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

Executives

Thomas Sitar - VP Finance, CFO

Mark Feldinger - VP Manufacturing

Analysts

Paul Quinn – RBC Capital Markets

Sean Steuart – TD Securities Inc.

Darrel Switzerloft - Raymond James

Allan Dahl - Reuters

Canfor Corporation (OTCPK:CFPZF) Q3 2010 Earnings Call October 29, 2010 ET

Operator

Good morning, ladies and gentlemen welcome to the Canfor Corporation Third Quarter Results 2010 conference call. The recording of the call and the transcripts will be available on Canfor’s website. During this call Canfor’s Chief Financial Officer will be referring to a slide presentation that is available on the investor’s relations section of their website.

Also, the 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 will now like to turn the meeting over to Thomas Sitar, Chief Financial Officer of Canfor Corporation. Please go ahead, Mr. Sitar.

Thomas Sitar

Thank you, Operator. Good morning everybody and welcome to Canfor’s conference call to discuss the company’s third quarter results. I am joined here today by Mark Feldinger our Vice President of Manufacturing. Unfortunately James Shepard our President and CEO will not be on the call today as he left yesterday on another forestry trade mission to China.

This mission has been organized by B.C.’s Minister of Forest Mines and Land, Pat Bell. It will be James 10th trip to China since taking over as Canfor’s CEO. I will talk about the positive impact that China is having on our business a little later in my commentaries.

Lumber markets overall were subdued during the third quarter, due principally to continued economic weakness a troubled U.S. housing market, a quick but short-lived upturn in prices for about three months in the first half of the year into an abrupt end. Quarter-over-quarter average prices were down more than 40 dollars for the benchmark SPF lumber and you can see a price graph on page 4 of our online presentation. The short lived nature of this rally supports our view that this is largely the result of supply factors rather than improved underlying U.S. demands.

Southern Yellow Pine market was hit even harder with average prices down nearly $140 per thousand board feet. Our lumber operations ran at approximately 70% of capacity, a slight increase from Q2 reflecting a full quarter operation at restarted Quesnel mill and the prime production ramp up at our Chetwynd facility.

In September we made the decision to permanently close the Clear Lake operation in January 2011. It was a difficult decision but was driven by the weak U.S. housing sector and the lack of economical fibre supply available to this mill. At the same time we remained focused on making our existing nodes more cost competitive as evidenced by major capital upgrade of our Fort St. John mill which has ample green fibre supply for the foreseeable future.

Projected budget for this modernization and expansion is approximately $45 million. Phase I was a modification to the sawmill and a new planer facility were put into operation just this past week and final completion is slated for the first quarter next year. When complete this project will increase capacity of the mill by about 1/3 or about 75 million board feet.

So, with James Shepard and Don Kayne our Vice President of Marketing and Sales in China, it is appropriate I comment on that market. Shipment to China again represent a significant proportion of our sales volume. As you know we have been focused on developing the China markets for several years.

In 2010 this has started to yield very impressive numbers in terms of sales volume and also sales value, the proportion of higher grade is increasing. For example when Canfor first started focus on China, the percentage of shipment of #2&Btr grade was minimum; this year 35 to 40% of our shipment are in the #2&Btr grade. The interest of our Chinese customers are showing in higher grades has been very positive for the overall lumber pricing in light of the continued recession levels in the United States home construction sector. In the third quarter we shipped 15% of our lumber to China and for the first 9 months of the year grew 14% of the total volume, a year ago it was half that volume.

In the fourth quarter we expect the growth in the Asian market, principally China to continue and thus help up the challenges in the North American lumber market driven by high U.S. unemployment level and record mortgage foreclosures. The demand from China – from Asia should continue to positively influence the SPF lumber pricing in North America.

Subsequent to quarter end the U.S. Trade Representative sent a letter to the Federal Minister of International Trade requesting formal consultations on the Softwood Lumber Agreement. Without having seen the specifics I understand the U.S. complaint relate to pricing of mountain pine beetle-killed timber in the B.C. interior. Until the consultations are complete it really is premature to comment further on this matter on how it may turn out.

