Canfor Corporation CEO Discusses Q2 2011 Results - Earnings Call Transcript

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 |  Includes: CFPZF
by: SA Transcripts

Canfor Corporation (OTCPK:CFPZF) Q2 2011 Earnings Call July 29, 2011 11:00 AM ET

Executives

Don Kayne - President CEO

Allen Nickel - CFO

Alistair Cook - SVP Wood Products

Analysts

Peter [ph]

Darrell Switzerloft - Raymond James

Michael Jenning [ph]

Sean Steuart - TD Securities

Paul Quinn - RBC Capital Markets

Mark Nielsen - Prince George Citizen

Ross Marowits - The Canadian Press

Operator

Good morning ladies and gentlemen, welcome to the Canfor Corporation second quarter results 2011 conference call. A recording of the call and a transcript 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 in the Investor 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 would now like to turn the meeting over to Mr. Don Kayne, President and CEO of Canfor Corporation. Please go ahead, Mr. Kayne.

Don Kayne

Thank you operator, good morning everyone and welcome to Canfor’s conference call to discuss the company’s second quarter results for 2011. I will speak very briefly about our quarter two highlight before turning it over to Allen Nickel our Chief Financial Officer. Alistair Cook our Senior Vice President of Wood Products Operations, and Wayne Guthrie our Senior Vice President of sales and marketing are with me as well.

Yesterday, Canfor announced shareholder net income of $26.2 million for the second quarter and an EBITDA of $66.8 million. Allen will speak to our financial performers in a few minutes. Despite the fact that we are seeing a few more positive signs in the recovery of the US economy, we still believe that recovery will be a very, very gradual process. June housing start figures were somewhat encouraging and US corporate earnings appeared to be improving.

We do remain very cautious in our expectation and continue to believe that the US will take another 18 to 24 months to reach more normal demand levels. Total BC lumber sales to China exceeded those to the US for the first time in May. A benchmark achievement that reflects many years of work on the part of Canfor, our industry colleagues and the BC at Federal Government in creating this new market for solid wood.

Continuing to aggressively work to develop Wood frame construction with China’s the largest developers and builders, will result in this market continuing to grow and strengthen well in to the future. Year-to-date, Asia has represented 35% of our lumber shipment. Canfor is very focused on continuing to develop the Chinese market and on bringing aboard a successful transition into the widespread use of wood frame construction in China.

India, while presenting slightly different market entry challenges from what we experienced in China offers considerable feature promise as well. Our Japanese market also continues to show very good progress despite that nations fear if they get a Tsunami. Overall shipments to Japan continue to increase from quarter one. I was in Japan in June and while we have some sense from North America of the scope of the devastation, it is hard to imagine just how severe it is without seeing first hand.

For reconstruction it will take some time for a civil planning effort of this size to get underway. When Japan does start to rebuild; overtime we expect that it will include about 200,000 homes. Many other wood suitable structures were damaged or destroyed as well including 800 nursing homes and hundreds of schools. Despite growth in Asian and sales and early signs of recuperation in the US, we remain closely focused on cost across company.

We are making solid progress on our capital investment program which will see us in debt at $120 million this year (inaudible) improvements and modernizations over and above normal maintenance pending. These investments will substantially improve our cost performance. In Q1 we announced the capital program that included technology and efficiency investment at our Vavenby Polar and Plato operations.

Yesterday, we announced a further $46.7 million at our (inaudible) and PG Saw mill operation. These investments include player upgrades in (inaudible) and the purchase of (inaudible) cogeneration facility as well as planer upgrade in our (inaudible). We have also announced that our Vavenby operation will resume with a one shift operation on September 6th. As co-production the Vavenby mill will add about 240 million board feet to our capacity on an annual basis.

Lumber production is up from quarter one and lumber unit manufacturing costs are down, primarily due to productivity improvements. Weather challenges in the first quarter were followed by the weather spring in summer in many years which is having an effect on our harvesting operation and long hauling. Our wooden [ph] group has been focused on maintain supply to ensure normal operations.

I would like to now turn the call over to Allen to discuss Canfor’s financial performance for the quarter.

