Canfor Pulp Products' (CFPUF) CEO Don Kayne on Q4 2015 Results - Earnings Call Transcript

| About: Canfor Pulp (CFPUF)

Canfor Pulp Products, Inc. (OTC:CFPUF) Q4 2015 Results Earnings Conference Call February 18, 2016 11:00 AM ET

Executives

Don Kayne - CEO

Alan Nicholl - CFO

Brett Robinson - President, Canfor Pulp

Wayne Guthrie - SVP, Lumber Sales and Marketing

Analysts

Sean Steuart - TD Securities

Ketan Mamtora - BMO

Paul Quinn - RBC

Hamir Patel - CIBC Capital Markets

Operator

Good morning, ladies and gentlemen. And welcome to the Canfor and Canfor Pulp's Fourth Quarter Analyst Call. A recording and transcript of the call will be available on the canfor.com. During the call Canfor and Canfor Pulp's Chief Financial Officer will be referring to a slide presentation that is available in the Investor Relations section of the company's website. Also the companies would like to point out that this call will include forward-looking statements, so please refer to the press releases for the associated risks of such statements.

And I would like to turn the meeting over to Mr. Don Kayne, Canfor and Canfor Pulp's Chief Executive Officer. Please go ahead, sir.

Don Kayne

Thank you, operator and good morning. And thank you for joining the Canfor and Canfor Pulp Q4 2015 results conference call this morning. I'll make a few brief opening comments about the quarter, 2015 overall and our current outlook before I turn things over to Alan Nicholl, our Chief Financial Officer for both Canfor Corporation and Canfor Pulp Products Incorporated. Alan will provide a more detailed overview of our performance in Q4 after which we will take questions. In addition to Alan with me today are Brett Robinson, President of Canfor Pulp; Peter Hart our Vice President of Pulp Sales; Wayne Guthrie our Senior Vice President of Lumber Sales and Marketing; and Stephen Mackie, Senior Vice President of Operations for Canada.

Canfor Pulp had another strong quarter increasing its production compared to Q3 despite a major maintenance shut at our Northwood mill. In addition, our two energy projects are fully operational, operating at design levels and generating the margins that were projected. Markets for pulp were steady in the quarter as the company realized the benefit of higher shipments and relatively consistent revenue on a Canadian dollar basis as compared to Q3. Approximately 85% of our pulp production being in higher grade premium reinforcing pulp, we continue to see good demand. Looking ahead, we see some positive momentum into the second quarter as a result of the traditional spring maintenance season. Overall, we expect our low cost structure and high value focus will continue to benefit the company.

Turning to the lumber side of our business, Canfor grew significantly in 2015. During the year, we completed the acquisition of approximately 500 million board feet Southern Yellow Pine lumber capacity, which will be fully recognized in 2016 and early 2017. Our focus continues to be on acquiring high quality new assets located in strong fiber regions with the capacity to produce premium specialty and high value products. While spreads widen for narrow widths during Q4, we believe that going forward spreads will return to historical norms. Our Canadian mills performed well in 2015 and realized solid productivity gains and cost improvements. With most of our major capital expenditures now behind us, we expect to see continued improvement in margin performance in 2016.

In the fourth quarter, we announce the acquisition of Wynndel sawmill in Southeastern British Columbia. This purchase is consistent with our high value strategy as the mill produces premium boards and specialty products. We expect to close that acquisition in Q2. Looking at our markets, I’d like to make a couple of comments. In China, we’ve seen recent improvements following the slowdown we experienced in Q3. The inventory buildup has been reduced and shipments have returned to more normal levels. We continue to focus on moving our shipments to China up the value chain and expect another solid year in the Chinese market with our projected shipments at historical levels.

In the U.S., we continue to see good demand, recent business with some of our key customers reinforce our view that we will see growth of 6% to 8% for 2016 due mostly to the slow but steady improvements in housing demand. In addition, we are seeing solid growth in the retail sector. We believe that inventory has decreased throughout the supply chain and is more closely balanced with demand.

So with that, I'll turn the call over Alan Nicholl to provide an overview of our financial results.

Alan Nicholl

Thank you, Don and good morning, everyone. My comments will focus principally on our financial performance for the fourth quarter of 2015 by reference to the previous quarter and full details of our results are contained in the Canfor Pulp and Canfor news releases both of which were issued yesterday afternoon. And as always, you will find an overview slide presentation on both the Canfor and Canfor Pulp websites in the Investor Relations section under Webcasts. The presentation highlights consolidated and segmented results and I will be referring to this presentation during my comments.

