Canfor's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 4.13 | About: Canfor Corp. (CFPZF)

Canfor Corporation (OTCPK:CFPZF) Q1 2013 Earnings Conference Call May 2, 2013 11:00 AM ET

Executives

Don Kayne - President and Chief Executive Officer

Alan Nicholl - Chief Financial Officer

Brett Robinson - President, Canfor Pulp

Alistair Cook - Senior Vice President, Wood Products Operations

Wayne Guthrie - Senior Vice President, Sales and Marketing

Sean Curran - Vice President, Sales and Marketing

Analysts

Daryl Swetlishoff - Raymond James

Sean Steuart - TD Securities

Mark Kennedy - CIBC world Markets

Paul Quinn - RBC Capital Markets

Operator

Good morning, ladies and gentlemen. Welcome to the joint Canfor Corporation and Canfor Pulp Products Inc. First Quarter Results 2013 Conference Call. A recording of the call and a transcript will be available on the Canfor’s and Canfor Pulp’s website. During this call, Canfor and Canfor Pulp’s Chief Financial Officer will be referring to a slide presentation that is available in the Investor Relations section of each company’s website. Also the companies would like to point out that this call will include forward-looking statements, so please refer to the press releases for the associated risks of such statements.

I would now like to turn the meeting over to Mr. Don Kayne, President and CEO of Canfor Corporation and CEO of Canfor Pulp Products Inc. Please go ahead, Mr. Kayne.

Don Kayne - President and Chief Executive Officer

Thank you, operator and good morning. Thanks for joining the Canfor and Canfor Pulp first quarter results conference call. I will speak briefly to the results of both companies before I turn things over to Alan Nicholl, who was our Chief Financial Officer for both Canfor Corporation and also Canfor Pulp Products Incorporated. Alan will provide a more detailed overview of our performance in Q1, after which we will take questions.

With me today to address your questions are Brett Robinson, President of Canfor Pulp; Alistair Cook, our Senior Vice President of Wood Products Operations; Wayne Guthrie, our Senior VP of Sales and Marketing; and Sean Curran, our VP of Sales and Marketing for Canfor Pulp.

Canfor Corporation posted quarter one operating income of $100 million, which was an improvement of $118 million over the posted results for the company in Q1 of 2012. Of this $100 million, $19 million is directly attributable to Canfor Pulp and the balance to our solid wood business. U.S. housing starts dropped $1 million in March for the first time since June of 2008.

Looking ahead to 2013, we are very encouraged by the consistent signs of improvement we are seeing out of the U.S. market. We are cautiously optimistic that the U.S. economy will continue to improve, and that improvement will continue to be reflected in our results. We see modest improvements in pulp markets and Canfor Pulp continues to make good progress on executing their business plans, including expansion of their energy sales.

In December, Canfor Pulp and BC Hydro signed an energy purchase agreement, which will see Canfor Pulp invest $26 million to upgrade two turbo generators at the mill that will add approximately 11 megawatts of capacity to the provincial grid. The installation work there is underway and on track. We continue to make progress on other capital plans as well. We were able to reopen our Radium division in the fourth quarter of 2012 adding 240 million board feet of production capacity.

Yesterday, we announced $20 million investment in our Houston facility. This is in addition to the $80 million of capital expenditures underway to improve efficiency at our Mackenzie and Elko facilities in British Columbia. Work is underway on the addition of a second production shift at our Conway mill in South Carolina, which produces Southern Yellow Pine dimension lumber. We are pleased to be able to continue to modernize our facilities as we look forward to improving markets.

I will now turn the call over to Alan Nicholl who will provide more details on our financial results.

Alan Nicholl - Chief Financial Officer

Thank you, Don, and good morning everyone. My comments will focus principally on our financial performance for the first quarter of 2013 by reference to the previous quarter. I will discuss the results of Canfor first and then Canfor Pulp second. In my comments, I will be referring to our first quarter overview slide presentation, which you will find on either the Canfor or Canfor Pulp websites in the Investor Relations section under webcast. Full details are contained in the Canfor and Canfor Pulp news releases both issued yesterday.

For the first quarter of 2013, Canfor reported equity shareholder net income of $62 million, or $0.43 per share, well ahead of shareholder net income of $21 million, or $0.15 a share reported for the fourth quarter of 2012, and the shareholder net loss of $80 million or $0.13 a share reported for the first quarter of 2012.

On slide three of our presentation, we highlight various non-operating items, net of tax on non-controlling interest, which affect comparability of results between the fourth and first quarters. In the first quarter, these included mark-to-market gains on financial derivatives and a foreign exchange loss on long-term debt. The adjusting items also included Canfor’s 50% share of income from the Canfor Louisiana Pacific Peace Valley OSB joint venture, which in accordance with International Financial Reporting Standards was excluded from first quarter earnings, but it will be included in income when the transaction closes in the second quarter.

