West Fraser Timber Co Ltd (WFG) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the West Fraser Q3 2017 Results Conference Call. (Operator Instructions) This call is being recorded on Tuesday, October 24, 2017.

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 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 conference over to Ted Seraphim, President and CEO. Please go ahead.

Thank you very much, and thanks to everyone joining us today on the call. I am joined by our CFO, Chris Virostek, and a number of our Vice Presidents.

This is definitely one of the most challenging yet rewarding quarters in some time for our company and our employees. Our employees in the B.C. Interior faced fires that impacted our operations, communities and their families for a significant portion of the summer. I can't express how proud I am of them and how they selflessly overcame those challenges.

I'm delighted with our acquisition of Gilman Building Products, and I'm excited about how quickly we have been able to integrate them into the West Fraser family.

I want do want to apologize right now to the group on the phone. There are some renovations going on in the floor above us, and we can't seem to get them to stop. So if you hear some buzzing, I do apologize for it. I will get back to my comments.

So once again, we are very delighted with the acquisition. We speak a lot about the culture of our employees at West Fraser, and I can say that the cultural fit with our new employees is extraordinarily strong. This culture will go a long way in our continued efforts to build on our base as the leading lumber producer in the south.

The Softwood Lumber dispute has also been taken significant time and effort from many of our employees as we were a mandatory respondent on both CVD and ADD investigations. During our previous quarterly calls this year, we shared our views regarding the fact that CVD and ADD duties were completely unwarranted and wholly without merit.

We understand the behavior of the U.S. Lumber Coalition and have seen this play out a number of times before. We said that in the long run, their efforts are damaging to U.S. homebuilders and homebuyers. Based on the reaction of the U.S. lumber market today, this is very clear as strong demand and supply fundamentals have seen the duties passed along consumers. I want to reiterate that at West Fraser, our preference continues to be to find a durable, long-term solution. And as such, we are prepared to be patient as we are confident that same arguments from the coalition that were rejected in previous rounds of litigation will be rejected again. I can't stress enough the appreciation we have for the support of our provincial governments in B.C. and Alberta and the Canadian government who have worked tirelessly to find a solution to this dispute.

And with that, I'll pass the call over to Chris.

Thanks, Ted.

Our third quarter was affected by a number of events starting with the wildfires in B.C., which curtailed some plywood and lumber production for a period of time. While we restored operations at the mills, we are still working on reaching pre-interruption production levels due to log supply constraints in certain areas. We are working with the problems to understand the impact on long-term log supply, but as of yet, it is too early to gauge any impacts. Salvage operations to process burnt timber are underway, and it is normal for us to be processing some element of burnt timber every year.

Towards the end of the quarter, 2 hurricanes crossed through the vicinity of our operating areas in the U.S. South. Our teams made preparations in advance to secure and protect our mills, and fortunately, we did not sustain any significant damage to our operations and have resumed normal operations.

We undertook a major maintenance shutdown at our Hinton NBSK mill at the end of the quarter, and with 3 years between shutdowns, we planned for a significant amount of work. There were some unexpected delays in contractor availability and some additional repairs that we elected to proceed with once we were underway, which extended the shutdown by a few days into the fourth quarter.

While the period of restart following the shutdown has been longer and more difficult than expected, we are encouraged by the fact that the mill has posted multiple production records over the last 12 months going into the shutdown with new daily, weekly and monthly production records all established over the past 12 months. Since the last shutdown in 2014, through focused efforts of our team, we've increased the average daily production at Hinton by nearly 200 tons or close to 20%.

We have been encouraged by the progress made prior to the shutdown, but realized that we were plateaued on progress to some extent. While the delayed restart was disappointing, we are optimistic that this shutdown will go a long way to improving asset reliability and look forward to the progress we believe is yet to come.

Our most notable accomplishment in the quarter was the completion of the acquisition of the Gilman mills. The opportunity to acquire significant U.S. South production is limited given the scarcity of large multi-mill operations. These mills are a natural complement to the West Fraser footprint in the U.S. South and bring with them a solid timber supply, a strong and dedicated workforce and good access to markets for lumber and residuals. We have spent the first several weeks working on integration, including transitioning all major IT systems and ensuring that organizational structures are aligned well with West Fraser.