For the fourth quarter of 2015, Canfor reported shareholder net income of $2 million or $0.01 a share, that was up from a net loss of $17 million or $0.13 a share reported for the third quarter and down from net income of $30 million or $0.22 a share reported for the fourth quarter of 2014. On Slide 3 of our presentation, we highlight various non-operating items net of tax and non-controlling interest, which affect the comparability of our results between the respective quarters. After taking account of these adjustments, the fourth quarter adjusted shareholder net income was $8 million or $0.06 a share compared to similarly adjusted net income of $6 million or $0.05 a share for the third quarter.

As set out on Slide 4 of our presentation, Canfor's fourth quarter operating income was $32 million, an increase of $23 million the previous quarter. After adjusting for onetime costs, most notably the $19 million Canal Flats sawmill closure provision that we recorded in the previous quarter, operating income was up $7 million compared to the third quarter. Results for the lumber segment are highlighted on Slide 5 of our presentation. After adjusting for the aforementioned onetime items and the favorable inventory valuation adjustment of $6 million in the current quarter, the lumber segment reported a small operating income of $1 million that was up $2 million from the $1 million loss reported for the previous quarter.

The increase primarily reflected higher Southern Yellow Pine sales realizations, improved productivity at the Western Canadian SPF operations as well as incremental contribution of the newly acquired Anthony Forest Products operations for the last two months of the year. Total lumber production was up by 6% from the previous quarter, reflecting higher operating results particularly in the Western Canadian operations as well as the addition of Anthony's which more than offset the impact of the Canal Flats sawmill closure. Overall, unit manufacturing costs were in line with the previous quarter reflecting the improved productivity which offset seasonally higher energy costs. Lumber shipments were relatively flat compared to the third quarter but were up 24% compared to the same quarter of 2014 reflecting our expanded presence in the U.S. site.

Canfor’s pulp and paper segment comprises the results of Canfor Pulp Products, Inc., and as you will see on Slide 6 of our presentation, Canfor Pulp reported net income of $30 million or $0.43 a share compared to net income of $31 million or $0.45 a share for the third quarter and net income of $21 million or $0.29 a share for the fourth quarter of 2014. Canfor Pulp's fourth quarter adjusted net income of $29 million or $0.42 and this represented a $6 million or $0.08 a share decrease from adjusted net income of $35 million or $0.50 a share for the previous quarter.

Canfor Pulp's results as highlighted on Slide 7 reflect the U.S. dollar NBSK list prices mitigated somewhat by the 2% weaker Canadian dollar. Unit manufacturing costs were slightly higher than the previous quarter mostly due to plant costs associated with the scheduled maintenance outage taken at the Northwood Pulp Mill which more than offset higher operating rates. Pulp production was up 4% from the third quarter and the results also included seasonally higher energy prices which boosted our energy revenue in the quarter.

Results in the paper segment were down slightly, reflecting lower prices and proportionately lower shipments to North America partly offset by the weaker Canadian dollar. Capital spending in the fourth quarter totaled $84 million of which $54 million was in the lumber business and $28 million in Canfor Pulp. In total 2015's capital spending was $172 million for Canfor and $68 million for Canfor Pulp. And looking ahead to 2016, we currently anticipate capital spending of around $155 million for our lumber operations and $75 million for Canfor Pulp.

For the fourth quarter Canfor Pulp's Board of Directors approved a quarterly dividend of $0.0625 a share and also during the fourth quarter Canfor repurchased approximately just over 1 million shares at an average price of $19.05 where Canfor Pulp repurchased just under 700,000 of its common share at average price of $14 a share. At the end of 2015, Canfor excluding Canfor Pulp had net debt of $484 million with available liquidity of $192 million. Canfor Pulp had net debt of $33 million with available liquidity of $117 million. Net debt to total capitalization excluding Canfor Pulp was 26%, for Canfor Pulp it was 6% and on a consolidated basis, it was 24%.

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

Don Kayne

Thanks, Alan. And so, operator, we’ll now take questions.

Question-and-Answer Session

Operator

We will now take questions from financial analysts. [Operator Instructions]. And your first question will be from Sean Steuart of TD Securities. Please go ahead.