The net impact of all of these items in the first quarter was approximately $8 million, or $0.06 a share. After taking account of the aforementioned adjusting items, the first quarter adjusted net income was $70 million, or $0.49 a share. This represented a $50 million or $0.35 a share improvement from adjusted net income of $20 million or $0.14 a share for the fourth quarter of 2012.

With respect to our first quarter operating performance, you will see on slide four of our presentation that reported operating income was $100 million or $111 million, including our share of Peach Valley’s OSB operating income, an increase of $62 million from the prior quarter. This increase principally reflected improved pricing and higher shipments in the lumber segment. Operating results for the pulp business also showed improvement reflecting a modest gain in market pricing and slightly higher shipments. I will speak more on our operating performance in a few minutes when I discuss the individual segment performances.

Slide five of our presentation shows the Western SPF benchmark lumber prices for 2x4 #2&Btr and U.S. housing starts. U.S. lumber demand continued to strengthen as total starts averaged 969,000 units in Q1, a 7% increase from the previous quarter. The March seasonally-adjusted U.S. housing starts number of 1,036,000 was the highest in closely five years. This coupled with solid offshore demand pushed Western SPF 2x4 prices to the highest level since 2006 on a Canadian dollar basis.

Turning to slide six, you will note that the lumber segment reported operating income of $88 million for the first quarter of 2013, an increase of $46 million from the previous quarter. The improvement in results principally reflected increased sales realizations in both North America and offshore compared to the previous quarter. Unit manufacturing costs were in line with the previous quarter with lower unit cash conversion costs offsetting modest increases in unit log costs. Higher production levels in the quarter reflected a full quarter production at the recently restarted Radium mill, as well as productivity gains.

Turning to slide seven, you will note that Canfor’s pulp and paper segment, which comprises the results of Canfor Pulp as well as the company’s Taylor BCTMP pulp mill reported first quarter operating income of $19 million, a $7 million improvement from the prior quarter.

The main components of Canfor Pulp’s results are highlighted on slide eight. For the first quarter of 2013, Canfor Pulp reported net income of $11 million, or $0.15 a share. This compared favorably to a net income of $5 million, or $0.08 a share for the fourth quarter and net income of $10 million, or $0.12 a share for the first quarter of 2012. Staying on slide eight of our presentation, Canfor Pulp reported operating income of $19 million for the first quarter, an improvement of $7 million from the fourth quarter. The increase reflected moderately higher sales realizations and shipments combined with lower manufacturing costs. In addition, the company benefited from a $1.5 million tax credit in the period related to scientific research and development tax claims. In the prior quarter, certain amendments to post-retirement benefit plans added about $5 million to operating income.

Turning to Canfor Pulp’s pulp segment on slide nine, the first quarter operating income was $15 million, that was approximately double that of the fourth quarter. Average U.S. dollar NBSK pulp list prices increased between $15 and $35 per ton in all regions with North America moving up $34 per ton from the previous quarter and shipments were up 11,000 tons. However, realizations didn’t match the full list price increases due to increased volumes to lower margin regions principally China.

Unit manufacturing costs decreases 3% in the quarter due to decreased maintenance spending and slightly higher productivity. The first quarter pulp segment’s results included the previously mentioned $1.5 million scientific research and development tax credits, while the fourth quarter results included $4 million accounting gain in connection with the amendments to your post-retirement plans.

Turning to Canfor Pulp’s paper segment on slide 10, we reported first quarter operating earnings of $6 million. That was down slightly from the prior quarter, with the 3% increase in unit manufacturing costs and lower realized paper prices partially offsetting higher shipments. Yesterday, the Canfor Pulp Board of Directors announced a dividend of $0.05 per share for the quarter, consistent with the guidance given in February of similar payments throughout 2013.

Capital spending in the first quarter totaled $46 million of which $38 million was in the lumber business and $7 million in Canfor Pulp. We currently anticipate that our 2013 capital spending for our lumber and pulp businesses will be around $150 million and $50 million respectively. At the end of the quarter Canfor excluding Canfor Pulp had net debt of $226 million with the availability liquidity of $292 million. On April 1st, the company repaid its US$75 million term note using its operating line of credit. It’s expected that this will be paid off during the second quarter using cash flow from operations. At the end of March Canfor Pulp has net debt of $95 million with the available liquidity of $108 million. Net debt to total capitalization excluding Canfor Pulp is around 16% and for Canfor Pulp is around 20%. On a consolidated basis net debt to total capitalization was 19%.