Allen Nickel

Thank you Don. Good morning everyone. In my comments on Canfor’s second quarter financial performance, I will be referring to our second quarter over few slide presentations which you will find on our website in the Investor Relations section. Full details (inaudible) are contained in our news release issued yesterday. Our second quarter of 2011 equity share holder net income which includes; just over 50% share of earning from Canfor Pulp Limited partnership with $2 million or $0.01per share.

This compares to a net income of $7 million or $0.05 per share for the first quarter of 2011 and a net income of $21 million or $0.15 per share for the second quarter of 2010. On slide 3 of our presentation, we highlighted non-operating items that affect comparability results between the first and second quarters. In the second quarter, these items consisted of gains on the translation of US dollar denominated debt into Canadian dollars affecting a stronger Canadian dollar, as well as gains on derivative financial instrument and also in the second quarter of onetime restructuring charge following the management re-organization that was announced in May.

After taking a kind of these items, the second quarter adjusted net income was $3 million or $0.02 per share and this compared to a similarly adjusted net income of $0.1 million for the first quarter of 2011; an increase of $3 million or $0.02 per share.

With respect to the second quarter operating performance, you will see on slide 4 of our presentation that our total sales was $619 million and this was about 1% lower than the prior quarter. EBITDA was $67 million, a decrease of $6 million from the first quarter. If you remove the fact of inventory evaluation adjustment in each quarter or so, EBITDA for the second quarter was $65 million, which was strong [ph] than the $11 million from the $76 million reported for the first quarter of 2011.

For the most part, this $11 million dollar variance is experienced by little solid wood realizations in the second quarter. I will speak more by this and the other contributing factors a little later in the (inaudible) overview. Slide five shows the history of US (inaudible) and Western SPF benchmark lumber price in Canadian dollars and as you can clearly see from the slides (inaudible) factor continues very heavily on North America and lumber markets in the second quarter.

Turning to slide six, you see that the lumber segment generated recorded EBITDA of $10 million in the second quarter of 2011 as compared to $18 million for the previous quarter. In the second quarter, we saw significant reductions in US dollar benchmark (inaudible) 18% quarter-over-quarter. However declines across (inaudible) were less and prices for off shore markets many of which are negotiated monthly or quarterly and at times did go about relatively well.

The stronger Canadian dollar also (inaudible) realization in the quarter. Shipments of Canfor for just lumber were up 17% from the previous quarter and this was slightly been a improvement in the transportation that were after the well related challenges that we saw in the first quarter as well as increased demand from China. Our unit lumber manufacturing costs were down 3% from the previous quarter reflecting improved productivity on lumber recoveries which impart reflected some of the cost of the impact on several recently completed Canfor projects.

Seasonally lower energy cost also contributed to the lower cost. The delivered unit loan cost to our mills was substantially unchanged from the previous quarter. If you turn to slide seven; moving to the pulp and paper segment. Second quarter EBITA was $63 million which is down by just $1 million compared to the first quarter of 2011. As a positive impact of higher U.S dollar NBSK co-prices until lesser degree seasonally lower energy costs was also sent by the combination of the stronger Canadian dollar, lower shipments and hired fiber chemicals and maintenance costs.

For more details of Canfor Pulps results, please refer to the news release on the conference call we had last week. Capital spending for the second quarter totaled $56 million of which $25 million was for the lumber business and $31 million for Canfor Pulp of which $20 million was added to reimbursable green transformation program.

For the 2011 year we anticipated that it will expand by $140 million of capital on our lumber business. At the end of the quarter Canfor, excluding Canfor Pulp had a salable liquidity at $450 million which was comprised of $104 million of cash as unused on the salable lines of credit $346 million. Our net debt to total capitalization excluding Canfor Pulp was just over 1% and on a consolidated basis 0.6%.

Don Kayne

Thanks Ally, operator I would like to now open the call up to questions.

Question-and-Answer Session

Operator

We fill first take questions from the financial analysts followed by the media. (Operator instructions) The first question is from Peter [ph], please go ahead.

Peter

Thanks, if you look at the pattern of the buying from Chinese customers over the last several months, it has been relatively steady expect may be for one or two months in January and February of this year. (inaudible) going forward in terms of, you know them and should we expect them to have a constant buying pattern or do you expect them to be price sensitive and also do you see other kind of (inaudible) for the shipments such as do you reach a point where you have trouble to ship you lumber who received because of availability of both phase of (inaudible) Can you discuss about all these issues.

