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

Executives

Henry Ketcham - Chairman, Chief Executive Officer and President

Gerald Miller - Chief Financial Officer and Executive Vice President of Finance

Analysts

Sean Steuart - TD Newcrest Capital Inc.

Benoit Laprade - Scotia Capital Inc.

Stephen Atkinson - BMO Capital Markets Canada

Paul Quinn - RBC Capital Markets, LLC

Richard Skidmore - Goldman Sachs Group Inc.

West Fraser Timber (OTCPK:WFTBF) Q4 2010 Earnings Call February 18, 2011 11:30 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Company Limited Fourth Quarter 2010 Results Conference Call. During this conference call, we 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 are 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 our annual MD&A, which can be accessed on our website or through SEDAR and as supplemented by our 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. Hank Ketcham, Chairman, President and Chief Executive Officer. Please go ahead, Mr. Ketcham.

Henry Ketcham

Thank you, operator. Welcome to our Q4 conference call. There is a summary presentation on our website for those of you who would like to follow along as we talk.

Yesterday, we announced our results for the fourth quarter. We earned $39 million or $0.89 a share after discontinued operations on sales of $719 million. Earnings from continuing operations were $27 million or $0.61 a share. Earnings for the year were $166 million or $3.84 per share after discontinued operations on sales of $2.9 billion. Our earnings for 2010 represent a significant improvement over the last few years despite the continuing poor new housing market in the U.S.

As a result of our improved earnings, cash flows and our balance sheet and our outlook for our businesses going forward, our board of directors approved an increase in our quarterly dividend to $0.14 yesterday. This brings our dividend back to the level it was before the dividend reduction announced in May of 2009.

In September and again in December, we announced that we have resumed our reinvestment program across the company. A key element of our long-term business strategy has always been to invest in our businesses to ensure that we have the most efficient and lowest cost operations possible. We believe that this strategy allowed us to operate at higher rates and achieve higher margins through the most significant downturn in generations. The capital programs that have been announced are directed mainly at improving our Solid Wood business, with capital focused on high payback projects across our Lumber business in Canada and the U.S.

In addition to the capital investments and our Solid Wood business, we're planning to invest the $88 million that we have been allocated as part of the federal government's Green Transformation Program and profit improvement projects in our Pulp & Paper business. The funding from this program is being invested in part to increase the amount of electricity produced in our pulp operations, which will allow us to sell power, lower our energy consumption and our production costs.

We also have had two projects shortlisted by BC Hydro under its recent biomass power call. These projects, if successful, will allow us to generate and sell electricity produced at two of our B.C. sawmills. This is an exciting time for our company and our industry.

Our sawmills generally operated well during the quarter. Lumber production was down slightly mainly due to fewer operating days in the fourth quarter. We continue to process a large proportion of beetle-killed pine in our B.C. interior mills. Lumber shipments were down slightly from the previous quarter largely due to the year-end slowdown that we typically see.

The SPF lumber market was surprisingly strong with the benchmark 2x4 price increasing in the quarter despite North American housing starts remaining at very low levels. With our higher benchmark price, we were able to increase our average mill return somewhat in the quarter.

Although the Southern Yellow Pine benchmark price increased in the quarter, the continuing price discount on wider width lumber resulted in a decline in the average mill returns for Southern Yellow Pine.

Offshore markets were good with our shipments to both Japan and China increasing over Q3 levels. We estimate that our export shipments to Asia in the quarter through both direct and indirect channels were approximately 270 million board feet or 32% of our total SPF shipments. About 70% of the total went to customers in China. The Chinese market continues to grow, and our shipments to this important market are growing with the market. Also, the volume of construction grade lumber into the Chinese market continues to increase.

Earnings in our Panels business came off quite substantially in the quarter, mainly due to significantly lower plywood prices in Canada, largely the result of increased U.S.-produced plywood entering the Canadian market. Lower MDF prices also contributed to lower earnings in this segment.

Our plywood plants operated near capacity while our MDF and LVL plants continued to operate at curtailed levels, consistent with the prior quarter. Our Pulp & Paper business operated at a record level in the quarter and shipping levels improved compared to the previous quarter. Prices for NBSK were slightly lower in the quarter, but prices for BCTMP, which represented about 55% of our pulp shipments, were substantially lower in the quarter. Our newest print mill ran well, and we were able to maintain shipments and pricing consistent with the previous quarter.

Overall, we had a pretty good year compared to the previous few years despite the continuation of the very soft housing market in the U.S. With our improved earnings and cash flows, we've been able to significantly improve our financial position and reinvest in our business.