And with that, Don I will turn the call back to you.

Don Kayne - President and Chief Executive Officer

Thanks Alan. So operator I’d like to now to open the lines up for questions.

Question-and-Answer Session

Operator

Thank you, Mr. Kayne. Questions will now be taken from the financial analyst. (Operator Instructions) The first question is from Daryl Swetlishoff. Your line is now open please go ahead.

Daryl Swetlishoff - Raymond James

Thank you. Good morning, guys. Don, just a question on lumber markets, what you’re seeing today in the various regions where you operate and with special attention to China in terms of inventories and logs and lumber please.

Don Kayne

Okay, I’ll just talk – thanks, Daryl. I’ll talk just to three markets real quickly first of all Japan. Japan continues to be real, real strong probably preformed the best of the three, but certainly we’re real encouraged both on from a pricing standpoint and also from a volume standpoint in Japan, solid quarter. And in terms of the United States as you have no doubt heard several times here, we are seeing certainly some improvement in the United States market in the last quarter partly because of its reflecting the improvement in overall housing starts in the United States. We think inventories are in pretty decent shape there as well. The only thing that probably caused it to be a little bit – slowed off a little bit here towards end of the quarter were some weather issues or what not, but for the most part we’re pretty positive throughout the quarter in terms of our U.S. markets overall, retail sales were good as well.

In terms of China, also despite some of the comments there on China, Daryl, I mean from our standpoint, we were very consistent to what we sold in Q4, almost identical numbers. And you go on and go back to another periods of Q1 of 2012 was actually up a little bit. So, we haven’t seen any reduction in terms of volume in China certainly in Q1 and going forward we don’t expect it to change much either.

Daryl Swetlishoff - Raymond James

Okay. So, I understand that you’re cautiously optimistic on pricing. As the trend of pricing continuing, we are seeing some weakness today in just the benchmark price in the current quarter. Do you attribute this to anything structural or normal seasonal kind of patterns?

Don Kayne

Yeah I think that that would be a good description there. I mean some of its seasonal and I think that we’ve had a pretty good solid run here, as you know through Q4 and on into the first part of Q1. And so I just think this is nothing more than just kind of a typical just a little slower, slowing down for a little while here, but we certainly don’t see that to be sustainable going forward at all. We think it will continue to be pretty solid year going forward.

Daryl Swetlishoff - Raymond James

Okay thanks for that. I’ll turn it over.

Don Kayne

Okay thanks, Daryl.

Operator

Thank you. The next question is from Sean Steuart with TD Securities. Please go ahead.

Sean Steuart - TD Securities

Thanks. Good morning guys. Couple of questions I guess first for Alan. The Canfor Pulp debt maturity, can you speak to I guess any updated thinking on refinancing options for that?

Don Kayne

Good morning, Sean. So, currently as to where we have recently negotiated $110 million operating loan capacity late last year if you recall. Our current plans are to use some cash that will buildup in our business through the balance of the year and used some of that to payoff the $110 million with the balance e coming out of the operating loan, that higher operating loan facility.

Sean Steuart - TD Securities

Got it. And can you go through I guess the maintenance schedule of the pulp mills that you have planned through the remainder of the year, if you could just remind us of that?

Don Kayne

Brett, you can take that one.

Brett Robinson

Sure. We just finished the Intercon shutdown on time, on budget and we’re going to be moving into the Northwood shutdown in June splitting the two lines and the longer of the two will becoming up in early July.

Sean Steuart - TD Securities

Okay and then I guess just finally I think we have a pretty good picture on most of the discretionary CapEx plans at sawmills but can you, Don, just highlight the $20 million you are spending in Houston, what – what are you doing there?

Don Kayne

Yeah, basically at Houston, we’re going to be doing some work on the sawmill and little bit and probably the bulk of would be though actually on the plainer side.

Sean Steuart - TD Securities

Okay that’s all I had, guys. Thanks very much.

Operator

Thank you. (Operator Instructions) The next question is from Mark Kennedy with CIBC World Markets. Please go ahead.

Mark Kennedy - CIBC World Markets

Good morning and congrats on a good quarter. I just wanted to clarify just on your CapEx comment there again, Alan. Did you say the plant CapEx is $150 million for core plus another $50 million for pulp so the combined consolidated CapEx would be $200 million for this year?

Don Kayne

That’s right, Mark, so about $150 million for our lumber business and just over $50 million for our pulp business.

Mark Kennedy - CIBC World Markets

And just roughly out of that $150 million for the lumber business, how much would you classify as maintenance and how much would you sort of classify as discretionary?

Don Kayne

Yeah, roughly about $30 million, $35 million would be maintenance. The bulk of it is high return targeted capital upgrades.