Don Kayne

Sure thanks Peter, I guess just on your first part of the question around pricing – and your are absolutely right through the first six months of this year after the most part we have seen a very steady take away month-over-month for the first six months, we really have not seen all that change, although I will say in Q2, we actually saw the volumes increase overall to China.

Going forward, we got a fairly good view of what is going on just about the amount of wood that we over sell and we have not seen at this point any interruption in Q3, in terms of volumes, we are pleased with overseeing going forward and really do not see any material change frankly for the balance of the year. I think that the ongoing focus that we see in the market in terms of trying to focus harder and harder on the wood bank construction and some of the opportunities around that, it should help to maintain that.

In terms of shipments, we did have some shipment issues in the first quarter and even probably in the second quarter just due to the increasing volumes, but that seems to have corrected itself now over the last four to six weeks and at this point, we do not anticipate any issues that going forward.

Peter

What was the problem you have on the shipments side?

Don Kayne

Well just through the distribution centers that we have, just a significant volume and that combined with the weather are causing problems. We probably heard someone of the transportation issues around bridge washouts and rail track washouts and so forth and that causes some delays.

Peter

So that was on this side of the trades that was in BC and no problem on the boat side, going on the sea side or?

Don Kayne

No not really. I mean with the container availability and (inaudible) availability was fine.

Peter

Okay, (inaudible) you mentioned that you have relatively good visibility on that, so what is the length of visibility you have on this is it a month, two months, three months.

Don Kayne

Yes, it is just based on what we are seeing from indication from our customer base with the next three months. We anticipate, being very similar to what we have been seeing in the past six months. So, no real substantial change at all, just consistent strong sales throughout the rest of the quarter and on into the balance of the year.

Peter

Okay, thank you very much.

Don Kayne

Yes, no problem.

Operator

Thank you. The next question is from Darrell Switzerloft from Raymond James. Please go ahead.

Darrell Switzerloft – Raymond James

Thank you, good morning guys. Couple of questions, first just want to clarify that your logging cost changes, I understand that costs are higher year over year and that is primarily due to diesel but flat quarter-over-quarter is that correct?

Don Kayne

That is correct.

Darrell Switzerloft – Raymond James

Okay, thank you. Don typically you have very good presence with your distribution chain. What it your stance today of inventory levels throughout the chain in the US or North America.

Don Kayne

Sure Darrell, I think that, as you are aware during the first quarter, we saw inventories probably peak and probably get to the highest levels, it has been there quiet sometime due to some of the issues that we face throughout the supply chain but we think substantial progress has been made in the second quarter. I am not just with Canfor Pulp (inaudible) also throughout the industry (inaudible) Canada even in the US, so we would say that well we are not probably down to the levels that we would like to see yet.

We have been seeing substantial progress largely because the rail system and the rail performance has improved significantly, as we proceeded and move through the second quarter, so hopefully that will continue, we expect that throughout the Q3 and Q4 that goes, the inventory reductions will continue.

Darrell Switzerloft – Raymond James

All right, thanks for that. (inaudible) you had both operations. (inaudible) what sort of potential improvements did you see in terms of either operations or marketing or what about that?

Don Kayne

Yes, I think there is no question in the yellow pine business has been a bit difficult and largely due to the fact that it is more relied in some of the other regions on the US market and what we are no different than anybody else in that case, but we have ourselves last while here announced [ph] and I spent some money there on capital to try to improve the operations there, largely on the (inaudible) side so we are focused hard on cost and all that we could do to make sure that we as competitive as we can be on a cost side and we are sure going forward.

On the marketing side, we believe that there is more, there will be more opportunities for yellow pine and we have seen some of that already to diversify into some other markets and we are seeing some of that in Asia even and also into other parts of Europe, so on terms of yellow pine, we still believe until the US comes back, it will continue to be a tough business, but definitely with the cost improvements we are making and we will be seeing on the marketing side. We do see it improving going forward and definitely use the key focus for us.