The NBSK pulp market appears to have peaked a record level in the third quarter driven by steady demand tight supply. For the fourth quarter the outlook is only slightly weaker as the recent restart of two North American producers will be partially offset by regularly scheduled maintenance (inaudible) in the industry.

I would now like to focus on our financial results and identify those items that affect comparability with other quarters and low factors that contributed significantly to our results. During my comments I will refer to a third quarter overview slide presentation which is on our website in the investor relations section of webcast. Also, note that for ease of reference I will refer to all dollar amounts rounded to the nearest million, except of course of per share amount and the full and detailed numbers are shown in our news release.

The third quarter equity shareholder net income which includes our 50.2% share of earnings from Canfor Pulp Limited Partnership was $6 million or $0.04 per share. This compares to a net income of $18 million or $0.13 per share for the second quarter of 2010 and a net loss of $5 million or $0.04 per share in the third quarter of 2009.

On slide three of our presentation, we have highlighted the current quarters' non-operating items that affect comparability of results between the quarters and I will detail them now. Charge of $13 million or $0.09 per share, relating to the permanent closure of Clear Lake’s lumber operations. A gain of $6 million or $0.04 per share due to the effect of translation of our U.S. denominated debt, net of investment as the Canadian dollar strengthened to approximately $0.03 compared to the prior quarter end. Finally, a $1 million gain or $0.01 per share on derivative financial instruments, though the amount is small this quarter we included for consistency of adjustment between the quarters.

After taking account of these items, the third quarter adjusted net income is $12 million or $0.08 per share compared to a similarly adjusted net income of $28 million or $0.20 per share for the second quarter of 2010.

Turning to our operating performance on slide five of our presentation. Total gross sales were $46 million lower than the prior quarter. The company generated EBITDA of $66 million, a decrease of $37 million from the prior quarter. If you remove the effect of inventory devaluations reflected in each quarter's result and the permanent closure of Clear Lake, EBITDA in the third quarter was $81 million, a decrease of $27 million from similarly adjusted $108 million EBITDA in the second quarter of 2010.

Looking at each business segments in turn on slide six of the presentation. The lumber segment has EBITDA of $5 million in the third quarter of 2010 compared to $39 million for the previous quarter. This result included an inventory devaluation recovery of $1 million in Q3 compared to a $2 million devaluation exempt reported in Q2 of last year. In addition there was a one-time charge of 18 million related to Clear Lake as I have mentioned.

When these items are adjusted out, EBITDA in Q3 was $22 million, which represented a $19 million quarter-over-quarter decrease. This decrease is mainly due to the North American lumber price. Although for most grades the prices have climbed slowly from their lowest at the beginning of the quarter the average benchmark price still remains $40 below the Q2 average.

Shipments have remained consistent with prior quarters and overall the unit manufacturing cost are in line with previous record.

Turning to the pulp segment, this is slide seven. The third quarter results reported for the pulp and paper segment includes Canfor's Taylor pulp mill together with Canfor Pulp Limited Partnership. The third quarter EBITDA was $65 million and was down by $2 million compared to the first second quarter of this year as high realizations were offset by lower shipment both from Canfor Pulp Northwood mill and our Taylor BCTMP mill. Full details of results for Canfor Pulp Limited Partnership which we own 50.2% were discussed in the Canfor Pulp Income Fund in news release and conference call earlier this week.

For the quarter our capital expenditures were $44 million which is comprised of $31 million for the lumber business and $13 million for Canfor Pulp. We expect that our capital expending for the full year of 2010 will be about $9 million dollars on the lumber side of our business. In addition to the upgrade of our Fort St. John Mill we are taking step to technology for the upgrade other mills with smaller projects. These are principally projects to improve the cost profile and great outturn rather than to increase capacity.

