West Fraser Timber Co Ltd (WFG) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber second quarter results conference call. I would now like to turn the meeting over to Mr. Hank Ketcham, Chairman, President and Chief Executive Officer. Please go ahead, Mr. Ketcham.

Thank you very much for joining us. Obviously, this is a difficult quarter, probably the worst quarter the company has ever had. And, we will talk about some of the issues as we go through the call. And certainly, Rodger Hutchinson is here, our Vice President and Controller; Martti Solin, our VP Finance is away on holiday, so Rodger will be fielding the questions as well. I've got some of the other operating people and salespeople on the line in case they are questioned specifically related to their areas.

We had a loss for the quarter of $5 million, or 14 cents per share, and compared to earnings in the second quarter of 2002 of $71 million or $1.91 per share. But in fact, in that loss is foreign exchange gain on our long-term debt of $17.7 million. So, the way we look at it is we have an operating earnings loss of $33 million for the quarter. And I think that's really what we need to be talking about. We do not really consider the gain on the foreign exchange to be a relevant number. So, the notable items included in our earnings before tax for the quarter were -- we were affected that we had a $41 million negative effect due to low lumber prices compared to the second quarter of 2002. Lumber CVD (ph) and ADD duties affected as to the tune of $26 million versus the second quarter of 2002. The impact of the strengthening Canadian dollar versus the first quarter of 2002 impacted us by $33 million. And of course as I mentioned, we had an exchange gain on the U.S. dollar debt of $18 million -- that's a gain.

We have a strike currently underway at Kitimat, which started on May 27th up at our Kitimat linerboard mill. I will talk about that later, but that has impacted our earnings as well, and it will continue to do so as it goes on.

Going to the divisional results, in our lumber division, our EBITDA was negative $4 million compared to positive $87 million EBITDA in the second quarter of 2002. I am not sure, but I would suspect that's the first time we've had negative EBITDA in our lumber division. I have not gone back and looked, but I cannot remember that happening before. Of course, the change from the second quarter of 2002 is due to lumber prices, which are at least at ten-year lows. And of course, lumber duties and the strengthening Canadian dollar, which has appreciated about -- when it was at 75 cents a short while ago depreciated 17 percent since the beginning of the year. The benchmark Specific price averaged $238, U.S. for the quarter, compared to $288 U.S. for the second quarter of 2002, and U.S. $214 for the first quarter of 2003. And pricing today is around $265. So, prices have strengthened, as the quarter has proceeded. In fact at the end of June, we hit $296 prices. So prices are up somewhat from the first quarter. And I guess we are somewhat positive that we will not drop back to those low prices that we had in the first quarter and the beginning of the second quarter. We should see stronger prices as the third quarter proceeds. Sudienell (ph) pine prices have also been lackluster, off significantly from the second quarter of 2002.

On the positive side, all of our mills are running well. We set record production during the quarter, even though we took the Terrace sawmill down at the end of May, as a result of the strike at Kitimat; Terrace is tied quite directly to the Kitimat operation. So, as soon as Kitimat shut down, we took Terrace down as well. In spite of that, our mills set an overall production record for the quarter.

Rail cars availability was better in the second quarter, meaning that we were able to start to reduce some inventory, and our shipments exceeded -- or we reduced our inventory by 34 million feet during the quarter. And of course, at a couple of our mills, we had a but chips on the ground during the quarter due to the strike at Kitimat.

Our Panel Division, which includes the MDF and plywood divisions, had an EBITDA of $5 million or 10 percent of sales compared to $19 million or 34 percent of sales in the second quarter of 2002. MDF markets have deteriorated this year, meaning that we've had to export significantly higher quantities of product to Asia, which has a much lower mill net, requiring us a change from our desired product mix. So both of those factors have negatively impacted our mill nets, and that's going to continue through the third quarter.

The Cornell MDF plant was down for eleven days in the second quarter for planned maintenance, and an additional 16 days for unplanned breakdowns. We had a couple of significant problems at the mill. So the Cornell MDF plant operated very poorly during the second quarter. Those problems are behind us, and we certainly expect both MDF plants to run well for the rest of the year.

And while our plywood plant operated very well, benchmark plywood prices were down $51 compared to the same period last year. They're climbing back. And as you know, there is a significant disparity between plywood prices and LSV (ph) prices right now, which is not a traditional -- which is not traditional. We expect plywood prices to strengthen somewhat, and to try to start to close the gap between LSV and plywood. In fact, we expect LSV to start to drop at some point because the gap is not -- the premium LSV over plywood is not 00 certainly has not been a traditional situation.