Darrell Switzerloft – Raymond James

Great, thank a lot. I will turn it over.

Don Kayne

Okay, thank you.

Operator

Thank you, the next question is from Michael Jenning [ph] from (inaudible), please go ahead.

Michael Jenning

Good morning guys. We saw in Q2 lumber shipments outpaced production by about 5% after a lagging Q1 and I think you mentioned some of the transportation issues. As you move to Q3, how should we think about volume, it did more in line with Q1 or Q2 or we kind of somewhere in between.

Don Kayne

Michael, we talked about that, we see Q3 being very similar to abnormal patterns, in another words the more of a match between production and shipments.

Michael Jenning

Okay, great and then, you mentioned in the lumber segment specifically talking about how the North American price decrease is not matched offshore and you talked about the length of the contracts being monthly or quarterly, is that something that is same in the US or is it just internationally that there is a kind of a lag versus the stock pricing.

Don Kayne

Yes, for sure we have talked about this before a little bit, I mean the bottom line is that we do typically offshore business, sell a little bit longer, when we took that a little bit longer (inaudible) two, three months, so throughout the second quarter as you are aware (inaudible) prices decreased, but we had a fairly lengthy order fall in overseas business and so we are able to hold on to a slightly higher price levels throughout the quarter. So, overall I would say generally, that the returns on overseas markets in Q2 were measurably better than what they would have been in North America as a result of that.

Michael Jenning

Okay, great, that is all I have.

Don Kayne

Okay, thank you very much.

Operator

Thank you (Operator instructions). And the question is from Sean Steuart from TD Securities, Please go ahead.

Sean Steuart - TD Securities

Thanks, good morning. Couple of questions, Don - wondering if you could touch on, I guess more recent flooding in the interior in July and how that is affecting logistics whether it is getting logged into the mills or getting product there, is that having any impact at all.

Don Kayne

Yes, for sure it is got an impact absolutely and we have been fighting that probably every day almost. I would tell you throughout the second quarter, seems like it just seems to rain every day. In terms of some of the impacts so far, the main one is - main thing probably is just that we have to operate with extremely low (inaudible) throughout Q2.

Due to that, we had a continuing struggle to fill any significant amount of inventory, so there is a lot of a cases just basically working that has the met throughout the quarter. (inaudible) just done a tremendous job, we are making sure that we have had products or logs in front of our saw mills throughout the quarter, but it is got to be an impact, but we are just fighting our way through it.

Sean Steuart - TD Securities

Okay and then, the second question, I was just interested in your comments on India as an emerging market for you guys and I wonder if you can speak to any marketing effort you put into that market and or is it just sort of taking the orders as they come right now.

Don Kayne

I would say the latter; I mean clearly there has not been any aggressive approach there at this point. We really view it as where China was probably 10 years ago. It has just been in December of this past year that we have been able to focus on India at all so we are in the real early stages of any market development there and but we do see a future their down the road and we are just going to continue to monitor that and make sure that were a part of that as it moves forward.

Sean Steuart - TD Securities

Thanks, that is all I had.

Operator

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

Paul Quinn - RBC Capital Markets

Yes, good morning. Just a couple of questions, one just on the hearing reports of growing Chinese lumbering inventories in China, are you experiencing the same thing and hearing the same rumors?

Don Kayne

Paul - And for the rumors, but we are not seeing the results of that and we heard them for several months, maybe several quarters and we continue to not see any interruption in our flow of products into the market place and so up to now well there may pockets of inventory throughout the country (inaudible) probably is. We have not seen the impact materialist as far as Canfor’s concerned.

Paul Quinn - RBC Capital Markets

Do you guys have notice any noticeable change in the use of your wood in terms of a growing percentage into a wood-frame construction.

Don Kayne

Absolutely and the way wood-frame construction were components of wood-frame construction. I guess, but what would be the best of saying that I mean, just looking at straight other thousands and thousands of just 2 by 4 wood-frame construction or 2 by 4 wood-frame homes being built, definitely they are increasing throughout the country and we see and hear a lot of that but more importantly, what we see is more of the components of the wood-frame house whether it be a (inaudible) walls or exterior walls in some cases for us process those types of thing, we definitely see increases in that and we also see the remand business both on our domestic use as well as export use increasing as well at a very brisk pace, so those will be the two areas and obviously the (inaudible) side it is continued like it always has been and is continuing to be strong as well.