At the end of the quarter Canfor excluding Canfor Pulp had cash $196 million and unused lines of creditors for approximately $380 million. During the quarter we extended our main operating credit facility to October 2013 and lowered the potential borrowing cost under this facility. Our net debt to total capitalization excluding Canfor Pulp was 2% and on consolidated basis to about 6%.

Subsequence to quarter end we completed the sales of all operating assets Howe Sound Pulp and Paper Limited partnership to Howe Sound Pulp and Paper Corporation a unrelated and new reformed subsidiaries of Paper Excellent B.V. The sales is not expected to have material impact on Canfor’s net income in the fourth quarter or the company’s asset (inaudible) and with that Colleen I would like to return the call back to you so we can open the lines for question.

Question-and-Answer Session

Operator

Thank you. We will now take question from the telephone line. We will first take question from the financial analysts followed by the media. (Operator instructions)

Our next question is Darrel Switzerloft with Raymond James. Please go ahead

Darrel Switzerloft - Raymond James

Well thanks good morning guys. Couple of questions first just a color on the Chinese market? Obviously with the mill change-over you are making a bigger commitment to that market. What is your sense of the any uses of BC lumber right now? We still focusing more on the utility grades or is it more number to them better. Any call on that?

Thomas Sitar

As I said in my comment we are now at round almost 40% of our volume is in #2&Btr grade so it has grown up significantly. The uses of principally - very various there is number of places in everything from concrete forming, scaffolding to remanning furniture, floor (inaudible), doors, pallets – it is has a varied use. What I guess I would say is that wood construction is such still in its early stages and that is the part still yet to grow significantly. Wood frame constructions whether low rise or six–storey building. Part of the volume goes there but that is very small and about to grow significantly that is we would be expecting.

Darrel Switzerloft - Raymond James

Okay thanks Tom. I am not sure if you can comment but I’d be curious what Canfor’s view on the North American lumber market and what prices might be without the volume is going to China, is it $25 or $30 a thousand impact. What’s Canfor’s sense?

Thomas Sitar

I do not know If I have a specific percentage but there is no question that we feel that it is influencing the market and really lumber is starting to follow (inaudible) with the sum of other commodities. It is becoming a commodity that the worldwide commodity as oppose to just a regional one and so there is a definitely an impact and I think judgment is to – what specifically that maybe but we have no doubt that is now positively influencing the North American prices.

Darrel Switzerloft - Raymond James

Thanks Tom I will turn it over.

Operator

(Operator instructions) Our next question is from Paul Quinn of RBC Capital Markets. Please go ahead.

Paul Quinn – RBC Capital Markets

Yes, thanks very much and Good morning. Just a question on your capital structure – Tom you went through that – I guess Canfor’s net debt total cap excluding Canfor Pulp is down at 2%. What you see is the ideal capital structure for a sort of an integrated lumber producer?

Thomas Sitar

You could say that at this stage we probably have a low-level of debt but the reality is, we are in a commodity business that is – have shown how it can fluctuate very dramatically and so having a low-level of debt does not trouble me at this stage. And if there is will be on appropriate uses, then we will change that but I am not going to be concerned about being at low debt level as we are right now.

Paul Quinn – RBC Capital Markets

Great. In terms of offshore pricing was up in a quarter versus last year’s pricing that was down, maybe you could just give us some color on your contracts on the offshore and how they work and what the (lag) is?

Thomas Sitar

China pricing, there is a number of ways that is done; it is a mix of pricing that 1 month pricing or 3 months pricing. At the time when prices are being taken is very comparable to North American pricing but it does have a lead time to it but it does vary with customers. So to a degree you have a lag effect but at the time when pricing is being done it is very comparable to North American prices.

Paul Quinn – RBC Capital Markets

And your freight to that market is pretty comparable to North American average, the North American (inaudible)?

Thomas Sitar

Yeah, actually it is and so on when we looked at it we look at it on a national basis, what do we get at the end? That is when I said, “pricing is comparable on a net basis to – that is judged.”

Paul Quinn – RBC Capital Markets

Do you see some point in the future shipping Southern Yellow Pine to China?