The support from the teams at the former Gilman Mills and the welcome they have been extended by the West Fraser team have been outstanding. We are beginning to examine investment opportunities at these mills and creating a list of targeted capital projects.

With respect to the transaction parameters, we estimate that the final purchase price, after subtracting approximately $42 million of tax assets, equates to a multiple of 5.5 to 6x trailing earnings pre-synergies and pre-capital investment. Excluding working capital, the cost per board foot of acquired capacity is approximately $500 per 1,000.

In the third quarter, we also increased our quarterly dividend from $0.07 per share to $0.11 per share and repurchased $17 million of common shares. This brings our cumulative share repurchases since 2013 to $381 million at an average price of approximately $48.50 per share. We will continue to evaluate opportunities for the prudent deployment of capital. We ended the quarter with net debt to capitalization of 14%, an undrawn $500 million revolver that we extended to 2022 as part of the financing we arranged for the Gilman transaction.

With that, I'll turn it back to Ted for some closing remarks before we open it up for questions.

Thanks very much, Chris. I think we will just open it up for questions. So operator, whenever -- we're ready for any questions.

(Operator Instructions) And your first question is from Hamir Patel from CIBC Capital Markets.

Ted, it's been, I guess, 2 months now since you acquired Gilman. Based on what you've seen so far, how are you feeling about that $10 million synergy target that you initially set?

Well, actually, I was just down there last week, and maybe I'll just give some broad comments about Gilman before I answer your question. First of all, tremendous workforce, such a very strong saw milling culture, and just we believe will be a tremendous fit for us. And as I kept walking through the mills, I kept thinking you can't buy culture.

And I don't want to overstate how important that's been in the success of our company, and I think it's going to be a great fit. In terms of the synergy target, it was a very modest conservative number. We do expect it to be more than that. They're doing a lot of things that we're going to learn from, and obviously, there's lots of things that we do well. So it's a pretty conservative number, and my expectation is it will be larger than that.

Ted, that's helpful. And just maybe a question for Chris. How should we think about CapEx in 2018? And how much of that would you expect to be associated with Gilman?

So we're in the process of finalizing our view on 2018 right now with respect to specific capital projects, but we would anticipate our CapEx for 2018 to be in the range of $300 million to $350 million.

And in terms of specifics around Gilman and others, it's not something we'd probably get in at this time. But I would say 40% or more of our spending on CapEx would probably be in the U.S. over -- next year, so somewhere in that range, and Gilman will be a part of that.

Great, Ted. And just the final question I had on lumber markets. Just curious what you're seeing in Asia, how your volumes to China have been trending, and what sort of other growth or perhaps decline you might be expecting for the year as a whole into '18.

Yes. Chris McIver is with us, so I think he'll -- he'd be happy to answer your question.

Yes, Hamir. Yes, I would say generally, Asia has been surprisingly strong. China, in particular, is -- continued along. We're putting as much volume there as we want to. We're not -- we're holding it pretty steady right there. Japan is very good, both with pricing and demand. And then Korea actually is a growing market for us as well. So I think our position in Asia is about where we want it to be, and it's fairly significant, but we're sort of measured as to how much product we put there.

Your next question is from Sean Steuart from TD.

A couple of questions, just with respect to the Hinton shut and restart. I gathered from your comments, the restart has been a little rockier than expected. And I guess I'm just trying to gauge the earnings impact that the shut had in Q3 and what we should expect for a Q4 impact, just trying to gauge how to spread it across those quarters.

Well, I think the first comment I do want to make is we get a lot of questions about the Hinton pulp mill every quarter, and I'm happy to answer them. But we have 47 mills, and we've got challenges at a number of our mills. And it's unfortunate for our folks at Hinton that, that one stands out all the time.

Yes, it was a tough shutdown. And as Chris mentioned in his comments, we are still making a lot of progress there. In terms of the impact, the financial impact of the shutdown quarter-on-quarter, I kind of like to leave that to Chris to answer that. But it's probably in the area of $10 million or $15 million, something like that.

