West Fraser Timber's CEO Discusses Q4 2011 Results - Earnings Call Transcript

West Fraser Timber (WFTBF.PK)

Q4 2011 Earnings Call

February 17, 2012 11:30 am ET

Executives

Henry H. Ketcham - Chairman, Chief Executive Officer and President

Larry S. Hughes - Chief Financial Officer and Vice President of Finance

Edward R. Seraphim - Chief Operating Officer and Executive Vice-President

Analysts

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Sean Steuart - TD Securities Equity Research

Mark Kennedy - CIBC World Markets Inc., Research Division

Daryl Swetlishoff - Raymond James Ltd., Research Division

Presentation

Operator

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Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Co. Ltd. Fourth Quarter 2011 Results Conference Call. During this conference call, West Fraser's representatives 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 is 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 the company's annual MD&A, which can be accessed on West Fraser's website or through SEDAR and as is supplemented by the company's 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 H. Ketcham

Thank you, operator. Good morning, and welcome to West Fraser's fourth quarter conference call. Joining me this morning is Larry Hughes, our CFO; and some of our other senior management team.

West Fraser earned $6.1 million or $0.14 a share in the quarter. This includes a gain recorded on the sale of certain assets related to our Eurocan operation. We recorded a loss from continuing operations of $11 million. EBITDA in the quarter was $18 million or 2.8% of sales. The primary reasons for our substantially lower earnings in the fourth quarter versus the previous quarter were as follows.

First, the benchmark 2x4 SPF lumber price in U.S. dollars was 3% lower versus the third quarter. However, our mill nets were even lower than that due to a 32% drop in the value of lower-grade lumber in the fourth quarter. This had a particularly significant effect at our mills that are processing high volumes of Mountain Pine Beetle timber.

In addition, while the benchmark Southern Yellow Pine 2x4 price was up 8% in the quarter, our overall mill nets in the U.S. were actually slightly lower than the third quarter due to the substantial discount of wide-width lumber teneros [ph]. The very low price we're achieving for wide-width lumber in the South has also had the effect of eliminating the traditional premium that Southern Yellow Pine price have enjoyed over SPF prices. We expect that the Southern Yellow Pine premium will return as lumber markets begin to improve.

Second, the Northern Bleached Softwood Kraft list price dropped 7% in the fourth quarter. This was partially offset by a 4% decline in the value of the Canadian dollar.

Third, lumber production was down 5% in the fourth quarter due primarily to capital projects being carried out at several of our Alberta and U.S. sawmills as well as some market-related downtime in the U.S. Also, NBSK pulp production was down 26%, due to a longer-than-anticipated shutdown and startup with respect to the modernization and expansion of our Hinton, Alberta pulp machine.

Fourth, manufacturing cost in our lumber division were up due in part to the lower production and cost associated with the capital expenditure program. Log costs were basically flat quarter-over-quarter in both Canada and the U.S. Our shipments to China slowed somewhat in the fourth quarter due to high lumber inventories there. Shipments have picked up substantially in the new year.

Capital expenditures during the quarter were $90 million, of which $25 million were for our Green Transformation Program. Most of our fourth quarter CapEx were spent in our sawmills in Alberta and the U.S. CapEx in our pulp division was concentrated in our 2 kraft pulp mills and was predominantly financed with GTP funding.

Looking forward, we don't anticipate any significant improvement in new home construction through midyear. We do, however, expect the export market will at least consume the same volume as last year.

Plywood, MDF and LVL prices will also remain under pressure until we get some improvement in new home construction. We expect that pulp prices will also be constrained at least through the first quarter. We have no planned major maintenance downtime scheduled for our kraft pulp mills this year.

I'll now turn the call over to Larry Hughes, our CFO.

Larry S. Hughes

Thank you, Hank, and thanks to everyone joining us today. Please refer to our advisory contained in our annual MD&A concerning our use of terms such as EBITDA, adjusted earnings or loss and adjusted basic earnings per share.

As Hank has noted, for the fourth quarter, we reported a loss from continuing operations of $11 million resulting in a basic loss per share of $0.25. There are tables found on Pages 3 and 12 of our annual MD&A, which describe and quantify several nonoperational items which affected our results.

For the fourth quarter, which is the table on Page 12, if we adjust the $11 million loss from continuing operations, which doesn't include the Eurocan industrial site sale, to add back the charge on equity-based compensation and then reverse the $9 million gain related to the translation of the U.S. dollar-denominated debt, the result, on an after-tax basis, is an adjusted loss from continuing operations of $15 million or an adjusted loss on a per-share basis of $0.35 for the quarter. For the full year, as shown on the table on Page 3 of our annual MD&A, adjusted earnings from continuing operations were $23 million or $0.54 per share. We have used the basic rather than the diluted weighted average number of shares in this calculation.

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