Mark Kennedy - CIBC World Markets

Right okay. And then just coming to the bigger issue, obviously we saw one of the companies in the OSE space earlier this week announce a fairly healthy dividend and just wanted to see what your current thinking is here as you look forward into pretty reasonable building products markets and your plans for your free cash flow and how you’re thinking about dividing that and using that going forward?

Don Kayne

Yeah, well, Mark, I say it’s very early days still as I think everybody will appreciate and but we’ve got a lot of strategic capital that we still have to spend as we’re just talking about and I think we’ve got a lot of different priorities that we are going to be resting with over the next few years and per share will have to give thought to dividends as part of that but it will be one part of discussion that includes many different types of items that you’ll appreciate.

Mark Kennedy - CIBC World Markets

Right, right, okay thank you.

Operator

Thank you. The next question is from Paul Quinn with RBC Capital Markets. Please go ahead.

Paul Quinn - RBC Capital Markets

Yes thanks. Maybe you can just talk to sort of you had an inventory build in the lumber side and we heard of similar things on the pulp side, weather related issues in the quarter and as well as railcar availability and how you expect to monetize those inventories over the next couple quarters.

Don Kayne

Sure, Paul, it’s Don. Just on the lumber side, first of all, the – for the most part we had a pretty decent shipping quarter for sure, we did build a bit inventory in the neighborhood of $15 million to $20 million feed overall which is not insignificant, but certainly manageable and we would expect by the end of Q2 to have been able to deal with that without a problem. Did we have any problems on transportation for the first quarter, yes, I think you could probably attribute the bulk of that $20 million increase to that specifically and that in combined with some of the whether issues that the railroads had during the quarter, but yeah, like I say, we’ll – we expect to have that dealt within the Q2. In terms of the pulp side, Sean, I don’t – is there anything specific that you would want to say there, I know you remote on the call, but if there is any you want to add on the pulp side you’re welcome to do that.

Sean Curran

No, actually, Don, I wouldn’t add anything in that, it’s pretty much the similar response that you just gave, we – our inventories rise came up a little bit because of the delays and the biggest issue is service related issues back to our customers, but we are forecasting a return to regular inventory levels as we come into later part of second quarter.

Don Kayne

Alright, thanks, Sean and…

Paul Quinn - RBC Capital Markets

Okay so just another question just on I guess weather related consumption activity, you guys noted the high starts levels, but I am looking through the news. You see lots of weather related issues in Q1 and which would affect consumption of lumber and we’re seeing obviously lower prices. In talking to your customers is that a big concern right now and do you see that continuing into Q2.

Don Kayne

Well, certainly the whether has been a concern as I mentioned in Q1 for sure. We expect that though, as we go in more in the Q2 that will start to be less of an impact. We do – all the reports that we have from most from our customer basis, but speaking specifically about the U.S. is that across the nation really know specific area more than another, that definitely activity is showing some positive signs will look forward. So, I guess the other thing to also mention is that the kind of numbers that you are seeing now through, we believe also that we’ll be able to continue to sell and even if we need to increase what we are moving into offshore markets also.

Paul Quinn - RBC Capital Markets

Okay then just lastly if you could just give us sort of your view on current pulp markets. We’ve got a big machine starting up in Russia right now. What do you think markets will hold at this point?

Don Kayne

Sean, I want you go ahead and do that then because you’ve just bought what yesterday at our pulp.

Sean Curran

Absolutely, yeah, very good question, you’re right, we have the (indiscernible) starting up. They have started up and you’ll start to see that coming into the market and probably this month and coming in really into next month into the month of June, but go to remember the offset to that is the rationalization of Fort Frances as well as the Kamloops line and then the potential at the shutdown at Canfor in Norway if that actually does happen and you have a balance of one is offsetting the other so, supply and demand will not be out of balance from where it is today. And pulp markets going forward, we still suggest that there is a moderate gains in this quarter coming up and especially with maintenance downtime taking effect, we are still expecting another couple of days to come of the producer stock so, Q2, I think you’ll see a little bit more in the modest gains for price increases in most regions.

Paul Quinn - RBC Capital Markets

Great that’s all I had. Good luck, guys.

Sean Curran

Thanks.

Don Kayne

Thanks Paul.

Operator

Thank you. (Operator Instructions) There are no further questions registered at this time. I’d now like to turn the meeting back over to Mr. Kayne.

Don Kayne - President and Chief Executive Officer

Yeah, thanks operator and thanks for all of you for participating in the call with us and we look forward to talking once again at the end of Q2. Thank you very much.

Operator

Thank you. The conference call has now ended. Please disconnect your lines at this time. Thank you for your participation.

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