Canfor Corporation Q4 2008 Earning Call Transcript

| About: Canfor Corp. (CFPZF)

Canfor Corporation (NYSEMKT:CFP)

Q4 2008 Earnings Call

February 20, 2009 10:30 am


James Shepard – President, Chief Executive Officer

Thomas Sitar – Vice President of Finance, Chief Financial Officer

Mark Feldinger – Vice President Manufacturing


[Darrel Switzerloft – Raymond James]

[John Koller – Oppenheimer]

Paul Quinn – RBC Capital Markets


Welcome to the Canfor Corporation fourth quarter results 2008 conference call. Please be advised that this call is being recorded and web cast live at A recording of the call and a transcript will be available on Canfor's web site. During this call, Canfor's CEO and CFO will be referring to a slide presentation that is available in the investor relations section of their web site.

Also, this company would like to point out that this call will include forward-looking statements so please refer to the press release for the associated risks of such statements. I would like to now turn the meeting over the Mr. Jim Shepard, President and Chief Executive Officer of Canfor Corporation.

James Shepard

Good morning and welcome to Canfor's conference call to discuss the company's fourth quarter results for 2008. I'm joined today by Tom Sitar, Canfor's Vice President of Finance and Chief Financial Officer, Don Kayne, Vice President of Marketing and Sales and Mark Feldinger, Vice President, Manufacturing.

I will give a brief overview of the quarter and then Tom will speak to our financial results including providing some detail on the significant unusual items in the quarter.

I don't want to use this time to bemoan the state of the markets and the forest products market specifically. If you are listening to this conference call, you're all aware of the unprecedented low demand and low prices we are currently seeing. Ours is not the only sector of the economy facing large challenges.

Yesterday, we reported a net loss for the quarter of $230 million or $1.61 per share. As you've noted from the news release the Q4 results included a number of unusual items that had a net negative impact on results. I'll let Tom expand on these in a moment.

After removing these one time items, the adjusted net loss in the quarter was $44 million or $0.30 per share which represented a decline of $40 million or $0.28 per share from a similarly adjusted net loss of $4 million or $0.02 per share in the third quarter.

As I speak, nine of our lumber operations are completing a one week curtailment and a week earlier, six operations were also down for a week. Beginning next week, we are curtailing our Radium operation as well as the third shift as Cornell. We also curtailed all of our operations for a two week period over Christmas.

Over the last year, we indefinitely closed four of our operations beginning with the McKenzie Saw Mill, followed by Shetland, Polar Board OSB, and the Tackama Plywood plant. These are not decisions we took lightly, but they are in keeping with an overall strategy to be responsive to market demands, to not build up inventories and to remain flexible during these challenging times.

We are committed to maintaining a strong balance sheet despite the turmoil that surrounds us. We are well positioned to take full advantage when the market recovers, but in the meantime we are taking every measure necessary to protect our position.

I wish I could be optimistic today and say that I see an end to this downturn that we are experiencing. Unfortunately, I think that would be anything but true. The truth is that the U.S. housing market drives our business and as along as housing starts remain at record lows in the United States, the forest industry will struggle.

So is there anything to be optimistic about? When the company records an adjusted net loss of $44 million, you wouldn't think so, but our operating results year over year bear a closer look. In the past 18 months, Canfor has been focused on cash conservation. We've done it the right way.

We've cut where we needed to cut while improving productivity. Our total unit manufacturing costs are down 12% compared to the last quarter of 2007. We've driven down our conversion costs. We've lowered log costs significantly as we've lowered our operating and overhead costs. We've curtailed when we've seen inventories grow so that we wouldn't have to sell at unsustainable prices. We are writing our own story and not waiting for the market to force us into action.

All industries are now being touched by this weakened economy, but if you look at Canfor, we have shown ourselves to be strong by the way we have faced this adversity. When everything around you is going south, you have two choices; worry about what's going around you or concentrate on the things you can control.

Canfor has focused on what we can do to preserve our strong position. For more details on our financial results, I would now like to turn the call over to Tom Sitar.

Thomas Sitar

My comments this morning will focus on our financial results for the fourth quarter of 2008 with special emphasis on those items that affect comparability with other quarters and those factors which contributed significantly to our results.

I draw your attention to our Q4 slide presentation which you'll find on our website in the investor relations section. I will refer to it periodically. Also, note that for ease of reference, I will be referring to all amounts rounded to the nearest million.

As Jim mentioned, Canfor reported a fourth quarter net loss of $230 million. That included a number of unusual items. This compared to a net loss of $94 million for the third quarter of 2008 and a loss of $237 million in the fourth quarter of 2007.

On Slide 4 of our presentation, we list these items and I will detail them now. Please note that the amounts I refer to are an after tax basis. First, an accident impairment charge of $74 million or $0.42 per share related principally to Canfor's Tackama plywood and polar board OSB plants as well as a further impairment of our holdings of asset backed commercial paper.