Sean Steuart

Thanks. Good morning, everyone. A few questions. Alan or Don, the $155 million you have budgeted for CapEx at the sawmills this year, I gather the bias is to the U.S. Can you give us a sense of maybe in percentage terms how much of this whole CapEx is going to the U.S. south, and then what percent going to the U.S. is for kilns versus other discretionary CapEx initiatives there?

Don Kayne

Sure, Sean, it's Don. Maybe what I’ll do Alan, you maybe can talk on CapEx there.

Alan Nicholl

Yes, Sean so you’re right, we’re targeting around $155 million for our lumber business, that’s in line with the depreciation that we’re anticipating for the year. I would say about half of its destined to the U.S. sites and obviously the other basically the Western Canadian operations. In terms of kilns I just don’t have that in mind for you, there is some money set aside for CBKs but the exact amount I just can’t give you right now, but we’ll follow up on it, if you don’t mind after the call.

Sean Steuart

Okay, thanks for that. And then you mentioned, Don, the trends you've seen early in the year in lumber volumes to China. Can you speak a little bit more to the mix you have there? I know that transitioning to a higher value mix has been a trend you've witnessed. Any context you can provide on how that's continuing to trend this year?

Don Kayne

For sure, Sean. I’ll let Wayne answer some of that specifics for that. But just at the outset just to reinforce what I said in my comments. And so we have -- it’s been again another pretty decent year in China overall with the fourth quarter seeing a descent rebound and gives us more confidence going forward into 2016 to kind of end up at pretty similar levels at where we’ve been in the past. But I’ll let Wayne talk about it, because he is doing a lot of work on the topic you mentioned there in China, which I think it will also helps in its way. So go ahead and provide that color.

Wayne Guthrie

Sure, thanks, Don. So Sean our mix -- our low grade percentage will probably go down a little bit in China just as our fiber quality improves we’re making a little bit less and we’re replacing that volume with products that you first mentioned before. We’re trying to get in some metric size components for the furniture industry, trying to just move up the value chain. And in fact that’s a line where we see a lot of our Chinese customers want to go anyway, because there with their labor rates and their cost of doing business, they’re trying to produce higher value products and that requires a higher value raw material. So it’s in sync with where our customers want to go.

Sean Steuart

Okay. Thanks for that, Wayne. And lastly, Alan, maybe you can address this. Just a question on the Canfor Pulp balance sheet. It looks like you're going to transition back to a net cash balance sooner rather than later. Any updated thoughts on returning capital to shareholders? You've been busy on the buyback and paid out a special dividend over the past year. Is the bias still on the dividend side towards special dividends as opposed to an increase in the regular dividend? Is that the right way to think about it?

Alan Nicholl

I would answer that as more of by saying that the bias I think is to clearly to stay the course with more of a hybrid approach which is lower base line dividend of $0.625 complemented by share buyback. Sean, we were quite active as you know in the fourth quarter and quite pleased with what we got there and we believe that that combination is still effective. It's got a lot of support from investors and our Board is very supportive on that approach as well. So we see that as being our preferred path at this point in time anyway.

Sean Steuart

Any thought potentially, of a substantial issue or bid on the Canfor Pulp side?

Don Kayne

[indiscernible]

Alan Nicholl

So from time to time we think through all of the areas that you would expect us to, but at this point in time we’re more motivated to pursue the normal course issuer bid. We think that’s working well for us, and as I say that’s our preferred path at this point in time.

Operator

And your next question will be from Ketan Mamtora at BMO. Please go ahead.

Ketan Mamtora

Yes, thank you. Good morning, Don and Alan. Just a question on M&A, can you talk about -- a little bit about how you are thinking about M&A on both sides of your business, both on the pulp side as well as on the lumber side?

Don Kayne

For sure Ketan and its Don. Maybe I’ll talk on the lumber side, maybe let Alan talk a bit on the pulp side. But just so on the lumber side, as you know, we’ve been in the M&A business here pretty good the last four or five years strengthening our position of course down in the south in a significant way which we’re seeing some of the benefits of that now. And then also in B.C. with the latest acquisition on Wynndel. And so at this point we’re really pleased with what we’ve done and accomplished so far from an acquisition standpoint. Whether or not and what degree do we grow even further, obviously we look at those priorities on a regular basis and try to rank them between the pulp opportunities and our lumber opportunities and the energy opportunities frankly. And so all of -- but what I will say is that we are very pleased with what we've done so far and everything we do will be based on fiber opportunities going forward. But at this point that's more as much as I really can say overall. Alan is there anyone to add on the pulp side specifically or Brett could you for that matter?