Thomas Sitar

From everything I hear is Southern Yellow Pine is heavy, it does not transport well across the warm climate and so. There is some of that but I do not see that as being a very major player in that export and big growth in that market. I just do not feel it.

Paul Quinn – RBC Capital Markets

Okay. In terms of – I guess we would pick lumber prices were residual values went up – could you give us a sense of sort of what percentage of lumber segment revenues were represented by residual? Just a ball park

Thomas Sitar

The residual, those are not priced on lumber prices. I am not sure I follow your question. I mean they are driven by pulp prices.

Paul Quinn – RBC Capital Markets

Right. But you are accounting for them on the lumber segment?

Thomas Sitar

Yes we are. They are part of the lumber segment.

Paul Quinn – RBC Capital Markets

Right. I am just trying to get an idea to what proportion of the lumber segment is represented by residuals.

Thomas Sitar

I do not have that list right now handy. We will look it up and we can get back to you on that. I don’t have it ready.

Paul Quinn – RBC Capital Markets

Okay. Last question, just on the change in IFRS, what is the major change for Canfor there?

Thomas Sitar

Well, the major change will be accounting for pension plan, pension plan cost and asset and we will show that at year end we will – our plan right now is that we will show an opening balance sheet at (inaudible) in our annual report. So we will detail that at that point. Principally the change for asset is the accounting for pension.

Paul Quinn – RBC Capital Markets

Okay. Thank very much. Good luck.

Thomas Sitar

Thank you.

Operator

Thank you. We will now take questions from the media communi – sorry, we do have a question from Sean Steuart of the Analyst Community.

Sean Steuart – TD Securities Inc.

Thanks, good morning. Tom, I just want to follow-up on Paul’s question. In you slide deck you referred to just slightly higher lumber price realization on off-shore markets and just reading through you said to Paul. Am I correct to think that the spike we had in prices in North America through the second quarter, that is just the lag effect of the contract won though the better pricing in China in Q3. And as such, can we expect maybe a little bit of prices off than what you are sending to China in Q4?

Thomas Sitar

There has been a bit of a lag effect that is part of it but also pricing in market like Japan was a bit better. So it is a combination of 2 but I do not see that there will be much of a problem in comparison to the North American market. So there is no question there is a bit of lag effect in pricing.

Sean Steuart – TD Securities Inc.

Okay. That’s all I have. Thank you.

Operator

Thank you. We will now take question from the Media Community. (Operator Instructions).

Thank you for your patience. Our first question is from Allan Dahl of Reuters, please go ahead.

Allan Dahl - Reuters

A question on the China market: Do you see a point of which pricing for China begins to lure in some other players? I am thinking some of the European players or I suppose more log is out of New Zealand going to domestic Chinese producers. Can we reach that level yet or do you see that coming up?

Unidentified Speaker

I don’t think so at this stage dramatically. Not specifically, I don’t see it.

Tom Sitar

Just to add to that Allan, China historically has consumed logs from New Zealand as well as logs from Russia so those commodities do flow there today in order to attract significant additional volumes in particular from Europe prices would have to be orders of magnitude higher typically to get in there economically.

Allan Dahl - Reuters

I guess also on the craze on lumber, are you sort of seeing a developing or sort of a permanent mix until you send the amount of grade 2 on the lumber is increasing in our purchases. Are you saying – have you figured out where you think there might be a balance between the overall types of grades, utility versus higher grade?

Tom Sitar

Well, we see the proportion of the higher grade potentially rising some more but it will be a market that will consume both the lower grade and the upper grade but over time I would expect the number to run better to – to continue to increase.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Sitar.

Tom Sitar

Thank you, Operator. Thank you all for joining us on the call and we look forward to speaking with you again on the next quarter. Thank you.

Operator

Thank you. There are no further questions registered. I will turn the meeting back over. The conference has now ended. Please disconnect your line. 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: Canfor Corporation Management Discusses Q3 2010 Results – Earnings Call Transcript
This Transcript
All Transcripts