Second, a loss of $52 million or $0.37 due to the revaluation of our U.S. dollar denominated debt. The end of period exchange rate went down by almost $0.13 from $0.94 to $0.817 cents. This is a positive from realized sales position but it has increased the notional payment cost of our debt and as an investment.

Third, a $50 million charge or $0.35 per share for the revaluation of our financial derivatives. This expense relates to falling oil and natural gas prices as well as the weakening Canadian dollar. We have a number of hedge positions related to those exposures that have seen mark to market losses.

Fourth, a restructuring charge of $7 million or $0.05 a share related to our investment idled operations and finally, a loss of $3 million or $0.02 relating to the new accounting standards which have impacted our log inventory valuation.

After taking account of these items, the fourth quarter adjusted net loss is $44 million or $0.33 per share. This represents a $40 million decline from the third quarter and it directly related to the weakness in both lumber and pulp markets.

Slide 5 of our presentation shows that the continued in the housing starts and market prices for SPF lumber.

Now turning to our operating performance, Slide 6 of our presentation, the company generated negative EBITDA of $30 million, $85 million less than for the previous quarter. After taking account of inventory devaluations and restructuring costs, EBITDA was a break even down $64 million from the third quarter.

Now looking at each of our business segments in turn; Slide 7 for the lumber segment. The lumber segment had an EBITDA loss of $24 million in the fourth quarter of 2008 compared to EBITDA of $15 million in the previous quarter. Affecting comparability are restructuring, severance and closure costs which were $1 million higher in Q4 and an inventory devaluation of $9 million related to the prior period, principally reflecting falling prices at the end of the quarter.

When these items are adjusted out of EBITDA, there was a $30 million quarter over quarter deterioration. This change was primarily driven by lower average SPF and southern yellow pine lumber prices, partially offset by the weaker Canadian dollar and a positive adjustment to the lumber export tax of $11 million.

More specifically, the average price for the benchmark SPF 2X4 in Canadian dollar terms went from $274.00 to $230.00 per 1,000 board feet. Our log and conversion costs per unit of production changed quarter over quarter.

Turning to the panel segment on Slide 8, the panel segment had an EBITDA loss of $11 million in Q4 compared to a break even result in the third quarter of 2008. Items affecting comparability included restructuring and severance costs that were $4 million higher in the fourth quarter and the devaluation of log inventory which was a $2 million expense in the current quarter compared to a $3 million recovery in the prior quarter.

When these items are adjusted out there was a $1 million reduction in EBITDA versus the third quarter reflecting steady prices on a Canadian dollar basis.

As a reminder, at the end of the quarter, neither Tackama plywood or Polar Board OSB were operating and currently our only producing facility is the Peace Valley wood plant of which we own 50% but as we speak, that facility is on market related curtailment.

Now turning to the pulp and paper segment on Slide 9. The results reported for the pulp and paper segment include Canfor's Taylor pulp mill combined with Canfor Pulp Limited partnership. Fourth quarter EBITDA was $9 million and was down $36 million compared to the third quarter, principally owning to reduced shipments as a results of shortage in demand, market curtailment, scheduled maintenance down time and lower realized prices.

Results for Canfor Pulp Limited partnership of which we own 50.2% were discussed in Canfor's pulp income funds news release and conference call earlier this week.

Capital spending in the fourth quarter was $22 million which was comprised of $9 million for the solid wood business and $13 million for Canfor Pulp. We are reviewing our 2009 capital spending plans carefully and depending on market conditions, plans that we may invest up to $80 million in both replacement and improvement projects in our lumber business which will be partially funded by insurance proceeds.

At the end of the fourth quarter, Canfor had cash of $262 million and unused lines of credit of $413 million. This excludes cash held in asset backed commercial paper that has been reclassified as long term investments.

No debt repayments were made in the fourth quarter. In 2009, there are debt repayments on March 1 and April 1 totaling $137 million U.S. dollars. We will make these payments from our cash reserves.

Our net debt to capitalization at the end of December was 15% on a consolidated basis and 7% for Canfor excluding CTLC.

At the end of Q4, we had in place almost $400 million of U.S. foreign exchange contracts that are designed to protect us against strengthening Canadian dollar. These contracts extend to 2009 and provide protection for more than half of our cash flow from the solid wood business.

But, at the current exchange rate, the top side of these collars in below the stock trade and so we will be limited in the benefit of any weakening in the Canadian dollar. With the unprecedented volatility in the Canadian, it's impossible to estimate the final impact of these options.

With that, I'd like to turn the call back over to Jim.

James Shepard

Looking forward, I fully expect conditions to be even more challenging through 2009 for all of our products. However, we have a strong balance sheet and we intend to maintain it by making the difficult decisions when necessary and by monitoring the market week to week. We have a one factory philosophy that allows us to be as flexible and as responsive as we need to be.