The pulp and paper sector -- EBITDA was negative $1 million compared to positive $12 million EBITDA in the second quarter of 2002. We had a regular maintenance shutdown at Kitimat during the quarter. It started in the first quarter and extended into the second quarter; that negatively impacted production and this quarter's earnings. And the mill was down from March 24 to April 11 for that maintenance shutdown.

As I said, we had a strike at Kitimat, which also negatively impacted results. The prior period's pulp and newsprint pricing increases about offset the effects of the strengthening Canadian dollar in the quarter. And, our Cornell River pulp operation, which we bought out the other half, in I think the third quarter of last year, has operated very well, and we are very pleased with the fact that we have been able to sell off the production in the mill. And we have really been developing new customers, and that has been a strong addition for us.

Alberta Newsprint operated well during the quarter, as it usually does, and established a new production record during the quarter.

The Kitimat strike is what weighs on our minds right now. We have two local unions at Kitimat. One of the two local unions chose to reject the Company's final offer, which was made the last week of May, after five weeks of negotiations. When they rejected the final offer, they went on strike and shut the facility down, and of course, as I said, the consequence of that was that we shut our Terrace sawmill down immediately.

So the mill went down on May 28th, and that has resulted in us having to put chips on the ground at our Smithers Mill and at our joint venture Houston and Dabine (ph) sawmills. The rest of our chips are continuing to move.

The strike is a difficult one. We offered the Pattern (ph) settlement, which has been accepted by roughly 85 percent of the industry here in British Columbia so far. We would expect it will be eventually be accepted by everybody in the industry. The Pattern settlement was based on the Norsky (ph) settlement -- the Norsky settlement, which was agreed to several months ago, I guess last year, actually. We have not been able to really figure out what the -- why they have gone on strike up there, why they rejected the offer. It is a good offer. In fact, in today's environment, the Norsky offer is a pretty rich offer, given the state of the pulp and paper business in British Columbia. So, we continue to look for solutions. But it is important for me to say once again that the future success of our Kitimat mills depends on being a cost-competitive operation. And, it is important for us to -- and it's important for our employees to -- work together to make sure this labor agreement is one that will enhance the competitiveness of the mill, going forward. And so, we don't seem to be on the same wavelength as our employees at this point in time, or at least the union representatives at this point in time. We just are going to continue to try to find solutions. But, I do not look for an early solution to this -- to the strike.

The lumber dispute is another area of uncertainty for the company and for the industry. We had a NFFTA decision yesterday, which I view as positive for the industry. It's, I think, positive for West Fraser. Although it just came out yesterday and we have to continue to analyze it. But essentially, I think we got some positive rulings that will help our case -- help West Fraser's case. A couple of other companies did as well. And I think the industry -- the Canadian industry -- should view the decision (indiscernible ) positively. And that should put us in a better situation as we continue to negotiate with the U.S. On, I think, August 17 NFFTA will come out with their final decision on the CVD (ph) portion of the dispute. And we expect that to be somewhat positive as well. We expect it to be positive as well.

The only thing I would like to say is that the industries on both sides of the border are looking for a solution, a negotiated solution, to this dispute. We have, unfortunately, from my point of view, we have moved from an interim agreement based on an export tax to an interim agreement based on volume restriction, which West Fraser has adamantly opposed for as long as this dispute has been going on. It is our view that the Canadian industry will be stronger, and will be better-served by a negotiated settlement based on a tax, which effects everybody the same, rather than a negotiated settlement based on some form of quota, which will allow the politicians to determine, to some extent, who are the winners and losers in this whole dispute. So we made our views known. There are other companies that believe the same, that a quota will be detrimental to our industry. And, as this dispute goes forward, we are going to continue to press our views.

I think that is really all I have. Rodger has a few comments to make, and then we will take your questions.

Thank you, Hank. Hank covered the results thoroughly, so I will only make a few additional comments. Firstly, the results are certainly dismal compared to our normal results and expectations. The loss per share, before the foreign exchange gain on long-term debt, was 62 cents. So, the foreign exchange on long-term debt impacts our results by 48 cents a share.

As Hank mentioned, the primary reasons for the loss were the low building product prices, the strengthening of the Canadian dollar compared to the U.S. dollar and in addition, lumber duties reduced earnings by 26 million and of course, the Kitimat strike which Hank has reviewed.

Lastly, I would just like to point out a couple of items on our cash flow statement. On June 30th, we made a debt repayment of U.S. $12.5 million. That brings our U.S. long-term debt at June 30th down to $135 million. And our debt-to-total-capitalization ratio at June 30th is 12.5 percent. So our balance sheet is in very good shape. In addition, in the quarter, we completed a small acquisition of timber in the Smithers area for $6.2 million. And Hank, I believe everything else has been covered. So, we can open up for questions.

Okay, thanks, Rodger.

(CALLER INSTRUCTIONS). Don Roberts (ph) with CIBC World Markets.

Hank, help us try to put a circle around the implications of the strike. You know, I was taken aback by this negative EBITDA in lumber. You are quite right; it's never happened before. I am just wondering, if we were to -- we've seen the negative implications on the Terrace sawmill as well as the chip sales of the three sawmills. If you had removed that negative effect, would the lumber have been EBITDA positive?

No, I don't think so.

Still?

I mean, no, it would not have been.

How big of an impact is this on those ones?

Well, the Terrace sawmill is not as big an impact; it's one of our highest cost mills; so it's not a big impact. The impact on the other two mills is... you know, maybe around $1 million.

Okay. At what point -- how long can you keep just stacking those up before you are going to have to take some production curtailments at the two JVs?

Well, we can continue stacking it up for a good long period of time.

Okay.

Don, we are going to do everything possible to run these mills, and to sell the chips where we can. We have made some good arrangements to sell these chips. But, the critical thing for West Fraser -- for the whole industry up here -- is to make sure that we are able to establish labor contracts that we, at West Fraser, and that the other pulp and paper operators, can live with. This industry here needs to start getting its -- needs to start to... you know, start to get efficiencies put back into, not just labor, but the whole pulp and paper sector up here. Because the pulp and paper sector up here is not the strongest sector in our industry, as you know.

Well, it seems that in the Norsky -- that this is the same agreement as the Norsky one. And they were dealing with some pretty militant folks as well. I am just wondering to what extent this is a problem between labor and local management. Could you give us a little more feed (ph) on the dynamics here, in terms of what has happened at the sort of local manager levels?

I don't want to get into negotiating on the phone or anything. I just want tot tell you what I think are the facts. And that is that we offered the Norsky agreement, almost verbatim. And that has been accepted by everybody else in the province, or most others in the province. Now, why not at Kitimat? Obviously, there is some problem between the union leadership and management, whether it's local management or top management at West Fraser, I don't know.

Okay. Switching to the panels side, I guess I was surprised a little with the -- I guess this 26 days -- maybe (indiscernible) to get a 16 of the downtime at the Cornell mill. What was the cost associated with that for the MDF?

Well, you know, probably not all that significant, Don, because the markets are so bad, and we've been hurt so badly by the exchange rate gain. I would not call it, you know --

Not a big issue.

I would not call it all that material.

Lastly, I'm wondering if your marketing guys on the pulp could just give us a little color on what is going on right now with regard to the BCTMP and sort of what the outlook is, maybe, over the next quarter or so.

Ted Seraphim is our VP of pulp, and he's right here.

Basically, BCTMP is running a lot better than the kraft rates. You've all seen the Norscan (ph) inventories come out, and they're pretty high. The BCTMP market ran at very high operating rates, very high shipping rates in the second quarter. There are really no issues around shipments or operating rates.

Going forward, we are quite encouraged, despite what is going on in the kraft market. We are not seeing the same impact on our business in terms of shipments and pricing or other things. We do see that there will be more capacity come on as Chett Winnum (ph) starts to ramp up. And that is something we have got our eye on over the next three to six months. But, with a growing demand for BCTMP, we do think that there is really no medium-term issues. There could be some short-term issues during this weak market environment. But, overall, we are optimistic. As Hank said earlier, we have been able to sell all the new production on the QRP (ph). We have been working on this for a couple of years. We are feeling pretty confident about where our business is going. And fundamentally, we don't worry a lot about where the price for kraft pulp is going. We are a pretty competitive producer in BCTMP. But, we continue to work to develop our business. I don't know if that answers it.

Would it be outrageous to assume that sort of the average BCTMP price in Q3 might be in line with the Q2 number?

Well --

Or do you think we will see some softening on it?

Well, there is softening in the overall market. I think you guys know that quite really clearly. The degree of softening in BCTMP will not be to the same degree as the rest of the business. As you know, prices ramped up during the quarter. So from April 1st, prices today are still better than they were at the beginning of April. So it may be relatively close. We are always shipping about a month after we fix our pricing.

I guess, the last question just back on the lumber. You did get a boost in the lumber segment, because the fact again, you had the rail cars, so you had shipments greater than production. I would have assumed that that would have been a positive, and which we are not going to get in Q3. How material was that, Hank, in terms of to the bottom line or is that just --

I wouldn't think it would be very material, because obviously we are, you know, shipping at -- there was not any profit in the stuff we were shipping.

Okay. Good luck.

Dyro Swetenchuk (ph) with Raymond James.

Good morning, guys. Just a quick question, follow-up on the strike question. I read a news report that suggested that the B.C. government was getting involved. Can you comment on the significance of this, if any?

I cannot really -- currently, there is not a lot going on. There was somebody up there. But, he is not up there anymore. Look, I don't really know how it's all going to shake out. I guess I've got to leave it this way. It is a dispute that we are quite resolute on. And, you know, we are looking for solutions. But, I don't want anybody to misunderstand; we are very resolute on this. So far, I don't see any particular light at the end of the tunnel.

Okay. I understand. With respect to your U.S. South (ph) operations, can you comment a bit on the progress of the capital upgrades (ph)?

Yeah. Down in the U.S. South, we still have are issues. They are not contributing, obviously. But, we do have one mill which is quite modern. It needs -- we just came back from there yesterday. It needs, you know, probably a couple of million dollars of capital more to be spent. Then it will be done. And, I believe that we have operational issues that we need to correct. And then that mill is going to be as good as any mill down there, and we expect it to be profitable through the -- hopefully through the cycle.

The other mill, which is the mill that is second or third generation, we have spent some capital there. We are in the middle of -- we are beginning the major upgrade, the $25 million upgrade. That will be done by the middle of December, and at that point, it will be just -- very similar to one of our mills in Canada -- high-efficiency. We hope, low-cost, and we expect both of those mills to be contributing within the next year.

John Benkenson (ph) from Benkenson Investment Research.

Good morning. Hank, just a question on the anti-dumping ruling that came out yesterday from the NFFTA panel. You are currently paying 2.18 percent. I remember a number of conference calls back, you did point out that you believe that they had used, you know, "bogus" I think was your term, calculations, in determining your company-specific rate. I think -- you probably have not had a chance to delve into it as you mentioned. But, do you think you will be down to zero percent? Is that your --

John, di minimus is 2 percent, and we are at 2.18 --

It should not take much to --

It should not take much, no. Again, the Department of Commerce is quite inventive. But, basically the ruling that came down yesterday, gives us quite a bit of hope that, if NFFTA sticks with the ruling that they may yesterday, we will have lower rates, going forward.

Okay. I guess you will be -- the test example, too, to see what happens to the money that you have put up for that 2.18 percent --would expect that would be recouped by the company?

Well, again, I mean I -- John, I don't want to kind of get myself out on a limb, here because this is a complicated process. And, at any turn in the road, you can get surprised. But, just based on the ruling yesterday, we got a good ruling yesterday. If it is upheld through the remends (ph), it appears to me to mean that we could be below 2 percent. If we are below 2 percent, I think the follow-on to that is that the money has been paid has been paid -- should be returned to us. But, let me just say again, I don't like to get too optimistic on these things. I think we want to cover our downside. It is quite possible that these rulings will be overturned. So, I just think it's one of these things -- it is positive today, and we will work for it. And, by the way, I think it's positive for the whole industry, too. I think that it's quite positive that other companies receive good -- some good news. And it is quite possible that the overall rate for the industry will go down, as well.

Okay. Thanks, Hank.

(CALLER INSTRUCTIONS). Mark Bishop with RBC Capital.

Good morning, Hank. Most of my questions have been answered, but I do have a question on the B.C. force policy changes. I know a lot of the progress appears still to be linked to an interim settlement. But is there any way you could give us an update on the tenure (ph) take back and I guess the upcoming negotiations, or potentially current negotiations, with respect to identifying where you are seeing your tenure removed, and I guess how the evaluation process might be proceeding for any sort of compensation?

We have out Vice President Woodlands, Wayne Clogg here, and I thought maybe he could answer that better than I could.

Good morning, Mark. I think, probably, most of you know that government put through quite a number of bills in the spring sitting of the Legislature, bills that dealt with the tenure changes, and, as well a bill that dealt with the timber expropriation, Bill 28. Those bills were passed. They received royal ascent. So, most of the tenure changes have now been inactive. And these would be things like to cut control, pertinency rules, and so on.

The Bill 28 received third reading very quickly. And the expropriation of the timber from the companies is effective actually at the end of March. So, as of the first of April, from a legal standpoint, that timber has been expropriated. Government's intent is to use that timber to enhance the auction program, to provide opportunities for communities and small tenures, and to direct a portion of it to first nations (ph). The process to sort of fill those pots is going to take some period of time. So the government has basically put provisions in place that would allow the companies to continue to access that timber until they are ready to use that. So, I guess the long and the short of that, Mark, is that there is no immediate impact from the take away. The government is now in the process of trying to go through the process of saying where that timber will specifically come from, because there is flexibility for companies to give up more on one license and less on another. And that is really going to be a process of working sort of with government to decide where their priorities are in different regions of the province. So, our company has had a preliminary meeting with government to sort of lay out where government's priorities are, and where sort of our flexibility would be as a company. And we would expect probably sometime in the fall, that government would come back, at least with a kind of a first draft of where they would see the timber being reallocated across the province.

As far as your question on compensation, that is sort of the last step in the process. So, what would have to happen is this whole overall scheme of where the timber would be sort of taken back from would have to be developed. That would go right down to specific licenses for each company. Once that is completed, then government can sit down and begin to work on the compensation question because there will be differential compensation, depending on which license the volume comes from. I would expect the compensation question to be dealt with, maybe a year to two years out, at this point. I don't know if that answers your question or not, Mark?

Yeah, no, I think it does. At least in the next few quarters then, we shouldn't expect any sort of operational impact from any of the changes that may be going forward?

No.

Okay. That's great, Wayne. One other question for Hank or Rodger on the real estate. It didn't sound like there was anything of note during the quarter. Should we be expecting anything in the next quarter or two?

Mark, in the quarter, we had about just short of $1 million of gain on sale of the real estate. We've got currently close to -- approximately $50 million to sell. Our book value is reasonably close to the expected proceeds. But we've got, you know, we think a net gain, but of course, markets move up or down. In terms of proceeds over the next half of the year, it is probably anywhere -- we expect to get proceeds in of 20 to $30 million. But in terms of financial statement impact, it should be very small in terms of a gain or loss.

Isan Sprotscroop (ph) with Equity Research.

Hello, it's actually Kevin Mason here. Rodger, I don't know how Martti happened to arrange this that you end up being the point man when you had the worst quarter of the company. But anyhow, I just had a couple of quick questions. First, was on the lumber shipments -- obviously, in this quarter, you caught up on a lot of the shipments that did not make in the first quarter. But, just giving your lumber realizations, looking at that, it seems that a lot of that may have been front-loaded, or I don't know if it was a product mix issue. But I was wondering if you could sort of speak to that a little bit.

Okay, Kevin, first and most importantly, I'm trying to figure out what happened to Martti, as well. (Laughter)... On the lumber question, yeah, As Hank mentioned, towards the end of the quarter, lumber prices did increase quite a bit. And I take it by your (technical difficulty), increased lumber prices, we really did not get the impact of those in our second quarter. We will see the impact in the current quarter, however, Kevin.

Also, just on sort of a shipment side again. I don't know if yourself or Hank just has any comment with respect to the B.C. Rail issues with the government. Obviously, if the ownership changes and stuff that are anticipated there, if that is sort of just a neutral issue for yourselves or if that is a point of concern or possibly something positive?

No, it is a huge point of concern. Hopefully, it can only turn out positive. But B.C. Rail is -- we are dependent on them in our operations. And freight is one of our biggest costs. So, what is important to us in this whole deal is to have a more efficient, lower-cost carrier at the end of the day. And, the concern we have is the monopoly situation that can exist, depending on who ends up acquiring the rights to the railroad. And so, we have been quite active with a group of shippers in trying to press our views forward. But, what is really important at the end of the day is that we have more options rather than fewer options in terms of accessing rail into the markets that we serve. And that is going to be key. We need a more efficient, lower-cost carrier, and we need more options.

Is there some possibility with some of these shortages and stuff there has been of cars, that, going forward, if is hooked in with a larger carrier, that that may not happen? Or is that --

That is possible, but we have had shortages of cars on CN as well.

(CALLER INSTRUCTIONS). Sean Stewart (ph) with T.D. Newcrest.

Most of my questions have been answered. Just a clarification on one thing, though. The 5 million per month cost tied to the Kitimat strike -- that's an after-tax number, I'm assuming. And also, I just want some clarification. Does that include the -- I guess, the side impact of the sawmill having to go down as well? Or is that just the paper mill strictly stand-alone impact?

Sean, the answer to both of your questions is yes. The $5 million is the after-tax impact, and it does include the impact from the chips being put on the ground at the sawmills.

Okay. That is great. Thanks.

At this time, we have no further questions. I would like to turn the meeting back over to you, Mr. Ketcham.

Well, thank you, very much. We are not, obviously, very thrilled with these results. And I hope we will be having a better third quarter conference call. Thank you for joining us. And if you have any questions off-line, give us a call. Thanks.

(CONFERENCE CALL CONCLUDED)