As we look forward, we see the export lumber market, particularly China, growing and we will fully participate in that growth. We also expect that there will be some small level of growth in the North American housing market. Plywood prices are expected to remain under some pressure as long as U.S. plywood continues to be shipped into Canada and indications are that pulp prices should be maintained or increased in the near term.

On January 18, 2011, the United States requested arbitration with Canada under the provisions of the Softwood Lumber Agreement over its concern that the province of B.C. is charging too low a price for certain timber harvested on public lands in the B.C. interior. The results of the arbitration are not determinable at this point in time.

I'll now turn it over to Gerry Miller, our Executive VP and Chief Financial Officer.

Gerald Miller

Thanks, Hank, and good morning, everyone. In the quarter, we earned $39 million after discontinued operations on sales of $719 million. EBITDA in the quarter was $75 million, representing an EBITDA margin of 10.5%. EBITDA and earnings were lower in the quarter compared to the third quarter, mainly as a result of lower prices per pulp, plywood and MDF and a stronger Canadian dollar.

Our EBITDA and EBITDA margin in this quarter compared to the previous quarter were lower in each of the lumber panels and Pulp & Paper segments. Our lower consolidated EBITDA and earnings compared to the third quarter were partially the result of higher selling, general and administrative expenses which relate mostly to an increase in equity-based compensation cost. The equity-based compensation cost was $20 million in the quarter, representing about $0.33 per share compared to $8 million in the previous quarter. This higher expense reflects an increase in our share price, which closed the quarter up 24% from the beginning of the quarter.

Amortization costs in the quarter and for the year were lower than in comparable periods as a result of changes in the rates of amortization for certain groups of assets and because certain assets became fully amortized in 2010.

In the quarter, we were able to renegotiate our committed revolving line of credit to extend the term to December 2014, adjust future borrowing limits and take advantage of more favorable borrowing and standby rates. In the quarter, we recorded a foreign exchange gain on our long-term debt of $10 million or $0.20 per share. The gain is a result of the strengthening of the Canadian dollar by just over $0.03 from the beginning of the quarter to the end of the quarter and the translation effect on our USD $300 million denominated debt.

Our quarterly results reflect an increase in the income tax provision of $10 million or $0.22 per share from a legislative change that prevents a deduction for certain payments related to share options. Diluted earnings per share after discontinued operations were $0.89 in the quarter compared to $1.04 in the third quarter and diluted earnings per share for the year were $3.84.

In the quarter, we made an adjustment to our segmented reporting. That adjustment relates to the allocation to each of our business segments of certain administrative costs that were previously reported in corporate. The allocation in the fourth quarter resulted in a charge of $4 million, $1 million and $2 million, respectively, in each of our Lumber, Panels and Pulp & Paper segments and a recovery of $7 million in corporate.

Our earnings from continuing operations resulted in a positive cash flow from operations before working capital changes of $23 million in the quarter, down from $79 million last quarter. The working capital increase during the quarter of $63 million reflects the seasonal building of log inventories for our Canadian Solid Wood Products operations.

In the current quarter, we invested $13 million in property, plant and equipment. This compares to about $10 million in capital investment in the third quarter.

In December, we announced a $230 million capital expenditure program to be implemented over the next 18 months. The program will be directed to strategic profit improvement projects mainly in our Lumber business. This capital is in addition to the Green Transformation credits that have been earned by our Pulp & Paper business.

Overall, we used $56 million in the quarter from continuing operations, again, mainly the result of building log inventories.

From discontinued operations, the closure of the Eurocan mill and the associated linerboard and Kraft Paper business, we generated cash of $8 million in the quarter as we sold two paper machines and continued to reduce inventories and collect accounts receivable. The closure of that operation is proceeding as planned, with the expected total cost of the closure to be approximately $45 million compared to the $70 million guidance we provided in Q4 of 2009. In addition, we are moving forward with other potential asset sales related to the business, which we expect will occur in 2011.

Despite the use of cash in the quarter, our balance sheet continues to be very strong. At the end of the quarter, the net debt to capitalization ratio was approximately 8%, up slightly from the previous quarter and largely due to the seasonal inventory increases.

I'll just make a few comments on IFRS. The 2010 financial results are the last results we will report under current Canadian accounting principles, which have been replaced with International Financial Reporting Standards. The quarter ending March 31, 2011, will be the first quarter we will report under IFRS, and at that time, we will also restate the comparative 2010 figures to comply with the new reporting standards. In our MD&A, under the heading New Accounting Pronouncements, we have provided IFRS disclosure intended to assist analysts and investors in understanding the impact of IFRS on our reported figures.

