mills, but we're in good shape when it comes to chemicals, and we're pretty confident we'll be able to get chemicals into those pulp mills. So things are really starting to open up. The weather has improved quite a bit. We're still early in the fire season. We need to be a little careful here, but things are starting to open up again, slowly.

Okay. Understood. On the pulp side, we have pretty good sense of headwinds in China for NBSK prices right now. Can you give a little context on what's happening with BCTMP markets, your ability to hold on to price gains you've seen over the last couple of quarters. Any detail there you can give?

Sure. And I think I've said a few times that we expected the gap between BCTMP prices and other major pulp grades to shrink just because of the supply-demand fundamentals for that business. There's no new capacity at BCTMP coming on, and the China board market has been quite strong. And that continues to be the case. We've got a really strong order file, actually, for all 4 pulp mills, but particularly for our BCTMP business. There was a little bit pricing pressure last month, but we're actually now seeing that going away. And so we're relatively positive about the next 2 quarters for BCTMP. I think we're more confident about BCTMP than we would be about the other pulp grades.

Your next question comes from Mark Wilde from BMO.

Ted, I wondered if you could talk a little bit just to kind of help us understand what kind of work or analysis goes on between the determination -- the preliminary determination of these duties and then the final determination later this year? And sort of how that may affect what West Fraser has assessed?

Well, you should come up to Cornell and you could see how hard our employees have been working. In all honesty, I mean, our employees have been working 15-, 16-hour days for the last 2 months and -- more than 2 months. And I've got to tell you, it's been a huge burden on them. So frankly, not really happy that, that burden's been put on our employees. But that being said, we're just about through the work in terms of the verification. And we're pretty confident that, that verification work is going to show that the final duties are going to be -- I don't want -- definitely lower than the preliminary duties. That all being said, I mean, we didn't believe that the preliminary duties were correct. And as you know, there's more politics that's involved in this than there is true math. So I mean, from our perspective, we sure aren't subsidized. So to have a rate of over 24%, it's ridiculous. And we know on dumping that we're nowhere near the margin that was published on the preliminary side. So we hope to be vindicated, but we've been through this before, so we can't really assess where we're going to end up.

So is this work you do? Or just work that you -- data that you have to present to kind of the U.S. official? I just -- I have no clue about how this whole process occurs.

Every piece of data that we provided, they come up and verify. The one thing I do want to say is they've been very professional, very cooperative. And I think they understand our business much better today than they did before they came up and visited with us. So no, it's a full-on verification of everything that we submitted in our -- as a mandatory respondent.

Okay. And then Ted, just to kind of carry on with this, do you have any opinion on the likelihood of a negotiated settlement the next several weeks? And if we don't get a settlement, is this whole thing going to get tied up in NAFTA so that we really don't have any resolution -- we might not have any resolution for years?

You're really trying to get me to speculate, aren't you? So I mean, I think we've all read what's in the press. I mean, I know that our foreign minister has got a very good relationship with the Commerce Secretary, Mr. Ross. I think at the end of the day, this is in the hands of the coalition. And as you know how the system works down here, the coalition has to have over 50% approval for any settlement to happen. My thoughts were there was going to be an effort to have this completed before the NAFTA negotiations start, I guess, which is mid-August. But really, we have heard nothing in the last 2 weeks, so it's been very quiet. So I don't know what that means. That may mean that the Commerce Secretary is having discussions with the coalition, or it may be that there are other priorities. I don't know. At the end of the day here, I mean, what we've seen is, and we've been saying this all along, is at some point in time, this is going to affect U.S. consumers. And we're already seeing it today with the impact of our fires. I mean, when you think about 800 million board feet, and I guess, with a few other mills, maybe it's somewhat just over 1 billion board feet on an annualized basis, the impact that's having? I mean, right now, SPF prices are higher than Southern Yellow Pine prices. That also kind of tells me that there's not the substitutability that the coalition talks about for SPF and SYP. So from our perspective, I'm talking West Fraser now, we're prepared. I mean, it's not going to be up to us. If there's a settlement, we're going to work with the Canadian government, our provincial governments. But frankly, we're definitely prepared not -- first, not to have a settlement, and we're still very bullish on our outlook for lumber markets. So a lot of speculation, a lot of discussion. We're spending a lot of time working on this in terms of dealing with the verification. But in terms of how running our company, we're pretty confident this is not going to be a material issue to our results. And as you see our second quarter results, it wasn't.

Yes. Okay. Just to toggle to a couple of other issues real quickly. On these, on the fire outages, Ted, do you guys have any kind of business interruption insurance that will cover some of the cost of these closures?

Well, listen, the answer to that is yes. And I think maybe Rodger can give you a little bit more color on that.

Yes. We do have some BI that will respond to that. I mean, it's after a significant period of time, and it's after the mills have been impacted directly by an evacuation order. So at this point, we're still hopeful that our people can get back to the communities and the mills can start up before the BI kicks in. So we're a little bit aways from now. But if it goes on for much longer, we will have some insurance to recover.

Okay. All right. That's helpful. And then Ted, there's been a pretty sharp drop in Southern Pine prices over the last, I don't know, 8 or 10 weeks. Can you help us in just thinking about implications of that in the third quarter and whether there are any particular mix issues we might want to be sensitive to?