Paul Quinn - RBC Capital Markets

Great. I guess you increased the shipment volume that we used up or brought down the availability of container and how much now are you doing great bulk and I guess they are real and question here is what does it is a cost and/or margin difference between the two if they are different.

Don Kayne

Sure, in terms of containers we are at 99.5% containers first of all, what are doing and you may have heard that the (inaudible) our products are partnered on a break bulk vessel that we recently had build in Korea and it has just had completed its first voyage and is on its way. I think today or tomorrow on a second voyage over to Shanghai and it is a break bulk vessel and so we are just basically as an industry trying to make sure that we have some alternatives to just being so heavily reliable on containers although we haven’t had too many interruptions here with containers either.

Going forward, your question around cost, yeah it is a bit higher, but it has come down significantly from where it was, so we feel that the small increase in cost it is apparent, it is more than offset by mitigating some of the risk and making sure that we are prepared for the future growth in China in rather satisfactory transportation network in which we deliver the product.

Paul Quinn - RBC Capital Markets

Sounds pretty reasonable. Okay, just a question on M&A activity just at the high level, have you seen any difference in the market place in terms of that it looks like the recovery and the US house market be pushed out. Have you seen any sawmills or potential acquisitions, be more amenable to that or any change at all?

Don Kayne

Yeah, I guess that your just on that, I cannot comment too much other than to say that, going forward we are always looking at opportunities, but I mean with Canfor we are really just focused to start here and is a key focus of the company and we spoke about it before, but it continues as to make sure that the existing operations that we have are operating absolutely as best as they can be and making sure that the capital plans that we have announced and are underway today and will take place over the next 12 to 24 months.

They were maximizing the productivity as quick as we can. So, that will continue to be of absolute priority and then at the same time as opportunities arise for acquisitions or mergers whatever, certainly there will be some that will come forward and we will just take a look at them and see if it makes any sense for us.

Paul Quinn - RBC Capital Markets

Okay and just lastly a sort of modeling question, it seem like your lumber realizations in Q2 are a little bit higher than I expected and it seems to be more of the lag in pricing drops in export markets. Is it fair to say that those will come down noticeably in Q3?

Don Kayne

I think what you will see in Q3 probably a bit more traditional comparisons between North America and overseas markets which really is more of similar pricing. We are really getting into a worldwide price or (inaudible) benchmark and we see that as being pretty consistent.

The other thing though that will continue and has improved is the spread between some of the other items that we were speaking about prior quarters as a negative. It seems to be back to traditional spreads now and particularly 2/4 and 2/6 and 2/10 and so we see that continuing with the balance of the share.

Paul Quinn - RBC Capital Markets

Great thanks, thanks a lot.

Don Kayne

Okay Paul Thanks.

Operator

Thank you. This concludes the question and answer session for analysts. We will now proceed with question from the media. (Operator instructions) The first question is from Mark Nielsen from Prince George Citizen, please go ahead.

Mark Nielsen – Prince George Citizen

I guess this is probably the big news from Prince George’s - is the (inaudible) sawmills and with one thing that you might be able to elaborate on what planned, with the purposes, the timeline, the cost, how many more people might be employed as a result, anything you can provide us about.

Don Kayne

I think I will let Alistair answer that question, if you don’t mind.

Alistair Cook

Certainly. Good morning Mark, absolutely we are going to do (inaudible) in terms of some optimization and removing some of the bottle necks that we see in the planer facility and Prince George. It will further improve the efficiency of that mill and continue to make it a low cost producer for us It looks like, we will do the in sell sometime in December and start that mill backup in January.

Mark Nielsen – Prince George Citizen

Can you say how much you’ll be spending on it?

Alistair Cook

Roughly 12 million.

Mark Nielsen – Prince George Citizen

And will that increase your employments at that particular sawmill?

Alistair Cook

We continue to look at those opportunities and it is going to allow us to run more efficiency and to utilize our capital better.

Mark Nielsen – Prince George Citizen

All right, if there are no other media, I was just wondering if you could elaborate on the potential in India as compared to China.