While many of the sectors of the economy have only begun to wake up to the new realities of this global market downturn, Canfor has been adjusting the way we approach our business for quite some time. In the last year, Canfor has defined itself as a company with the ability to respond to external forces.

This capacity to adapt to changing circumstances is engrained in everything we do. I'm not making light of the loss we announced yesterday. It is a significant amount. Despite that loss, I am optimistic about the future prospects for our company.

We are well positioned with strong cash reserves and a strong customer base to emerge from this downturn as a dominant player in our sector. There will be opportunities when the markets rebound. In the meantime, Canfor is focused on saving for the future while still meeting the needs of our key customers.

What the near future holds for the forest industry remains uncertain, but by further focusing our efforts on that which we can control, I believe Canfor will come out of this downturn in an even stronger position than when it started.

I'd now like to take questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from [Darrel Switzerloft – Raymond James]

[Darrel Switzerloft – Raymond James]

Question on the costs; perhaps you could give us a little bit more color on how you achieve those kind of reductions and secondly, give us an idea of how durable those cost reductions are, meaning how much are related to lower rates which will reverse when prices recover and how much are operational lower costs permanently?

James Shepard

The costs came down right across the company but the areas with the most impact was certainly in the manufacturing area and I'll turn that over to Mark to give you some background as to just how extensive these cost reductions have been.

Mark Feldinger

When I take a look at our cost position as Jim had mentioned, we have made structural changes and productivity changes across the company, so operationally, our overhead areas we have sustainable reduced costs. We have asked and targeted cost reductions in our contractor work force and we continue to find ways to keep our log costs at lower levels.

So really, I think that would be a summary of where we have focused and have had good support from the people who work for us and with us.

[Darrel Switzerloft – Raymond James]

On your B.C. operations, what percent would be beetle kill going through mills right now?

Mark Feldinger

We're approximately 80% of the volume going though our mills today is from mountain pine beetle impacted stands. Not all of those trees obviously are all attached by mountain pine beetle.

[Darrel Switzerloft – Raymond James]

Just on strategy with respect to your panel segment, you're down to really $0.5 million to J.V., what are the long term plans on the panel side for Canfor?

James Shepard

At this point we have Tackama curtailed and we also have the Polar Board curtailed. At this point they're indefinitely closed and we are going to be measuring the market and see how that performs. So at this point, those operations are on hold.


Your next question comes from [John Koller – Oppenheimer]

[John Koller – Oppenheimer]

In the lumber, could you give an idea of how you're operating as a percent of capacity with curtailments, and then any assets that you might have for sale or that aren't in use, what your plans for those might be.

James Shepard

I think the broad brush number is capacity approaches $5 billion and at the moment we're operating at about 70% of that.

[John Koller – Oppenheimer]

Any assets that you have that you might be looking to divest?

James Shepard

We aren't looking specifically at divestitures but we have two saw mills that are definitely shut, and that Chatling and McKenzie, but we don't have any specific disposal plans.


Your next question comes from Paul Quinn – RBC Capital Markets.

Paul Quinn – RBC Capital Markets

A question on lumber markets off shore. I have a pretty good read in North America, but what are you seeing off shore especially for j grade prices and volumes.

Mark Feldinger

Just personal overall on off shore, actually in Q4 overseas shipments were actually up slightly over Q3, and j grade was also fairly stable in Q4 through Q3 specifically into Japan. Recently though we've seen some weakening there in the Japan demand. However, we expect that with some of the other options there that we're working on it, we'll be able to maintain the current levels.

Paul Quinn – RBC Capital Markets

That 12% lumber manufacturing cost reduction year over year, if you could break that out into conversion costs versus stumpage? Is that like a 50/50?

James Shepard

We're not going too specifically into that, but I can tell you stumpage is not a large portion of that. Stumpage is actually a small portion of that change. It's basically both in logging overhead and manufacturing costs across the board, but it's not stumpage in any kind of large or majority way.

Paul Quinn – RBC Capital Markets

On the export tax refund, I'm curious as to why you didn't classify that as a one time item and then if you could split that $10.8 million between Q4 '07 and Q1 '08 so we can adjust for that.

Thomas Sitar

It gets reported two quarters. It's not split between the quarters. I don't have it split that way. You have to have two quarters back to back before the refund applies, and yes you could argue whether it should have been identified. The issue is that this is an adjustment to that rate. That could happen again, and so it's really an adjustment to the rate.

In terms of volume in those quarters, in terms of shipments it was roughly equal so if you want to just do a split, it's probably 50/50, but you need two quarters taken back to back before the refund kicks in.

James Shepard

It's really an adjustment of rate.


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

James Shepard

Since there are no further questions, I'd like to thank everyone participating on the call this morning and for your interest in Canfor. I look forward to talking to you all again next quarter.

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