Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Edward R. Seraphim - Chief Executive Officer and President

Larry S. Hughes - Chief Financial Officer, Vice President of Finance and Secretary

Analysts

David Quezada - Raymond James Ltd., Research Division

Sean Steuart - TD Securities Equity Research

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Mark Kennedy - CIBC World Markets Inc., Research Division

Frank Duplak

West Fraser Timber (OTCPK:WFTBF) Q1 2013 Earnings Call April 26, 2013 11:30 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber First Quarter 2013 Results Conference Call.

During this conference call, West Fraser's representative 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.

Edward R. Seraphim

Good morning, everybody. Joining us this morning is our CFO, Larry Hughes, and a number of our senior management team.

West Fraser earned $67 million or $1.57 per share in the quarter. EBITDA in the quarter was $141 million or 16% of sales. The primary reason for the improvement from the fourth quarter of 2012 was due to improving lumber prices.

Adjusted earnings for the first quarter were $103 million, or $2.42 per share, as compared to $51 million in the fourth quarter. Our Lumber business generated $146 million in EBITDA, up 97% from the fourth quarter of 2012. Shipments of SPF were down 5% from the previous quarter, due to weather-related transportation issues in Canada. As a result, we undershipped our production by almost 100 million feet in the quarter.

We produced 1.3 billion board feet in the quarter, an increase of 8% from the fourth quarter. The increase in lumber production was a result of the completion in 2012 of a number of major capital projects in Alberta and the U.S. South, as well as the acquisition of the Edson Forest Products in Alberta.

We expect to complete the construction of the planer this summer, and we've taken some of them at Edson for 3 months later in the year for its rebuild as well. We have a significant capital plan in our Lumber business for the remainder of the year, which includes a construction of 2 bio energy plants at our Chetwynd and Fraser Lake sawmills, the rebuild of the Chetwynd sawmill, a new plant at Williams Lake, as well as a number of projects in the U.S. South, including a new planer at Newbury, a sawmill upgrade at Armour and a number of continuous kilns.

Our panels business generated $18 million in EBITDA, up 64% from the fourth quarter. Improving markets for all our panel products contributed to the increase.

Our pulp and paper business generated $8 million in EBITDA, down 67% from the fourth quarter. Our Hinton mill has a scheduled minor maintenance shutdown in the quarter. In addition, we faced operational issues at both our NBSK mills in the quarter, which contributed significantly to our total production loss of 19,000 tons. Our earnings were also impacted by lower electricity revenues in our BCTMP and newsprint business, lower shipments due to rail delays and lower newsprint pricing.

Our joint venture, Cariboo NBSK mill is slated for a 2-week major maintenance shutdown in May, which will reduce our share production by approximately 8,000 tons in the quarter. The 63-megawatt power project is underway at our joint venture Alberta newsprint mill, and we expect it to be completed in the fourth quarter.

The housing recovery in the U.S. continues to show positive momentum. U.S. housing starts in March exceeded 1 million and new home sales continue to show encouraging results. Our shipments at China remain strong. After a very strong first quarter, lumber and plywood pricing have slipped in recent weeks.

We're early in the building product cycle recovery and a fallback after such a strong quarter shouldn't come as a surprise. Our outlook for our building products business continues to be optimistic for the medium term. Pulp markets are expected to be under continued pressure as new capacity ramps up this year.

With this, I'll turn the call over to Larry Hughes.

Larry S. Hughes

Thanks, Ted, and thanks to everyone joining us today. Please refer to the advisory contained in our quarterly MD&A concerning our use of terms such as EBITDA, adjusted earnings and adjusted earnings per share.

The table on Page 3 of our MD&A describes and quantifies several nonoperational items, which affected our results. If we adjust our announced $67 million of earnings to add back the $32 million charge on equity-based compensation and the $6 million loss related to the translation of U.S. dollar-denominated debt, the result on an after-tax basis is adjusted earnings of $103 million or adjusted earnings per share of $2.42 for the quarter.

The equity-based compensation charge reflected a strengthening of the company's share price over the quarter, as well as the granting of share options and units during the quarter.

The loss on the U.S. debt resulted from a weakening of the Canadian dollar against the U.S. dollar in the period. Our defined benefit pension plans were revalued as at the end of the quarter, resulting in a charge to comprehensive earnings, net of income taxes, of $52 million. This value will fluctuate with changes in long-term interest rates and the return on our plan assets.

For this quarter, the main contributor to the adjustment was a lower discount rate as described in Note 7 of our quarterly financial statements, partially offset by higher returns on plan assets.

Cash generated by operating activities during the quarter after working capital changes was $2 million, despite a substantial buildup of log inventories at our Canadian solid wood operations. Capital expenditures for the quarter totaled $49 million, and we are still projecting capital expenditures this year of between $250 million and $300 million. Our balance sheet remains strong with a net debt to capital ratio of 14%, at a time when our log -- Canadian log inventories are peaking.