Yes, I think that's reasonable, when you consider the maintenance cost and the foregone production.

So that's $10 million to $15 million in the third quarter? Or that's the effect you expect to have on fourth quarter?

In the fourth quarter.

Okay. Second question I had was on Canadian plywood markets, huge run in pricing through the third quarter. And I'm wondering, Ted, if you could give a little context on how much of that you think was tied to the fire season in Western Canada and how much was just strong demand and

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you can provide on how markets are trending in the fourth quarter.

Sure. I think Chris McIver will answer that one for you.

Yes, Sean. I think there are a whole bunch of factors. Certainly, fires and log supply were a major impetus to get the thing going. Also, the hurricanes down south brought a lot of demand into the -- that was coming up towards Canada's -- was sent down to the U.S. And then the Canadian market has been very strong. So you put all that together, and we had a pretty good run.

Now saying that, prices have come off substantially. As they went up substantially, they're kind of getting back to what I would say more normalized levels for this time of year. Still strong, but certainly have come off in a fairly big chunk, and we think we'll start to see them sort of stabilize around where they are now. I mean, it's pretty confusing for buyers right now because they ran up $150, $200, and they've come off $125. So we expect it -- you're going to see more normalized pricing for the next period.

Your next question is from Paul Quinn from RBC Capital Markets.

Yesterday, I guess, one of your log suppliers down in Arkansas announced acquisition or merger. Just wondering if that has any effect on the mills that you've got down there in terms of supply concerns or any kind of hint of starting to see some kind of log inflation on the cost side.

Well, I think it's a bit too early to tell, but we have a very good relationship with Potlatch. And so on balance, we're very positive about it.

Do you buy many logs from Deltic?

No. We buy from Potlatch, and we have a very good relationship with them.

All right. And then maybe, Ted, you could put on a previous hat that you [as sat] have as a pulp sales guy and explain to me what the heck is going on with pulp markets globally here.

Well, obviously, it's been a lot stronger since I got out of pulp sales. So -- but in all seriousness, I mean, it's -- we were surprised by it. Chris McIver just answered the question around the plywood prices. Let's be honest, we were surprised about that into the upside. But when you look at NBSK prices up basically about $230 in China since July. And BCTMP prices up probably in the order of $150 or more. It really is quite -- just really tells you how important China is.

And we know some of the startups and new capacity have been a little bit slower than, I guess, people anticipated. But it has been very, very strong, and we are sold out very far into -- towards the end of this year. And so I can't really forecast where markets are going in 2018. I think all analysts, all companies, probably if you asked us 6 months ago, we expected a much more challenging second half of the year. But I think since China has -- their paper business is strong, but they also have shut down more of their -- more pulp mills. And then also, this move to significantly reduce the importation of recycled fiber, I think, has had a huge impact on the demand for virgin fiber. So not anything that anybody could have predicted, but definitely shows you how tight the market is.

Okay. I don't feel as bad now on my forecast. Maybe...

Yes, yes. We don't mind being surprised to the upside.

Maybe just a question on softwood lumber. When you ask most companies, they say government -- the government discussions continue. My question is, are they really continuing? Is there any progress, especially given -- sort of what we've seen on NAFTA?

Well, I know that Minister Freeland continues to have discussions with the U.S. I guess the real question at the end of the day here is, the coalition ultimately is the decision-maker at least at this point in time in the U.S., and they haven't shown willingness to effectively negotiate.

So I think in terms of getting a settlement, I think, as all you are seeing, I think, in the short term, I think, we would not be optimistic of a settlement in the short term. And I don't think NAFTA helps at all in that regard at this point. And frankly, given that we've been able to pass along most of the duties, I think patience on the Canadian side will be a virtue in the long run.

Your next question is from Mark Wilde from BMO Capital Markets.

Just to start off, we've had a couple of announcements of new greenfield sawmills or perspective greenfield sawmills down in the southern U.S. in the last, I don't know, 6 weeks here. Would you guys ever greenfield in the south?