Well, I think part of it is that we believe that the treaters ahead of these disputes also increased their inventories as much as they could. And this is generally the quieter season for that demand in the summertime. So I don't think there's anything too unusual, but I think the whole -- all these -- the duties that were put onto Canadian lumber, I think it just caused buyers to really try and load up as much as they could on lumber in the first quarter, and I think that's probably had an impact. And as I've said many times before, 3-week order file, prices are very strong; the 1-week order file, not so strong. And we're starting to see our order files for Southern Yellow Pine start to rebuild a little bit. So can't really predict the next month, the next 2 months. But I think when you look at the broader market, we should expect the markets to improve over the next few months.

Okay, all right. Last question for me. You ended the quarter with quite a bit of cash. Is this sort of a position you're going to take as long as we've got the uncertainty around the trade issue? Or is this kind of dry powder for potential M&A over the next year or 2?

Well, I think, first of all, we went -- when we came into this year -- and you know we've done -- we've spent over $360 million in share buybacks, and we still have the ability to do that to continue. We still have our normal course issuer bid, and we'll be reviewing that again this fall. So that's one avenue. We still have capital to spend, and we went into this year expecting a fair amount of uncertainty. It's been a better year than, frankly, than we expected. And at the end of the day here, when we get -- we don't feel like we're in a position of pressure to do anything with our cash on hand. It's not a bad place to be to have excess cash on the balance sheet today, and we continue to run quite conservatively. But we're always looking for acquisition opportunities. We're -- we've got some great capital projects in the pipeline, and we have the ability to share buyback. So it's not something we're -- it's a good problem to have, I guess, at the end of the day.

(Operator Instructions) Your next question comes from Paul Quinn from RBC Capital Markets.

Just a couple of questions. One, Ted, interested to hear that the approval for the coalition is at 50%. Is that based off numbers voting members? Or is it volume-weighted, depending on how much each individual producers in terms of lumber i.e., does Weyerhaeuser have a single vote versus some mom-and-pop in the U.S.?

My understanding is that it comes down to volume. And of course, companies that have -- companies such as ourselves don't have the ability to vote. So it comes down to volume. And I think, generally, they want probably closer to 60%, just to be sure. But it's got to be over 50%.

Yes, that's helpful. And then just maybe if you could comment on just -- I know you're frustrated with the preliminary duties that were assessed, some of the methodology. Maybe you could just comment on the relative duty that West Fraser got versus the other investigated companies. I was a little bit surprised that your AD duty was as high as it was given you do have some pretty decent margins in the business.

Well, we were quite surprised, quite disappointed. And I don't really want to say much more than that. But I will say that the way we do our math might be a little different than the Commerce Department did their math. I'm not sure what more I want to say here. I don't want to get myself into too much trouble.

Okay. Maybe just flipping over to -- you've got the -- provided we don't get a deal in the interim, but you've got the preliminary CVD that's expected to come off at the end of August. What are you anticipating the effect of -- on lumber prices with the removal of that duty?

I'll be honest with you. I don't know. I mean, it's been so volatile. I mean, just think about it. Southern Yellow Pine prices are lower than SPF prices today. A lot of this doesn't make sense to me. And ultimately, the way we run our company, we focus on the things we have control. I know you've heard me say this too many times and it sounds quite repetitive, but we really don't have any control or influence over it. And I know the people that buy lumber are thinking about it, but we're selling lumber every day and we're not spending a lot of time worrying about it. We do believe though that in time, given the supply-demand dynamics, this will largely be passed through and that's -- we're playing a long game here at West Fraser. I know I'm not answering your question. I mean, I think your guess is as good as mine, Paul, or maybe better.

My guess is down, but I think to your comment that 2017 has been better than expected, I would agree with that. And I've been actually surprised. Maybe you could just turn over to...

Maybe the only thing I'd say is like on a net-net basis, I can't expect our net prices to be lower, let's put it that way. I mean when you look at duty, I mean, I could only see upside for us as we look at that period.

So in 2017 here, you've had the implementation of these preliminary duties and the expectation for final duties towards the end of the year. Have you guys changed your shipment patterns into which countries? And do you foresee that given the current level of duties?

Not for our company. I mean, given our size, Paul, we can't really move volume significantly from one market to another. We're very committed to our Asian business. We think that makes sense for a whole bunch of reasons. And so really, from our perspective, it really hasn't shifted our strategy from day 1. If we're a small company, I think we can be much more opportunistic, but we aren't.

Right. And then maybe just lastly, turning to probably one of your favorite subjects, Hinton. You mentioned the big shut in September that you take every 3 years. What are some of the things in that shut that might improve -- materially improve the operations going forward that you wouldn't have done in a typical annual shut?

Well, we don't -- we went from annual shuts a few years ago to we're at one recovery boiler there every second year, so that's Cariboo. Hinton, we have 2 recovery boilers, so we do a mini shut every 18 months and a big shut every 36 months. So I mean, there's -- for me, they -- I mean, maybe the best way to answer that is maybe give Rodger a call after the call -- after this call and he can go in a bit more detail with you. But fundamentally, as you're running the mill over that 3-year period, you start to see issues that you know you're going to have to rectify, and you can only do it during the major shutdown. But there's nothing material. But I think some of the issues we had in April and May are issues that we're going to be able to address through the shutdown. Nothing major, I guess, Paul, just a number of issues we'll be working on during the shutdown, and it's a pretty extensive shutdown as you know. We're going to be down for 16 days.

There are no further questions at this time. Please proceed.

Well, again, everybody, thank you so much for joining us on our call today. And if you got any further questions, please give Rodger a call. Thanks a lot.

Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.