Alan Nicholl

I think all I would say Ketan is a similar criteria that we apply to both pulp and operations for the most part. So clearly not as many high quality acquisition targets on the pulp side as there perhaps would be on the lumber side and so it's something we keep an eye on as you would expect, but at this point nothing to report.

Ketan Mamtora

Thanks for that. That's helpful. Just a follow-up question on that. On the south side if there was something interesting that came along, would you be willing to lever up for something like that or you want to maintain a more conservative balance sheet at this point?

Don Kayne

Yes, I mean Ketan as Alan articulated, I mean I think we're looking at opportunities as they arise and so it would depend significantly on just what the opportunity was and how it ranked within the way we priorize our capital going forward. So I guess that's about all I can really say around that. I mean, it's certainly a consideration among many other things right. So at this point we're pretty happy where we're though.

Ketan Mamtora

Okay. That's helpful. And just one more follow-up on the lumber side of the business. Would you have, you know, sort of a preference in terms of acquisitions between U.S. South, B.C., Alberta or it would depend on the opportunity, you know, that came along?

Don Kayne

Again one of our largest areas that we consider a lot is just the fiber situation and wherever we go. And so really whether it's Alberta whether it's B.C. or whether it's Southern Yellow Pine, at this point we would have to understand what the opportunity was and rank it based on that with probably fiber being number one and there is a few other areas we would also consider. But clearly the South has been a key priority for us as going forward and we believe very strongly in that area. At the same time, we also we feel very, very strong for B.C. and the future here too, so I am not sure if that really helps you too much but that's how we're looking at it today.

Ketan Mamtora

No, that's helpful. And just one last one. Are you seeing any evidence of increased offshore lumber imports into North America?

Don Kayne

Maybe, Wayne, you can answer that one.

Wayne Guthrie

On the board side of the business there has been some, on the dimensional lumber side still relatively small.

Ketan Mamtora

And on the board side, where really you are seeing increased imports?

Wayne Guthrie

Yes, this increase, it's European board position and U.S. south side, so been there for a while and it's -- we expect that to stay. So on the 1-inch boards Europe plays a big role in that.

Ketan Mamtora

Got you. That's very helpful. I will turn it over. Good luck in 2016.

Operator

Thank you. Your next question will be from Paul Quinn at RBC. Please go ahead.

Paul Quinn

Yeah, thanks very much, and good morning, gentlemen. Just a couple of easy questions. One, one of you highlighted the growth in Canfor's lumber platform. Just, if you could outline, especially in the U.S. south, the shift of product mix and you also mentioned that you expect the spread to return, the historic spread between narrows and wides to return, what gives you the confidence there?

Don Kayne

I mean I will let -- on the second easy question, I will let Wayne answer that. Just on the first one I mean in terms of our growth down there are you just more interested in the scale of the growth and more around the product mix within that scale. I mean just on that I think overall we'll see our business, Paul, has gone from I don’t know 10% to 12% two to three years ago will be at the end of this year close to 25% and our plan is to take that up to 30% or maybe even higher, but certainly 30% will be a good number. But as equally important in that as we've spoke about I think a little bit before is the makeup of that 30% and the real focus through our choices of purchasing areas with real high fiber regions is really on the premium products right now, the high value products. And that's really what we’re focusing on within that 30% going forward. So less on the commodity more on the specialties, really differentiating ourselves as much as we can from others.

Wayne Guthrie

It's Wayne, maybe on the spread question, I mean in our models, we have just learned over the years that this industry has a -- history has a tendency to repeat itself. So when we're looking out and trying to project the future here, we tend to go back to five and 10 years averages to kind of guide us into the future. Secondly and more specifically Yellow Pine, we do expect Yellow Pine to kind of creep up in production over the next several years and SPF may well be either flat or even down a touch. If that happens the premium that we're seeing today may well start to go back towards spend. As Don illustrated though we don’t spend a lot of time worrying about the price of one width versus another. Our business down there is really, really focused on specialty products, on MSRs, on land stocks, on board, on things that we can kind of differentiate ourselves from the competition and quite frankly from the print.

Paul Quinn

Okay. Then how would you describe your level of flexibility? So, say for example 2x4s, prices start to track up off, 2x8, 2x10, which is what we've seen. Are you able to flex that way and are you comfortable with your degree of flexibility? Is that something that you are trying to increase going forward?

Don Kayne

Wayne you’ve been down there a lot lately so why don’t you comment on that, because you’d have a real good knowledge on that.

Wayne Guthrie

I’d say it's pretty good, Paul. I think we spent some money on that in the last little while. We’re not maybe where we need to be in all operations for sure. But some of the newer acquisitions particularly in Central and West side have a tremendous amount of flexibility. So that’s kind of the model that we want to move some of the other operations towards.

Don Kayne

One thing maybe just to add to that Wayne too is of the log size that we have down there, because the log size and quality both are quite large down there clearly you’ve got lot more opportunity to be flexible when you got big log as opposed to a small log. And so most of them knows that we have down in the south, I think Wayne for the most part are pretty big.

Wayne Guthrie

Pretty sure on the west side that is right.

Paul Quinn

And then just switching over to the softwood lumber file, I understand March, you know, we have a meeting between Trudeau and Obama, is it safe to say that kicks off negotiations between the two sides? And the second part was really just wondering if your ownership in the U.S. south has changed any of the conversations among U.S. south sawmillers?

Don Kayne

The second question first is no, that’s the simple one. We haven’t seen anything. They’re aware of it. From the standpoint -- I guess maybe from the standpoint that we certainly are much more in tune with the operating conditions down there and the operational metrics they know that we understand that a lot better than we did maybe back in 2006. But aside from that, we’re aware of course of the Obama-Trudeau meeting coming up here. But I think for now what we understand is they’re not negotiations so much as discussions really going on between the two governments and we ourselves not much to really comment over and above that as this point. We’ll just have to see what happens here, but there is a lot of work that has to be done here over the next little while to make progress. So time will tell here, what happens as a result of that.

Paul Quinn

Okay. Last easy question, just on the pulp and paper side, the $75 million in CapEx, what are you spending that on?

Don Kayne

Maybe Brett are you -- Brett can you hear us here?

Brett Robinson

Yes, absolutely.

Don Kayne

Maybe you could comment on that and give Paul some color on that one.

Brett Robinson

So, on the pulp and paper side we’ve really changed our focus over to cost reduction, things like O2 delig, wash press upgrades, anything that can drive costs down and protect our position.

Paul Quinn

Okay. So that $75 million, what would that break into as sort of maintenance and strategic capital? Is that like a 40, 35, split?

Alan Nicholl

Sorry, Brett, I’ll just answer it here. So I think you’re pretty close with that Paul.

Paul Quinn

Wow, got lucky. Okay. Best of luck, guys. Thanks.

Don Kayne

Everybody does once a while.

Operator

Thank you. Your next question will be from Hamir Patel at CIBC Capital Markets. Please go ahead.

Hamir Patel

Hi, good morning. Wayne, first question for you, on the lumber exports on the China side, it looks like your guys volumes, by my calculations, up maybe 2% to 3% in 2015, the industry was down about 13% and some of your peers were down in the sort of 30% range. What do you think drove that difference?

Wayne Guthrie

I think that about the middle part of last year going into Q3 there, shipments from Canada dropped and bottomed out in August-September and that was a combination of push back from China and also better price in the U.S. and some exchange things and whatnot. So there was a short term gain that maybe switched some volume over to the U.S. What ended up happening very quickly though is the inventory got addressed -- the inventory over to China got addressed very quickly and by the mid part of Q4 there was some attractive pricing and attractive volume back in China again. So, by being stable there and by being loyal and having really good customers we were able to pick up some late Q4 business that was quite attractive to us. So I think that was a differentiator. The bigger issue maybe is just that product mix that I alluded to earlier on the call where really it was a low grade problem. So that was the issue with China. Our high grade business didn’t really see any dip in volume at all.

Hamir Patel

Thanks. That's helpful. And just a final question I had on the pulp side of the business. You guys reported energy revenues were up about 25% last year. I know this year you should have all three turbines running for the full year. What is the sort of dollar figure savings you are anticipating for 2016?

Alan Nicholl

Yes. So it's similar to what we’ve disclosed previously that we’re getting close to this annualized run rate number of $25 million EBITDA annualized.

Hamir Patel

Thanks, Alan. That's all I have.

Operator

Thank you. At this time, Mr. Kayne, we have no other questions registered. So, I would like to turn the meeting back over to you.

Don Kayne

Thank you, operator, and thanks everyone for joining the call and your interest in Canfor and we look forward to talking to you at the end of the next quarter. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again we thank you for participating and ask that you please disconnect your lines. Have yourselves a great day.

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