Well, I think it comes back to our overall strategy in the South. And as -- what we've done over the last 5 years is we've had -- we've acquired, I guess, now 8 sawmills. But our primary -- so that's been one part of our focus here, but the primary focus that we've had is improving the performance and investing capital, improve the performance of our base. And so that still is going to be our primary focus.

I think in terms of looking at greenfield, I'm not surprised that we're seeing announcements of a few greenfield projects. And we may, at some point in time, look at greenfield. But fundamentally, if we're going to look at a new site, not only do we take in account the cost of building the sawmill, we look -- we take into account what impact does that have on log cost; can we find a good home for the -- for half that log, the chips and the hog and the sawdust and the shavings; and can we get a good -- can we build a good workforce.

And so those are much greater challenges than spending the capital that we spent. We've been able to increase our production by 400 million feet with our legacy mills. We've been able to reduce costs, improve grade, create much better working conditions, and that's going to continue to be our focus. We do want to increase our production, and I think I said on the previous call that with our current footprint, we probably expect over the next 4 or 5 years to increase it around 15%. And so that will be our primary focus, but that doesn't mean we won't look at greenfield. We just haven't seen anything to date that is more compelling than what we're currently doing with our capital program.

Okay. All right. That's a good answer. I'm also curious, I think, you talk about a number of, I think, like $150 million, $200 million going into Gilman over the next few years. I wonder if that's still a good ballpark number. And if you could give us some sense of the types of projects that, that would go into.

Well, I think that number is a good number over the next few years. It's still a bit early here. I'm not sure if Sean McLaren is on the line. If he is, he could probably go into a bit more detail. But ultimately, our -- I won't go into the projects, but I'll tell you where our focus will be. I mean, our focus will be -- we see a huge opportunity to improve log recovery there. Log recovery, the tons per 1,000 board feet at our U.S. mills, we get a lot more recovery out of a ton of wood than the Gilman mills do, and that doesn't surprise us because they haven't been able to spend much capital. So I think that would be number one.

I think number two would be grade. Number three would be the lower cost. So what have we done at West Fraser over the last number of years? We've put in continuous kilns, we've done planer upgrades, and then we've done sawmill optimizations. And I think it'll be somewhat like that at Gilman. We're also going to look at how we expand that footprint as well. So I think it's still early days.

The other thing I do want to say, though, is as we -- as our folks have been through the mills numerous more times than I had been, what you really do see is you see a business that's done very well with the capital they have. So they deserve capital, and we're pretty excited about spending it there. But again, I think it's going to be log recovery, which will help our log costs. It will be great improvement. It'll be -- which will be through better drying, through planer upgrades. And then obviously, we'll be looking at how do we get more production through each of those mills.

Okay. Just 2 final ones. One, just with the continuing rapid decline in newsprints, can you talk about how you think about that in the context of Alberta Newsprint? I know that's a very low cost mill. I'm just curious as to whether you're just going to be the last man standing or whether you're diversifying kind of the portfolio at all.

Well, I think our partner, Stern Partners, they run Alberta Newsprint, and they're extremely entrepreneurial on how they run it. First of all, they're a low cost producer, which is a great place to start from. But they're diversifying into other grades of paper. They're -- they've got a -- I think you've been to the mill, haven't you, Mark?

I have, with Hank.

Yes, yes. It's a beautiful site, and so we're doing transloading. They're doing all types of things in terms of getting more revenue off that site, so it continues to be a significant contributor to our results. And we're -- we've seen newsprint demand shrinking. There's no question about it. I think if there's going to be the last man standing, it will be Alberta Newsprint, not only a low-cost producer, they probably produce one of the best sheets out there.

And as I've -- as I'm reiterating, they continue to look at other sources of revenue, which are starting to have a material positive impact on the results of that business, and they continue to search for more. They've got a number of -- they always have a number of opportunities. They're looking at it in terms of taking full advantage of that site, and so I think we'll continue to be pleased with the results coming out of ANC.

(Operator Instructions) At this time, there appear to be no further questions. You may proceed.

Well, again, thank you very much for joining us, and we look forward to talking to you in 2018.

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