Don Kayne

Mark - Canfor overall, we think it is an opportunity like I was mentioning briefly that we kind of looking at it as perhaps where China was 10 years ago and we are in the very initial stages of trying to get our hands around just like parts of India provides the biggest opportunities where some of the products and where do we really want to focus within the country. Because like China, it is a huge country and the first thing would be to try and determine what areas and what products have the best potential. And so, we will be putting some time in it out over the next 12 months. But, like China it is an emerging economy and emerging market that we think that we definitely can add some value to go in forward.

So, it is something that like I say is in the early stages, but we are somewhat focused on that and see what is the kind of opportunities that we can bring to the table here going forward.

Mark Nielsen – Prince George Citizen

That’s it.

Operator

Thank you. The next question is from Ross Marowits from The Canadian Press. Please go ahead.

Ross Marowits - The Canadian Press

Yes hi, I just wanted to follow up on India as well. Can you give any indication as to who your competitors thus far from Canada and foreign competitors are in India.

Don Kayne

Sure Ross. I am not 100% sure yet, because it is relatively new, but I guess I would comment that - I would say that most of the Western Canadian are (inaudible) competitors who will certainly be dealing it probably in a similar way than we are in just initial market involvement and trying to assess just what the real opportunities are and other than that there is definitely a product has been shipped in there from Europe and we are seeing some of that and that seems to be probably the biggest competition in terms of at least going forward that we may face.

Ross Marowits - The Canadian Press

And are there any numbers in terms of dollar figures or quantity of lumber that you are shipping to India and when did that start?

Don Kayne

Started, we were only able to start shipping in December of 2010 and so we shipped just a very small amount and it is not just raw material at this point, but hopefully in 12 months when we speak with you it will be, I can say something a lot better.

Ross Marowits - The Canadian Press

Is the use of wood or the barriers to getting wood into the country similar to China? Is there not a culture of using wood or how does it work like?

Don Kayne

India like China has a culture of using wood going back many, many years right and so that is the attraction, but again it just comes down to making sure these markets are so big and so widespread, making us really have a very focused approach in terms of what you are going to do within some of those large countries because you have many, many choices so right now we are just kind of we are basically looking at it like we did in China going back 10 years ago to try to determine what that focus should be so but clearly there is a desire for wood in the country. They use a lot of wood today, it is just the question of where (inaudible) fits in that.

Ross Marowits - The Canadian Press

Okay and in terms of your forecast for Chinese shipments where - it has gone a lot, where do you see that going?

Don Kayne

Just as an industry and as a country and in terms of consumption we see huge opportunities in China going forward and there is no doubt that over the next five years we see no problem with the ability to double the volume going into China. There market continues to expand at a fast rate, much faster than what often we think and so this whole wood frame construction site is really largely untapped.

We talk about it in different ways, but overall that is really what we are all focused on as an industry and as a (inaudible) of the country and that is really when we start to see the investments that we have all made pay back of pay off and we are seeing the first signs of that and we see that continuing over the next I guess, one, two, three years.

Ross Marowits - The Canadian Press

And can I ask you about the US budget issues there; however it is resolved, it sounds like there is going to be cuts in government spending. Are you concerned that that may delay the recovery and by how much?

Don Kayne

Yes, we are absolutely concerned about that without question, but we really in our view of the US market going forward has always been one of caution for the last several years and it is going forward as well. We are definitely - there are some areas that are bit stronger than others in the country, but (inaudible) we believe that we just need to be very cautious moving forward. We think the recovery will take some time 18 to 24 months maybe even longer, but certainly 18 to 24 months and that is worth preparing for through the diversification. And we have in place with Asia and also the capital that we're focused on spending and delivering on at the saw mills to make sure that we can be as competitive as possible, in case the US doesn’t come back at the rate we expect.

Ross Marowits - The Canadian Press

Thanks very much.

Operator

Thank you, this concludes today’s question-and-answer session. I would like to join the meeting back over to Mr. Kayne.

Don Kayne

Alright, thank you operator. Thanks to all of you for participating and I look forward to speaking with you again at the end of the next quarter. Thanks very much.

Operator

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

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