And Ted, that concludes my remarks.

Edward R. Seraphim

Thank you, Larry. And now, we're prepared to open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Quezada from Raymond James.

David Quezada - Raymond James Ltd., Research Division

I wondered if you guys could give us an update on what your thoughts are around the 2 idled mills in the U.S. South.

Edward R. Seraphim

Sure. I mean, we continue to review markets. And these mills are still down. But we continue to take a hard look at whether we should be restarting one or both of the mills. But at this point, we haven't made any decisions.

David Quezada - Raymond James Ltd., Research Division

Okay. That's helpful. And then, just on fiber cost in the U.S. South, I know that they're -- they haven't really ticked up the way they have in BC. But how do you see that kind of developing or when would they start to go up?

Edward R. Seraphim

Well, I think, your comment, first comment, is correct. I mean, fiber cost in the U.S. have been very flat. And I think, for us to really predict where they're going over the next year or 2 is just like lumber markets, this may be a little difficult to do. I think the key point, though, is that we all know that the U.S. South has been significantly undercut over the last 5 years. So we do expect, if we're going to make a prediction, I think our expectation is that if there are going to be increases, they'd be fairly muted, at least over the remainder of this year.

Operator

The following question comes from Sean Steuart from TD Securities.

Sean Steuart - TD Securities Equity Research

With respect to the pulp operations, Ted, maybe if you could just go into a bit more detail on what went wrong with the NBSK mills this quarter and led to the extended downtime? And then, other than the maintenance shut at Cariboo this quarter, did any of that downtime extend into Q2 that you had the issues in the first quarter? Any context you can give us there?

Edward R. Seraphim

Sure, Sean. I think, first of all, the Cariboo shutdown is actually scheduled for May. So that hasn't -- that's starting in about 10 days. In terms of the loss in the first quarter, I think, fundamentally, we had -- we have a 3-year duration between our major shutdowns at our Hinton pulp mill and 2 years at Cariboo. Hinton is 3 years because we have 2 recovery boilers. But every 1.5 years, we have to do some inspections of our recovery boilers. So we basically had a small shutdown scheduled for the quarter, but unfortunately, just before the shutdown, we had a failure in our digester. And so we were dealing with that. And that issue really has been different than the issues that we faced at Hinton over 2012 when we were trying to ramp up the production on the pulp dryer, because that's where we spent the capital. So I think as we look at the quarter, we're very disappointed with our operational results in our NBSK business. But -- and those issues have not carried forward into the second quarter, by the way. But where we have our confidence is that those mills are well-capitalized, the projects we did are good projects, and we've got good cost structures there, but the mills need to run well. So I can tell you there's a significant amount of focus in terms of improving operational reliability and we have to prove ourselves, is, I think, is all I can say about the future here.

Sean Steuart - TD Securities Equity Research

Okay. And then just following on that, Ted. The lower power sales, I guess, from the mechanical pulp mill and the ANC, can you quantify how much that was and what fed into that? And if that's an ongoing trend?

Edward R. Seraphim

Well, I don't think we're -- we'd like to quantify it. But we don't see it as an ongoing trend at this point.

Operator

[Operator Instructions] Our following question is from Paul Quinn from RBC Capital Markets.

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Just following up on Sean's question on -- Ted, you described the issues at Hinton. What was the issue at Cariboo?

Edward R. Seraphim

Well, we had -- again, we had some operational issues at Cariboo. Nothing that is significant. We will -- we had to run the mill a little bit slower over the quarter because we had an issue in our digester. And so it had an impact on our production, but it's fairly minor. And we'll correct it in our shutdown. So there's no long-term issues from an operational standpoint at Cariboo. The bigger issue was at Hinton in the quarter for sure.

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Okay. And then just on transportation, you flagged out a couple of times on whether it was rail car availability at BCTMP or on the lumber side. Is that behind you now?

Edward R. Seraphim

Well, I think, deliveries have improved, but we've got a ways to go to get that 100 million feet shipped. I mean, we've been able to produce it a little bit week-by-week, as weather has improved. And we're hopeful that we'll be able to take care of that probably over the next, I'd say, 3 months. I mean, it's not going to happen in a month, it's going to take us a few months to get that behind us. But things are improving.

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Okay. And then just on the panel side. You referenced slowdown at the end of Q1. Just what you're seeing in Q2 here?

Edward R. Seraphim

Well, I think, it was particularly really on the plywood side. So plywood markets were quite strong in the first quarter. And I think, generally, I think our customers may have overbought a little bit. And we saw a bit of a slowdown. But it's almost a week-by-week thing, Paul. And this week, we've seen a bit of a recovery in plywood demand. So I don't -- we don't think it's anything systemic. But we have seen a bit of a slowdown, just as we've seen in our Lumber business as well, as you guys, I'm sure, are well aware of.