Equity on the transition date of January 1, 2010, is expected to be reduced by $195 million under IFRS. The details of the reduction are explained in the MD&A. The change to IFRS will not impact cash flows and will not have a significant impact on our debt covenants. At this point, we believe we are fully transitioned to the new accounting and reporting standards, and we will be fully compliant with the new standards for the first quarter reporting period.

With that, Hank, I'll turn it back to you

Henry Ketcham

Okay. Thank you, Gerry. And I think we're now ready to take some questions, operator.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Rick Skidmore of Goldman Sachs.

Richard Skidmore - Goldman Sachs Group Inc.

First, Gerry, just on the unallocated corporate costs, is that largely just the share-based comp staying so high in the quarter?

Gerald Miller

No, in corporate is the share-based, equity-based compensation. We have not allocated that to the other divisions.

Richard Skidmore - Goldman Sachs Group Inc.

So that $14 million in the quarter, 20 of that is share-based comp. Is that right?

Gerald Miller

Yes.

Richard Skidmore - Goldman Sachs Group Inc.

So as you think about that line going forward, it’s couple of million dollars a quarter, that corporate and other?

Gerald Miller

The remaining?

Richard Skidmore - Goldman Sachs Group Inc.

Yes. Sort of thinking about it for my modeling purposes, as we go forward, that corporate another line, excluding changes in the share-based comp, what will that look like?

Gerald Miller

Maybe a couple million dollars.

Richard Skidmore - Goldman Sachs Group Inc.

And then maybe just shifting, Hank, to the Lumber business, on the beetle kill wood, how long into the future do you expect to be able to be harvesting beetle kill wood and to be processing it in the lumber mill?

Henry Ketcham

Well, obviously, it is deteriorating. So we expect that -- we're still harvesting at fairly high levels, and we expect that to continue for an indeterminate time. The province is reducing the annual allowable cut. There's been an announcement in our Cornell and Prince George operating areas of reductions. But it partly relates to the market. The higher the price, the more and longer you can salvage the stuff. So we see a gradual reduction in the production of beetle killed timber over the next five to 10 years, Rick.

Richard Skidmore - Goldman Sachs Group Inc.

And then lastly, Hank, just in terms of operating rates in the Lumber business. Did you run full across the system? Or was it full in B.C. and less so in the South?

Henry Ketcham

Yes, we ran full in Canada, and we ran somewhere between 70%, 80% in the South.

Operator

[Operator Instructions] The following question is from Sean Steuart of TD Newcrest.

Sean Steuart - TD Newcrest Capital Inc.

Hank, you touched on what you're seeing in pulp markets in general with resilient pricing. Wondering if you can differentiate a little bit between what you're seeing with NBSK, which is obviously quite strong right now, and BCTMP. I guess it’s our impression there's still some slack in that market. Can you touch a little bit more on the dynamics in BCTMP?

Henry Ketcham

Fundamentally, BCTMP is more related to hardwood kraft. So hardwood kraft is under pricing pressure and as a result, so is BCTMP. The opposite is the case for softwood, which is in high demand, and inventories are in good shape.

Sean Steuart - TD Newcrest Capital Inc.

And it looks like you drew down your BCTMP inventories quite a bit this quarter. You’re comfortable with where those inventories are now?

Henry Ketcham

Yes, definitely.

Sean Steuart - TD Newcrest Capital Inc.

And then, Hank, just one other question. You touched on higher percentages of construction grade lumber going to China. Can you put some numbers around that to help give us context of the percentage now versus where it might have been a quarter ago or six months ago?

Henry Ketcham

In our case, and I’m only speaking from West Fraser's case, but in our case, probably somewhere between a 20% and 30% increase versus earlier in the year -- increase over what we would have shipped earlier in the year, so a significant increase.

Operator

The following question is from Paul Quinn of RBC Capital Markets.

Paul Quinn - RBC Capital Markets, LLC

Maybe you could give a little bit more color around the CapEx spend of the $230 million, where that's directed sort of on a maybe a segment or country basis.

Henry Ketcham

Well, well over 50% would be in Canada, and so significantly under 50% will be in the U.S.

Paul Quinn - RBC Capital Markets, LLC

And then in terms of lumber panels, not really too much in panels and expect the bulk of that in the Lumber segment?

Henry Ketcham

Yes, it's almost entirely in the Lumber segment.

Paul Quinn - RBC Capital Markets, LLC

Then just turning to panels, the weakness in the quarter, you mentioned the increased imports from the U.S. Also, I guess slowing Canadian housing market going forward, is a factor, but what do you see about that business going forward? Is it going to be sort of weak? Do you expect 2011 like Q4?

Henry Ketcham

I think we're not expecting strength. The issue is the strong Canadian dollar allows the Americans to divert plywood up here given the fact that housing is so weak in the U.S. And if housing falls off up here as well, that will create further weakness.

Paul Quinn - RBC Capital Markets, LLC

And just on the Softwood Lumber dispute ongoing, do you see that as a material impact to the company in that it sounds like you feel pretty strong about the Canadian case and then the timing of that is still -- it seems to be well off into the future?

Henry Ketcham

It's really very, very difficult to predict both timing and the effect, if any. We do believe we have a very strong case, and so I can't give you anything more than that. I can't put any more color around it than that. But we do think we have a very strong case.

Operator

The following question is from Joe Dekersy [ph] of BMO Capital Markets.

Stephen Atkinson - BMO Capital Markets Canada

Stephen Atkinson. Can you give us some color on as to what is being sold?

Henry Ketcham

We're selling a couple of -- well, there were two paper machines there. We're selling them. Other peripheral assets and, of course, we're still working on a couple of other more major assets up there, Stephen.

Stephen Atkinson - BMO Capital Markets Canada

So I can assume it's relatively small?

Henry Ketcham

Yes.

Stephen Atkinson - BMO Capital Markets Canada

And I hope you could give a bit more color on the schedules for the projects or the, particularly, operators of the U.S. soft lumber mills in terms of timing and spending, things like that?

Henry Ketcham

I think, predominantly, that's going to happen second half of this year and first half of 2012.

Stephen Atkinson - BMO Capital Markets Canada

And so we'll see the benefits obviously '12 and '13, more like '13?

Henry Ketcham

Correct.

Stephen Atkinson - BMO Capital Markets Canada

And in terms of China, do you see any -- well, obviously, it's growing very quickly. What's your experience in 2011 so far?

Henry Ketcham

As you said, it's growing very quickly. It's really been a -- it's growing significantly, and we see that growth continuing.

Stephen Atkinson - BMO Capital Markets Canada

And were there any [indiscernible] pickups in terms of freight, transportation and so on? Have you seen anything unusual on that side in terms of being able to ship lumber?

Henry Ketcham

I wouldn't say unusual, I'd say usual. And you're right. There are hiccups during the winter as bad weather causes problems in the supply chain, but it's not unusual and we have built a little bit of inventory due to car supply and so forth but nothing that we can't solve over the next couple of quarters.

Operator

[Operator Instructions] The following question is from Rick Skidmore of Goldman Sachs.

Richard Skidmore - Goldman Sachs Group Inc.

In terms of the returns, what type of returns do you anticipate on that capital spending that you're going to be doing?

Henry Ketcham

No, I think in general, there's going to be -- it's a big program. Some are very, very fast, under a year. We kind of look at two to three years. I think you can count on a bulk of it and then there’s some of it would be somewhat more than that because it’d be some strategic capital.

Richard Skidmore - Goldman Sachs Group Inc.

And then lastly, just coming back to the beetle killed discussion. How does that impact your lumber production in Canada over time? Will the beetle killed kind of continue in terms of the amount that you can harvest at a relatively steady state? Or is that declining over time? And how does that impact your lumber production in Canada over time?

Henry Ketcham

Well, so we're very heavily into beetle wood in our central interior British Columbia operations very heavily. And over time, we will cycle out of out into a more balanced diet of beetle wood and green wood. That's going to happen over time. The cut’s going to be reduced, so in general, production in the interior British Columbia will be reduced. We believe that over time, we peaked at 15 billion feet of production out of the interior British Columbia, not West Fraser, which we had but it was the whole industry. And we believe that over time, we're going to be more of like around 10 billion feet, which is kind where we're at today because of the market.

Operator

[Operator Instructions] The following question is from Benoit Laprade of Scotia Capital.

Benoit Laprade - Scotia Capital Inc.

Gerry, a quick one for you. Depreciation was down Q4 versus the prior quarter. Is $37 million we saw there a good proxy going forward? Or I assume it's going to be ramping up as you spend the $230 million. How should we think about depreciation in 2011?

Gerald Miller

I think for 2011, around $180 million, and as we get the capital spent, that number will be adjusted accordingly. It'll probably increase a little bit.

Benoit Laprade - Scotia Capital Inc.

So $180 million for 2011 is a good number?

Gerald Miller

Yes, I think so.

Operator

There are no further questions registered at this time.

Henry Ketcham

Okay. Thank you, operator, and thank you, everybody, for joining our call. And I guess we'll talk to you in the next quarter. Thanks. Bye.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. 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's CEO Discusses Q4 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts