Canfor Corporation's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Feb. 9.12 | About: Canfor Corp. (CFPZF)

Canfor Corporation (OTCPK:CFPZF) Q4 2011 Earnings Conference Call February 9, 2012 11:00 AM ET

Executives

Don Kayne – President and CEO

Alan Nicholl – CFO

Alistair Cook – SVP, Wood Products Operations

Analysts

Paul Quinn – RBC Capital Markets

Mark Kennedy – CIBC World Markets

Sean Steuart – TD Securities

Operator

Good morning, ladies and gentlemen. Welcome to the Canfor Corporation Fourth Quarter Results 2011 Conference Call. A recording of the call and the transcript will be available at 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 on 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 fourth quarter results for 2011. I am calling in from Beijing this morning, as I am part of the business delegation participating in Prime Minister Harper’s mission to China. I will speak very briefly about our Q4 highlights before turning the call over to Alan Nicholl, 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 also with me today as well to answer any questions you may have specific to their responsibility areas.

Our year-end financials paint a picture of a company that continues to invest in its operations despite challenging market conditions. On balance while Q4 was challenging Canfor’s solid productivity gains and continued strong balance sheet positions the company to drive as economic conditions improve. We continue to see slow but reassuring demand signals from our key markets and I will speak to that later.

Yesterday, we reported an adjusted loss from continuing operations of $32 million on sales of $576 million for the fourth quarter and negative EBITDA of $16 million excluding inventory valuation adjustments, closure provisions and asset impairment charges. Alan will speak to our financial performance shortly. The Q4 loss is attributable in large part to lower low grade market prices and higher log costs. Conditions in the United States housing market remained relatively steady over the quarter, in line with forecast expectations.

We continued to anticipate that further 18 to 24 months will be necessary to see the U.S. return to more normal demand levels that we are encouraged to see positive demand signals coming from the U.S. as compared with Q4 of last year. In November, overall British Columbia year-to-date exports reached $1 billion, a tremendous achievement brought about by a decade of strategic market development investment by the BC and Canadian governments and forest companies.

Canfor’s Asian Pacific business continued to be very strong. Offshore lumber shipments were 15% higher this quarter as compared with Q4 of 2010, reflecting continued growth in shipments to China. Sales volumes to Japan and Korea also experienced increases over last year.

We continue to see strong growth prospects for wood markets in Asia and continue our aggressive market development activities to grow the uptake of wood frame construction in China and also across Asia. Our market strategy in China is increasingly focused on China’s major developers and builders targeting those companies that have the capacity to build with wood at a significant scale in the country.

Unseasonal weather patterns continued throughout our operations in Western Canada, combined with higher diesel costs and increased hauling costs contributed to the increased in unit log costs experienced in Q4. Overall lumber production was up 7% compared to the fourth quarter of 2010 for a total $867 million board feet. These production increases are the result of solid productivity improvements and a restart of the Vavenby Division sawmill, and are partially offset by the closure of the Clear Lake mill in early 2011.

Our capital investment program is delivering solid results to our cost performance and productivity is strengthening across the operations. We remained very confident in our Asia-Pacific markets and exceptional customer base in China, Japan, Korea and several of the other Asian countries. As demand recovers in North America, and continues to grow in Asia, Canfor will be well positioned to prosper.

At this point, I’d like to now turn the call over to Alan to discuss Canfor’s financial performance in the quarter.

Alan Nicholl

Thank you Don, and good morning everyone. My comments will be principally focused on our financial performance for the fourth quarter of 2011 by reference to the previous quarter. In my comments, I’ll be referring to our fourth quarter overview slide presentation which you will find on our upgraded website in the Investor Relations section on the webcast. Full details and amounts are contained in our news release issued yesterday afternoon.

For the fourth quarter of 2011, we reported an equity shareholder net loss of $44 million or $0.31 per share. This compares to a shareholder net loss of $22 million or $0.15 per share for the third quarter of 2011 and shareholder net income of $33 million or $0.23 per share for the fourth quarter of 2010.

On slide three of our presentation, we highlight various non-operating items, net of tax of non-controlling interest which affects comparability of results between the third and fourth quarters. The most significant of these in Q4 was a provision of $17 million relating to the closures at our Rustad and Tackama manufacturing operations with both operations build and done in January 2012. After taking account all of these non-operating items which totaled $12 million or $0.09 per share, the fourth quarter adjusted net loss was $32 million or $0.22 per share. This compares to similarly adjusted net loss of $2 million or $0.01 per share for the third quarter of 2011, a decrease of $30 million or $0.21 per share.

With respect to our fourth quarter operating performance, you will see on slide four of our presentation, the reported EBITDA was negative $16million, a decrease of $71 million from the prior quarter. This balance includes the previously mentioned closure provisions as well as asset impairment charges and inventory valuation adjustments. Removing these impacts, the adjusted EBITDA for the fourth quarter of 2011 was $26 million compared to $54 million in the third quarter assigned $28 million.

The decrease reflected a weaker lumber and residual chip sales realization, lower pulp prices, increased unit log costs as well as seasonally higher cash conversion costs. More on these factors in a few moments, when I discuss the individual segment performance.

Slide five shows the Western SPF benchmark Random Lengths prices for 2x4 #2&Btr and Utility #3 lumber grades. This graph indicates that whilst the #2&Btr prices are little changed from the previous quarter significant declines were seen in prices for lower grades. This reflected slowing construction activity in China in part related to the Lunar New Year as well as an increasing use of #2&Btr product by Chinese customers. As you might expect, the weaker lower grade prices had a negative impact on our sales realizations in the fourth quarter.

Turning to slide six, here you’ll see that the lumber segments reported EBITDA was negative $34 million in the fourth quarter of 2011, a $44 million decrease from the prior quarter. After adjusting for one-time items, EBITDA for the lumber segment was negative $5 million in the fourth quarter of 2011 and this compares to positive EBITDA of $11 million in the third quarter of 2011, a decrease of $16 million.

Sales realizations were down in the fourth quarter primarily reflecting the impact of the lower grade prices as I mentioned, offset in part by the weaker average Canadian dollar in the period. Shipments of Canfor-produced lumber were in line with the previous quarter, although production was down 7% reflecting downtime taken over the Christmas period which along with the seasonally higher energy usage that we saw in the fourth quarter resulted in the modest increase in unit cast conversion costs.

The fourth quarter also saw a moderate increase in unit log costs, with the combination of a shortage of log truckers in parts of the BC Interior, higher diesel prices and unseasonably mild weather all contributing factors. The milder weather resulted in lower than normal volumes at logs being harvested and delivered to our sawmills in the period.

Now turning to the Pulp & Paper segment on slide 7. Fourth quarter EBITDA was $39 million which was down $12 million compared to the third quarter. North American NBSK pulp prices fell to 7% reflecting softening global demand over the weaker average Canadian dollar mitigated before taxes is the full impact of this. Pulp production was up from the third quarters following the completion in October of the Northwood Pulp mill upgrade.

Pulp unit cash manufacturing costs were down from the previous quarter, reflecting the higher production levels in the period as well as lower fiber costs. More details of Canfor Pulp’s results were discussed in the news release and conference call earlier this week.

Capital spending for the fourth quarter totaled $116 million, $49 million of this was for the Lumber business and $67 million was for Canfor Pulp, of the later $27 million related to the reimbursable green transformation program. For 2011 as a whole, we spend approximately $155 million in capital projects in our Lumber business. And by year end, we had completed by two-thirds of our $300 million strategic capital encashment program.

At the end of the quarter, Canfor excluding Canfor Pulp had available liquidity of $377 million, comprised of $31 million of cash and $346 million of available lines of credit. Net debt to total capitalization excluding Canfor Pulp was about 8% and including Canfor Pulp approximated 13%.

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

Don Kayne

All right, thanks very much Alan. And operator, I’d like to open up the call now to any questions.

Question-and-Answer Session

Operator

Certainly. We’ll now take questions from the telephone lines. We’ll first take questions from the financial analyst followed by the media. (Operator Instructions) Please press star one now if you have a question and there will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Paul Quinn of RBC Capital Markets. Please go ahead.

Paul Quinn – RBC Capital Markets

Yes, good morning and good evening, Don. Just a question on Softwood Lumber Agreement, maybe you could comment on the extension and give us an update on the current arbitration?

Don Kayne

I guess on the extension as I think everybody is aware of it, we did come to an agreement relatively standard for through to 2015. And so we felt that we certainly supported that and while it’s appropriate I guess to some degree, when it does we will give certainly to the marketplace and also to producers. So I guess the next step there will be as we move forward here, as we prepare for 2015 to work towards a strategy in terms of eliminating that as we go forward beyond 2015.

In terms of the arbitration, the SLA arbitration that’s also in place, that’s for the London Court, that’s going to be dealt with here over the next, I think it’s week 10 days in terms of that arbitration and then we expect some sort of a decision on that. It will take some time perhaps two or three months, but not exactly sure how long but probably somewhere in that timeframe, Paul. So again on that, we are extremely positive that we have a very, very strong case.

We had a strong case from the start. And we expect that we will have a positive judgment against us or a positive judgment with us on that when the decision is finally made.

Paul Quinn – RBC Capital Markets

Yes, on the lumber pricing you mentioned that low grade prices in Q4. What have you experienced in early 2012, and what’s the expectation going forward?

Don Kayne

I think that hopefully we’re seeing to start to get more normal although we’re still not where it once was for sure. But part of that is pause of story from the standpoint that I think it was touched on a little bit earlier, Paul, is that the #2&Btr prices are being supported much more overseas than they have been in the past. We’re seeing what we hope to see. And that is more support for the higher value products over there beginning with #2&Btr but not limited to #2&Btr.

So that’s created a lot of that spread. And so we’re having to deal with that as a company and as an industry and how are we dealing with that, well several ways, probably the two key ones though are part of with our capital program obviously, we are spending in several dollars on the backend of our sawmills and the planner and optimization area. To just reduce the volume that we get of that overall, but – and also to continue to look at new markets in addition to China which was still paid that significant amount of low grade.

So we’re seeing that low grade prices are starting to move up to some degree. Whether they will get back to where they were, it’s too early to tell and frankly I don’t think they will personally. I think we’ll see more of the benefit in higher #2&Btr prices.

Paul Quinn – RBC Capital Markets

Okay. And lastly you talked about milder weather reflecting, I guess lower log inventories in front of your mills. How acute is that and how are you relative to the rest of the industry?

Don Kayne

On that one, Alistair, maybe I’ll let you answer that specifically because that in terms of the numbers, you probably you got those in front of you in Vancouver.

Alistair Cook

Sure, thanks Don. Paul, no question we’re experiencing some weather challenges and certainly in areas that we operate. However, I’m very confident that we have seen March targets that we want to hit and draw intensive purposes were actions in place to meet those targets for March.

Paul Quinn – RBC Capital Markets

All right, great. Thanks guys. Thanks a lot.

Don Kayne

Thanks, Paul.

Operator

Thank you. The next question is from Mark Kennedy of CIBC World Markets. Please go ahead.

Mark Kennedy – CIBC World Markets

Good morning. Don, just a question and it’s kind of interesting that you’re in China right now, because obviously we’re hearing a lot of talk about property prices falling and real estate prices falling there, but also I think the other talk is there is sort of two markets of China, there is the sort of private market and then there is the government sponsored market. Could you just give us a sense of how much wood is sort of falling into each of those and your expectations for this year?

Don Kayne

Yes, I can. It’s in the high level market, couple of things. Yes, certainly on from a commercial aspect and commercial pricing and commercial real estate prices in China, certainly there has been a drop in some of the major metropolitan areas here. From Guangzhou, Shanghai, all the way up into Beijing. No question, some of the major areas have seen that overall.

But as a lumber producers, we don’t really participate too much in that side of the business. So it’s really I would say a marginal impact on us certainly as a company, it wouldn’t be material. I think the – but on the other side of it, really the area that we’re really focused on and the upside there is tremendous. And we’re seeing some uptake there. It’s on the affordable housing side. And one of the meetings that we had here again as a result of the strong relationships that have been built here with our federal government and our camp through Minister Oliver as well as our Minister of Forests for BC is Steve Thomson as well as Pat Bell.

We’ve been able to really make some progress there with the Vice Minister of Construction there. He has been a big promoter of green building, a big promoter of this whole affordable housing side of the business. In terms of the uptake really is on that side and that is as you probably heard, it is the area where they are planning and delivering on building up to 10 million affordable homes per year over the next five years. So significant volumes and its all try to deal with the large income gap between the lower level of people close to the wealthier people.

So there is a lot of work being done there and that’s really where we see the huge opportunity over and above the progress that we made today. And that was again solidified and confirmed with the meetings that we’ve had just this past week with the Vice Minister in China.

Mark Kennedy – CIBC World Markets

And then you also mentioned in your introductory comments there that clearly the U.S. housing market in the heal gap [ph] but you said you’re seeing some positive demand sides in the fourth quarter of this year compared to the fourth quarter of last year. Could you just give us a little more color on that?

Don Kayne

Yes, well I think that as we’ve all read and we’ve all seen and as we follow some of the positive news, this relatively positive news in terms of unemployment rates and additional jobs that are being created in the United States. It seems to be pretty sustainable trend that we’ve seen here over the last several months. And I think that that’s first of all obviously positive and that’s translated in our view. So a bit better positive outlooks from some of the pro dealer customers that we deal with, as well as the DIO [ph] customers, some of the bigger, the big box stores that we deal with and others do as well. We’re seeing a bit better takeaways from that customer base overall.

So I think the mood, the little bit of the certainly the consumer mood that we’re seeing out here has improved to some degree. It’s been a long way to go and for by no means at all, going to address any of the conservatives that we haven’t placed today going forward which is largely going to continue to have our focus around market diversification.

Mark Kennedy – CIBC World Markets

One last question, just on the sort of the transportation costs as you’ve been experiencing in the Interior BC. Is that really just the temporary thing or is this more of a sort of structural shift given the pressures you get from the oil patch to just sort of start with this higher cost level of transport?

Don Kayne

Well I think just generally speaking in all levels of transportation, there is definitely continuing inflationary pressures on trucking rates overall whether that’s logging truck drivers or whether that’s just standard over the road truck drivers. I think we’re seeing that, you know there is obviously the significant competition from all the manufacturing facilities in any industry to get to the ports more and more as more volumes being exported and so forth and a lot of volume does move by truck.

So I guess that we’re just continually looking at ways that we can try to manage that inflation that we speak about. But it is definitely an issue. And going forward I think it’s something that we’re going to have to continue to battle as the economy improves.

Mark Kennedy – CIBC World Markets

Okay, thank you.

Operator

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

Sean Steuart – TD Securities

Thanks, good morning and good evening everyone. Don, just wondering if you can talk a little bit about the pending acquisition of the Tembec sawmill and cutting rate assets. If you can go into a bit more detail I guess on your plans to improving margins of those mills, understanding they were in line with the Tembec’s average sawmill margins which had been below industry average obviously for quite sometime. But I guess your plans to improve margin there and how it fits into the rest of the asset base that you have in the area?

Don Kayne

Yes, for sure, I mean as you say accurately, Sean, with that acquisition we’ll have a very solid, very high quality fiber base in the area. Some of the best fiber we think in the country is located in that area. So we’re real excited about moving forward and closing that deal. It will close at something, but we’re not closed, it’s not closed yet as you probably know, it won’t be closed probably, at this point, we’re expecting mid March, that type of timeframe.

We’re in the process right now. Alistair and his fellows are in the process of evaluating that whole area there in terms of what we want, we think it should look like from a strategic standpoint going forward operationally. In terms of – so that’s still to be determined and we’re not – we haven’t made any firm decisions yet exactly on anything that long-term planning there yet. That will be certainly over the next probably 60 to 90 days.

In terms of the opportunities there, aside from the excellent fiber there, it fits very well with Canfor strategy which is always been as you know to focus hard on the some of the appearance grades in both North America and offshore markets. We think that is going to provide a lot more upside for us to increase those value added products particularly in North America, but I think even more particularly in some of that markets in Asia particularly Japan.

I don’t think that in the past that everybody has different marketing strategy, they don’t think Tembec marketed as much in Japan from a percentage wise as we did. So I think there is some upside there for sure that we can capitalize on and we intend on doing that going forward. And then on the rest of it, I mean there is, I guess the other big opportunity there is that they have three – they have a FSC certification. And that certainly will provide us with some additional opportunities that we don’t have today. And it will also, will be one of the few producers that have all three certification systems that we can offer to our global customer base.

So we think that’s a positive and also an opportunity to improve margin going forward.

Sean Steuart – TD Securities

Great, that’s good detail. Thanks Don.

Don Kayne

Okay.

Operator

Thank you. We will now proceed with questions from the media. (Operator Instructions) There are no further questions at this time. This concludes the conference call. Please disconnect your lines and we thank you for your participation.

Don Kayne

All right, thanks to you all for participating. I look forward to speaking with you again at the end of next quarter. Thank you.

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