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Okay. And then just lastly, just on the lumber business itself, I mean, Ted, you referenced prices coming off a little bit, which is not unusual. Maybe you could just give us some additional color on what you're seeing in the Chinese market, as well as do you expect prices or the fact that prices are weakening, is that a function of demand has been less robust than expected? Or is that more supply coming out of the market?

Edward R. Seraphim

Well, I think, maybe I'll try and answer your question in a few ways. I think, first of all, China, continues to be very strong for us. I just want to speak for West Fraser there. So we haven't seen a fallback in demand there. And we had a very good quarter in China. In terms of demand in the United States, I think what we're seeing here, again, very strong reliance, everybody knows, in the first quarter. And customers probably overbought a little bit. And then, weather definitely was an issue towards the end of the quarter. I mean, it was a very, very tough winter. And so I think that's had an impact. But when we look at underlying demand, you know the statistics as well as we do. I think they're all very encouraging. And we are early in this recovery. So we expected there to be some bumps in the road. And in terms of the actual demand for lumber, that can change a week from today. I mean, anything can happen. We don't think there is a huge oversupply of lumber out there in the marketplace. We'd really see this as a bit of a pullback. And we're fairly, let's say, cautiously optimistic about the rest of the year. But right now, it is a bit slow.

Operator

Our following question comes from Mark Kennedy from CIBC World Markets.

Mark Kennedy - CIBC World Markets Inc., Research Division

Just wondering if you can

[Audio Gap]

if you have any better feel, especially with respect to the B.C. Interior? What's likely to happen to your fiber cost, especially driven by some pitch here? And is the move going to be more in Q2? Or is it going more in July, where we're going to see a good step up in stoppage[ph]?

Edward R. Seraphim

Mark, I think, we will see some modest increase in the second quarter and we expect to see a further increase in the third quarter. I can't really quantify what that will be. But obviously, given rising lumber markets and the demand for logs in the interior, we're going to see rising log cost definitely as this market improves.

Mark Kennedy - CIBC World Markets Inc., Research Division

And can you just sort of -- just put that in context with Alberta as well, like we're not going to see the same degree of movement there, I don't expect, right?

Edward R. Seraphim

We'll be seeing increases in Alberta as well, but probably not to the same extent as British Columbia, but we will still see some increases in Alberta as well.

Operator

Our following question comes from Frank Duplak from Prudential Investments.

Frank Duplak

I had a couple of questions. You talked about the 2 biomass projects that you're working on. Have you kind of talked about how big those projects are from a cost perspective and when they might come on online?

Edward R. Seraphim

Sure. Yes, we announced them last year. One's at are our Fraser Lake mill, and the other one's at our Chetwynd mill, they're $45 million each. And we expect them to come on late second quarter of next year.

Frank Duplak

And then any idea what the EBITDA contribution could be over the payback period?

Edward R. Seraphim

We have no idea. No, of course, we do. These projects, they're 20-year agreements with BC Hydro. And they're very strategic projects. When we talk about our overall return on capital, we tend to look at 3-year-type returns. These are a little bit longer, but very strategic projects for both mills.

Frank Duplak

Okay. And since there's a question on the upcoming bond maturity, I guess, it becomes a current maturity in the fourth quarter. Just curious what your plan is there. Is it really just kind of hold this thing until the end and then refinance at that point? If you have any color that, that would be helpful.

Edward R. Seraphim

I think, I'll ask Larry to provide the answer to that one.

Larry S. Hughes

Yes, we've been watching that and your observations were quite right. But we're looking at our cash generation, and that's going to play a role in our decision-making. But we're looking at it now and we're looking at it for the rest of the 18 months. And we will deal with it probably closer to the time of maturity.

Frank Duplak

But it doesn't sound like you're necessarily concerned if it becomes a current maturity on the balance sheet?

Larry S. Hughes

Not a big concern, no.

Frank Duplak

Okay. And can you just clarify for me the -- looks to me like in the MD&A, there was a talk that the collateral has been dropped from the notes in the credit facility. And I thought when you guys got the amendment back in 2010, the way I read it, I thought both Moody's and S&P would have to upgrade you to investment grade before that collateral could be dropped. Could you just clarify that for me?

Larry S. Hughes

Yes. No, it was not -- we don't need both. We just needed one. And we got Moody's. And so the security did come off.

Operator

We have no further questions registered at this time. I would now like to turn the meeting over to Mr. Ed Seraphim.

Edward R. Seraphim

Well, again, thank you very much for joining us today. And if you've got any further questions, feel free to give us a call. We'll be here all day. Thanks very much.

Larry S. Hughes

Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: West Fraser Timber Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts