West Fraser Timber Co Ltd (WFG) 2005 Q1 法說會逐字稿

Welcome to the West Fraser Timber first-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.

Good morning, everybody. We appreciate you joining us. This is the first reporting quarter for the new West Fraser. The profile of the Company has changed significantly with the acquisition of Weldwood on December 31, 2004, so comparability to prior periods is significantly impacted.

Our first-quarter earnings reported yesterday were $43 million or $0.99 a share, compared to last quarter in 2004 of $41 million or $0.94 a share, and compared to the first quarter of 2004 which was $27 million or $0.71 a share.

In the first quarter of 2005 earnings, notable items included before tax for the quarter were $8 million share option expense; that had an after-tax effect on earnings of $0.12. An exchange loss on our long-term debt of $3 million; that had an after-tax effect on our earnings of $0.07. And the impact of the purchase price accounting for the acquired inventory when we bought Weldwood of $17 million or $0.26 after-tax per share. I think Martti Solin, our CFO, will elaborate on these items later in the conference call.

Let's talk about the divisional results for a moment. In our lumber division all plants are running very well. Our EBITDA for the quarter was $103 million or 20% of sales, versus $55 million or 17% of sales last quarter. During the quarter the benchmark SPF price was US$398 versus US$336 last quarter.

Average B.C. interior stumpage decreased from the fourth quarter by a dollar. We expect a further decrease on April 1, 2005, for the second quarter of about $6.50; and we expect an increase on July 1, which is the beginning of the third quarter, of about $4 per cubic meter. Over in Alberta sawlog stumpage increased about a dollar from the fourth quarter of 2004; and currently the stumpage is up about $3.50 from the first-quarter average.

First-quarter lumber prices were strong primarily due to housing starts, strong housing starts, and also partly due, we think, to transportation issues which affected West Fraser significantly during the quarter. We were not able to get adequate railcars to ship our production. So obviously you have seen a build in our inventory over the quarter.

Another aspect that may have affected prices a little bit during the quarter was a log trucker's strike that happened up here in the interior British Columbia. It affected everybody somewhat differently, but probably there was a bit of a concern in the market relating to the truckers' strike and relating to the ability of the mills to get enough logs in for breakup.

West Fraser may be affected to some degree by the unseasonably warm winter, which had the effect of shutting down logging a little earlier than we would have liked. So in some cases we did not have the log inventories -- in some cases log inventories are below their desired levels for this time of year. We believe we have contingency plans in place. But it's quite weather dependent.

Of course the pricing outlook for lumber is rising interest rates typically have an effect on housing starts; and so we're going to be interested to see, as the year progresses, how the housing starts situation develops.

In our panel division, again, all plants performed well during the quarter. The plywood plants were hit by railcar shortages, so they built plywood inventory. In the division our EBITDA was $22 million or 16% of sales, versus $15 million or 23% of sales last quarter. Of course the plywood division -- or the panel division consists of three plywood plants and two medium density fiberboard plants now, after the Weldwood transaction.

The benchmark plywood price was $439 FOB Toronto, versus $457 last quarter. We think the plywood market was affected to some degree during the quarter by severe winter weather in eastern Canada, which had some impact on plywood demand. The demand and pricing for MDF was about the same as it was in the fourth quarter. LVL demand and pricing is very strong at this point.

In our pulp and paper division, the mills ran very well for the quarter. EBITDA in that division was $30 million or 11% of sales, versus $0.3 million last quarter. Improved results from the fourth quarter were the result of the addition of the two Weldwood kraft mills and the continued operating and cost improvements at our Kitimat operation. Of course Alberta Newsprint continues to be a solid contributor to earnings.

I want to note that during the second quarter each one of our three pulp and paper mills -- that's Cariboo pulp, Hinton pulp, and Eurocan pulp and paper -- each one of them will take 13 days of maintenance downtime. This will all be taken in the second quarter and that will have obviously some significant effect on our results from the second quarter.

The notable capital spending item that I'd like to mention is the $100 million for the new sawmill that we were going to begin construction on this quarter. We in fact have the groundbreaking on this project tomorrow here in Quesnel, which is where we are having our annual general meeting. This mill should start up in about 15 months. It is going to be built alongside our existing mill, so will lose no production. The new mill will produce about 500 million board feet annually on two shifts, versus 380 million feet in our current mill today.

I think with that, I'll turn the call over to Martti Solin, our Chief Financial Officer.

Thanks, Han, and good morning or afternoon to all of you; and greetings from Quesnel where you hear the train go by here. This has been a busy quarter, as everybody can imagine. It sounds simple enough to put two companies together and come up with one set of financial statements. I wish it were that easy.

Lots of people worked very hard to make it happen. West Fraser and Weldwood had different accounting platforms. Our initial (indiscernible) task forced (ph) to produce statements off West Fraser's Oracle-based system; and thanks to Roger Hutchinson and his team's hard work, that has now been accomplished.

Turning to the statements, as Hank said right at the outset, comparisons to prior periods are not very meaningful. I was hoping to come up with an elegant way of doing this comparison, such as using percentages and margins per unit or unit costs. On reflection I, however, figured that all of you would have your own elegant ways to do the comparisons. So no elegant ways for me, just a couple of basic comments to elaborate what we have submitted yesterday as our quarterly statements.

However, before going further, let me just remind everybody that comments we make or answers we give to your questions may include forward-looking statements the accuracy of which is subject to several risks and uncertainties. With that now behind us, a couple of comments on the balance sheet.

As you can see our cash balance sheets were reduced by about 300 million. I believe we give you a heads up on this point in our previous calls. But in any event, we paid our 2004 taxes and some 2005 tax installments in February, totaling to about 170 million. As Hank already mentioned and everybody knows, there is a seasonal log inventory buildup which used cash, about 80 million. We reduced our borrowings immediately after the closing by about 66 million, and as a result our net debt to capitalization stood about 31% at the end of the quarter, which was close to what we expected.

In terms of the P&L, and Hank already mentioned the key point there, the accounting rules require us to record the product inventories we acquired at fair value. This means that the estimated margin on those inventories are included in the acquired working capital. Some of you may be interested how that 17 million, or 26% (indiscernible) breaks out by segments. It's a lumber 13 million; panels 3 million; and pulp and paper 1 million. There will be no further adjustment on account of this item in a subsequent period. So it has come through the system in the first quarter.

In terms of SG&A, some of you were asking that. To give everybody a heads up, the increase reflects just the Weldwood addition. Our SG&A may look higher than some of the companies you are comparing us against. Trust me, we have not started to spend money on any fancy gadgets and stuff. It is simply the reason is that we include the mill level SG&A under this heading, whereas some other companies reclassify those costs into cost of products sold.

And finally we are in the process of finalizing the purchase price calculation, which is the net worth calculation, with IP. We don't expect any major adjustment to the recorded purchase price. We also have accrued approximately 18 million on account of various restructuring charges. Once we have a better idea of the total cost, this item will be adjusted.

Finally the allocation of the purchase price between the various assets will be fine-tuned during the balance of the year. Therefore there will be potentially small changes to our amortization when we go forward. I think with this, Hank, we have to take -- back to Hank.

I would like to just cover off a couple -- thanks, Martti. I would like to just cover off a couple of more items that I neglected to cover. Just make one or two comments on the softwood lumber dispute. Since the last conference call I would not say that things have moved much.

However there have been a couple of government-sponsored meetings between the industries at which -- where discussion took place, positions were discussed. I can't say that -- it does seem like both sides are pretty entrenched in their positions.

I would say from the Canadian side we are moving ahead well on the litigation front. We continue to win the critical issues on litigation. In late summer we're going to -- the extraordinary challenge case at NAFTA -- the decision should come out.

While we don't know, we think there's a very strong likelihood that that decision will be in Canada's favor, and that is going to be a very significant point in time for this case, for the softwood lumber case. We continue to invest in this litigation and it's moving us in the right direction. I think we need to be very confident about that.

I did not say anything about the integration of Weldwood and West Fraser, so I'll just mention a couple of things to give you a little bit of a flavor as to how it is going. We believe that the integration is going well and going according to plan. Systems evaluations are going well, and some system conversions are underway.

Our pulp sales group is now fully formed and functional. Previously NBSK pulp was sold by International Paper, not by Weldwood. So when we took over on January 1, we needed to take over with a newly formed and fully functional pulp sales group. And we did that, and we have done it without a hitch, and we're very, very happy with the new sales organization that we put in place.

We're currently evaluating the lumber sales philosophy that both West Fraser and Weldwood have used over the years. We're trying to figure out the benefits that each philosophy brings, and were getting very close to making some decisions on the lumber sales side.

We're up here in Quesnel, which is our operating head office, and we are in the middle of an expansion of this office because we've determined to move. Prior to the Weldwood transaction, West Fraser operated lumber sales out of Quesnel; and we also had all of our IT staff here in Quesnel. Weldwood had their sales and IT staffs in Vancouver. We are consolidating the two organizations.

We are moving it to Quesnel, and we believe that this will be a -- we are very, very firm on this, because we believe that we really want to have all of our operating people as close to the operations as possible and as close to the communities that we operate in as possible. We just think that is going to give us an opportunity to make better decisions. Our people are closer to the action and decision-making can be done right here at site, which we think is an advantage.

On June 1 we're moving the two Vancouver offices together in Vancouver into a new office, into a new site. Finally we're still confident that we will achieve the $80 million of synergies that we announced. We expect to achieve about a third of them this year on a run rate basis. With that, I think what we would do is turn it back to you and accept questions from anybody on the phone.

(OPERATOR INSTRUCTIONS) Don Roberts from CIBC.

Two questions, one getting back to this recurring rail issue. Are there any sort of specific strategies that you can pursue to alleviate this problem? Whether it is more leasing, or what are your thoughts on this, and how long do you think it's going to continue?

One strategy that we are following is we are continuing to put some of our lumber on vessels down in Vancouver and going around to market that way. That is costly but it does get inventory into the marketplace.

On the railcar side it has been a recurring issue for us and to a greater or lesser extent to most everybody else. You know, we do investigate all strategies including leasing. I can't tell you if we are going to change our strategy at all at this point in time. We believe very, very strongly that with the rail system here in Canada the customer should be provided with the equipment and with the service that they're entitled to. We're certainly trying to press that as hard as we can. I can't really elaborate on any other strategies we might follow, Don.

Have you done anything in terms of trying to assess the potential opportunity cost here? Or what is the bottom-line implications, or is it just mostly a service issue?

I don't quite follow the opportunity costs. In terms of buying or leasing cars, you mean?

Yes.

Oh, yes, definitely. We certainly do that. We haven't convinced ourselves that that is the right way to go yet.

The second question is just give us some -- now that you are more of a participant on the kraft pulp side -- your perspective on where that kraft pulp market is right now?

I might, Don, if you don't mind, pass that to over to Ted Seraphim, who is our VP of Pulp Sales.

I think most of you have probably seen the March inventory numbers. In terms of days of supply, they did go up a little bit. Pulp prices are doing a number of different things. Softwood kraft there is downward pressure in Asia and Europe in April. Hardwood kraft on the other hand is moving upward. That is a bit of an inconsistent situation today.

I think as we look in the near term we expect the market to be rather difficult through the second quarter. But we expect that the floor will be hit very quickly, and we expect that the buyers will come back to the market fairly strongly after, towards the end of the second quarter or maybe early third quarter.

Because our understanding is that our consumer inventories are not high, not like they were last year when the market softened. But we think if they take a pause this quarter we will start to see things deteriorate a little bit and then, as I said, because of the cop (ph) position and the Canadian dollar and the euro and other things we expect the market to hit the bottom fairly quickly.

I would have that with IP doing the selling before a lot of that product, especially out of Hinton, would have been going out into the Midwest and so forth. Are you sort of changing the geographic focus? Is there going to be much of a learning curve in terms of moving to these new markets and taking over that responsibility?

I think first of all we've been very actively involved in the pulp market with our BCTMP mills for many years. In terms of our presence as an NBSK pulp supplier, I think the first thing you have to remember is we have this 170,000 ton contract with International Paper. So you take that out of the fold, and I guess our pulp capacity or sales is somewhere in the order of 450,000 tons of NBSK. Again that is heavily focused on North America and we don't expect to make any significant changes in the near term or in the long term. We are going to continue to focus on building on, frankly, the great job that IP did in that business.

Thank you.

Mark Bishop from RBC Capital Markets.

A couple of questions. Hank, I'm just wondering, following up on your comments regarding the downtime at all three facilities, is there a way you could quantify that, maybe quarter-over-quarter, as to where you see perhaps the cost per ton of that downtime?

I don't think I could do that. We could probably tell you how many tons we are going to lose.

Okay.

We are going to lose about 43,000 tons of production during that period of time. But I don't think we can elaborate any farther than that.

Okay. Moving to the transportation theme, are you seeing any pressure or significant pressure with respect to your rail rates, CN and others, beyond what you might be seeing in fuel surcharges?

Again, I think there is always pressure there. I would not expect we are seeing any more pressure in that regard than anybody else. But we do have both the supplier and the customer, us being the customer and the railroads being the supplier, are working very hard to look after their respective interests. So there is always that healthy tension.

You have multiyear contracts in place with your suppliers? Or any contracts that might be coming due in the near term?

It's Ernie Thony. We do have contracts with most of our carriers. They come due over various periods of time. Some are coming up shortly, some are further out.

Okay. Just on log decks, and maybe Ernie this is also a good question for you. As you look toward the later spring, are you feeling confident you have got enough to get through? Or obviously you have got some lumber inventory built up. Where do you see your log deck position as you look towards, say, late May and early June?

Well, I think as Hank elaborated, we've got -- in some facilities we're well supplied, others where we are somewhat tight. It will depend now on the weather going forward. Certainly the weather has been very dry up here. So we would expect that we could probably get back into the bush somewhat sooner than normal. But we have to be a little bit careful in that comment that it doesn't get too dry and we start running into fire restrictions and so on. So it's a bit dicey.

Great. Just one last question with respect to your take back in BC. Any visibility on a timeline for when that might be resolved?

No, not at this point.

Thanks, Hank.

Stephen Atkinson from the Bank of Montreal.

In terms of the railcar shortage, has it been resolved or will you be able to -- shall we say -- catch-up what you built up in inventory?

Right at this particular point we're still struggling with car supply. If we go back and look at a little bit of history, during the first half of the year we struggle quite badly; and by the third and fourth quarter we can basically get back to even again. So we're hoping that continues, but we're not letting our guard down. We're still moving wood by vessel and we're hoping for the best.

The synergies relating to Weldwood were, if I understand it correctly, you will be at one-third of your target by year one. What is your plan for year two?

Stephen, we are just basically saying one-third, one-third, one-third. If there is some significant change, I think we'd certainly advise that. But really we're really only just over three months into this thing. I think we are going to have a better view of that later in the year.

In terms of the merger of the office, I assume that the costs would be included in that 18.5 million integration?

(indiscernible) Sorry, what was that, Stephen?

I believe you are moving to a new office.

Yes.

And combing the two.

Yes.

So where West Fraser had taken 18.5 million charge associated with the integration of Weldwood, I wondered if that was included in that.

Yes, it was.

In terms of the plywood division, one of the things I was wondering is -- is your product impacted by OSB is it, should we say, safe?

Plywood and OSB compete certainly in the sheathing areas. Plywood has a very strong presence in Canada, more so than OSB. But they are a competitor.

So that you are mainly in the sheathing areas then?

Sheathing and flooring and so on, yes.

Last question, on CapEx. Can you give me an idea of the CapEx for this year, next year?

Our CapEx will be under our depreciation (multiple speakers) year.

So I could use previous year's and then put in the cost of the new lumber mill.

Yes. The Quesnel sawmill which we're building is going to be spread out over at least two years, yes.

And the Quesnel sawmill starts up the middle of next year?

The Quesnel sawmill, we start building this month, right virtually now. It will take 15 months. It will start up next summer.

I know I said one more question, but you mentioned the sawmill. Can we assume some of the increase in productivity is related to better recovery?

There will be better recovery and better productivity, yes.

Thanks a lot,

Eldar Brodsky with Burlingame Asset Management.

I'm try to understand the cash earnings for the quarter versus the accounting or GAAP earnings. I'd like to exclude onetime items or acquisition-related items. Is the appropriate way to look at that earnings basically to focus on the cash flow, pre working capital and pre future tax effect?

And then basically add back the effect of severance, synergy costs incurred in the quarter, and maybe even the effect of rail, given that it will probably be solved some point this year, and maybe even -- I'm not sure how you have accounted for the increase in COGS due to purchase accounting, whether that's being added through in the amortization line of the cash flow statement? Am I being clear?

I think I got a bit where you are going. If you look at our cash flow statement, I would look at that item and the 112 million or 113 million we have there before the non-cash working capital changes. There is no restructuring charges in this quarter. The only item is the approximately 17 million, we mentioned that -- the inventory profits arising out of the finished products inventories we acquired did not flow through the P&L. They were taken into the working capital, in (indiscernible) working capital. That is what I will do to get what I think what you are after.

Okay, because I thought there were some severance costs that were incurred in the quarter.

They accrued to the purchase price, the 18 million I mentioned in my comments. Any severance or other restructuring charges, as Stephen Atkinson was asking, the office for example will be accrued against that item. Therefore there is nothing material to my knowledge going through the P&L at this time.

If rail had been in normal operating circumstances such that -- I guess what percentage of production would you have shipped in the quarter? Would it have been like 99% or 95%?

I think if we had all the transportation that we needed, we would have shipped 100%.

Which would be another 100; the 30 million is board feet. The difference between the production and shipments which you see in the statistics we provided.

If I used this, what kind of incremental cash flows would that have yielded?

I think that is information we can't tell. If you take it in the segmented information, take the average lumber margin, that's as close as we can give you.

Your maintenance CapEx for the year is expected to be what, as opposed to total CapEx?

Maybe around 60; I can not tell you for sure. But maybe around that number.

My last question is if you guys win the antidumping dispute, countervailing dispute, would that mean that your duties would go from what you had in the quarter, 40.8 million in duties, to zero? If it went as well as you hope?

If it went as well as we hope, in theory duties should come back. But I don't think there's anybody who thinks that we're not going to have to fight to get the duties back. And that fight will take, I'm told, it could take two, two and a half years, something like that. So we are certainly not counting on getting anything back in the near future.

I'd say again though, we are convinced that our case is strong and that if we follow this through West Fraser believes we're going to win this case. We're currently -- we've won on dumping, West Fraser has; and we haven't got our money back. We are fighting for that. So that is just a prelude to the issue we're all going to be in if we win the CVD and ADD and have to try and get our money back.

If you win, you get around $278 million back, U.S.?

I don't have that number; I think that is right, yes.

And less -- then that's a taxable income.

My last question is the log trucker strike and the warm winter. Do you have any sense of how much in incremental cost that added in the quarter?

It didn't add. It didn't add any cost to us in the quarter, I don't think.

That is it, thank you very much.

Rick Skidmore from Goldman Sachs.

Hank, can you talk about the lumber dispute just a little bit more in detail? As you sit across the table from the U.S. industry, how does the U.S. industry respond with regards to the fact that Canada has generally won the court decisions? And does the U.S. see the extraordinary challenge as a critical point? Or are they just viewing that as just another decision and they will just keep on going with what the current trend?

It gets a little dicey for me to talk about things as we get closer and closer to the end here, because it's all legal, and I do not want to trip over myself. But fundamentally, if I were on the other side I'd view the ECC as a pretty significant time, because that is the point in time -- that's on injury -- that's at the point in time at which all of the other -- they have exhausted their appeals and so forth.

If Canada gets a favorable ruling at the ECC, that should be the final conclusion. What we've learned time and time again is that every time we think we are getting to a final conclusion, some obscure tactic is employed that extends it. I am just talking for West Fraser. I see that whether we get finality in August or not, we continue to put nails in the coffin on this case.

We're going to get there, I think. I am not sure if that is fully shared by everybody, because you have to make your own assessment on the legal advice you are getting. But that would be my view.

Then just shifting to the difference between your production numbers and your shipment numbers. It sounded like you were essentially saying that if you had the railcars all of that volume would have been shipped. How much inventory, how are your inventory levels now on the lumber side? Assuming the rail situation doesn't resolve, do you expect to build another 100 million board feet of lumber inventories? Or do you start to take some downtime? How do you respond to that?

You're asking me today, I'd say we do not expect to take downtime. We expect to work with the railroads to find a solution to this. We believe that the railroads are going to have to figure out how to do a better job of getting cars to their customers.

They are building more cars as well.

They're working on. They're building more cars and they are trying. This isn't -- in some cases it is not a unique situation in British Columbia by the way. The transportation system across North America is kind of clogged up due to the economies and so forth. But in answer to your question, we don't expect to build that kind of future inventory. We expect to liquidate our inventory, and we expect to do it through better car supply from the railroads.

If I can ask Ted just a question on NBSK. In terms of the breakdown, you said the majority of that goes to North America. Can you give a more specific number in terms of percentage of NBSK to the U.S. or to North America? And have you then seen the pulp prices in the NBSK market, because the list hasn't moved and the majority's going to the U.S. Is that -- have your realizations been more stable than what you are seeing, obviously, in the Asian markets?

I can't really comment specifically on volumes that we're shipping to each markets. But I think somebody else asked the question, it is safe to say that with the IP contract that makes our situation fairly strong in North America.

In terms of realizations, I don't want comment on that too much, except to say that I think we know that the benchmark price in April in North America is 680. We know that the PIX (ph) price in Europe was 645 or so under pressure. I think it's commonly reported that NBSK prices in Asia are anywhere between 530 and 580 depending on the region. So that being said I think the more business you have in North America the better off you are. I can not really elaborate much more than that, Rick.

That is fine. Thank you.

Paul Quinn from Salman Partners.

Maybe I could ask this geographic sales distribution question another way. If you brought it back up to total pulp sales, what sort of split are we seeing between North America, Asia, Europe?

Martti maybe should clarify this, but I think in terms of how we report our sales it is based on all our pulp we pay for. I think (multiple speakers) prepared to comment on that basis. On that basis, don't have been numbers exactly in front of me, but North America is going to -- we have about 1 point, including Alberta newsprint, just over 1.7 million tons of pulp and paper; and we have I'd say over about 60% our sales would be North America. That is a real rough number. If you want me to give you a better number, I could talk to you later in the week.

Great. That sort of same geographical breakdown for panels is, I imagine, the vast majority of plywood is sold in Canada. Do you have any idea what that is?

It is probably 85%, somewhere around there.

Just moving on to -- Hank talked about the philosophical difference in lumber sales between Weldwood and West Fraser. I wonder if you could just expand upon those two different philosophies?

Basically the prime difference would be that the old Weldwood sold more to the end-user, the retailer, the box stores, those sorts of folks. Whereas the West Fraser was to distribution, wholesale. Those particular customers.

But right now you have sort of kept the sales team sort of together, right, as you are working through this, the ultimate end?

We are operating basically out of two different offices at the moment. The old Weldwood group are still in Vancouver and the West Fraser group is in Quesnel. One of the reasons we haven't got everybody together is we have two different sales systems, IT systems. And we have to get those put together before we really can bring the sales group together.

Is that expected by Q3 or what kind of --

Our plan is by the end of the year.

Just back on softwood lumber. I haven't heard very much on the West Fraser case. I mean there was sort of an expectation in the market that we would hear something in December, and we're now well into April here. Do you know anything that we don't know?

Do you anything we don't know? We have been expecting the same thing just as you have.

When you mentioned -- fight to get the duties back over two and a half years, what litigation do you see happening over that period of time?

I can't tell you. All I know is that I'm assuming that if this thing does come to a conclusion, a litigated conclusion, I'm assuming that we're going to have to fight to get the duties back. That is all I can say, and I don't know under what legal basis we're going to -- they're going to keep them, or on what legal basis we are going to try and get them back.

Fair enough, thanks very much.

Daryl Swetlishoff for Raymond James.

Most of my questions have been answered. Just on the Kitimat mill, I see you set another production record during the quarter. In your annual report though you mentioned that given where exchange rates are currently at, positive earnings are difficult to achieve. Given those two factors, what are your longer-term plans for the Kitimat mill?

The Kitimat mill consumes a lot of the chips and hog fuel and other wood residue that we produce all along the west line of the CN rail in Northern British Columbia. It's an important aspect of our Company. It is in a very competitive market, and it is one of the only linerboard mills in Canada.

So one of the key issues we have there is, unlike lumber or pulp, when the Canadian dollar strengthens there is little to no effect on the U.S. dollar price for linerboard. So that is a disadvantage we have versus pulp for wood products, or newsprint for that matter. So that is an issue for us.

But our longer-term plans are simply to solidify our markets that freight logical, and we're doing a good job of that; and get consistent high production out of that mill, which we haven't had for 20 years, and we are getting that now. And once we get the production we can stop -- once we feel that we've got consistency and production, then the team up there can really start to manage costs, which is what they're doing now. So we don't know where we can go with this mill. But we do know that we're going in the right direction.

Thanks, that's all I had.

Pierre Lacroix (ph) from Desjardins Securities.

Good morning. It's Richard Kelertas. I just have a couple questions. First on your harvesting operations where there's beetle killed, could you just give us an idea if you're expanding your harvest areas in those affected regions? What is that doing to your costs? Are you seeing a substantial reduction in costs, or with the wood that you can use a significant falldown is basically just working itself out? And I have a couple more after that.

As it relates to the beetle situation, obviously, it's a serious issue up here, and we're really logging. Where we're in beetle areas, we're logging virtually 100% in beetle wood. Of course, the AAC has been increased up here to allow us to liquidate the wood while it has commercial value. So, obviously, that is giving us an opportunity to produce more, and so that drives costs down.

But on the other side of the coin, the wood is declining in quality. So we will over time -- and we're seeing it now -- but we will over time see a lumber grade problem, lumber recovery problems, that sort of thing.

Where you able to see any noticeable difference? Outside of your production unit cost going down, because you're producing more, have you seen anything on the stumpage side?

Sorry, in terms of what?

In terms of absolute wood cost. Did they come down in the regions that you are harvesting in?

Not over the last year or so, no.

Now just looking at the pulp side, have you seen -- obviously there's benefits on the lumber side -- but have you seen any bluestain problems in some of your pulping operations? In terms of chip quality.

No.

Do you anticipate that there might be, like some of the other producers in the interior are finding at this particular stage?

Richard, we are seeing bluestain, but we're not seeing any real impact in the quality of our pulp at this stage.

It's always anticipation that we're asking for. So in terms of a year going out, let's say, when you basically have your harvest cycle out for one year to five years, in terms of where you are going to be going for your chips for most of your pulping operations, do you anticipate that there might be a problem in a year?

We don't expect one at this stage.

Just finally, can you just let us know right now in terms of the BCTMP markets, Chinese have opened up a couple mills just recently. There is some talk that there's going to be some pressure on those prices; hence more BCTMP will probably stay in North America. Have you seen any impact on your pricing there?

I'll answer that one. I guess the first question is how much pulp are these two -- there's really two BCTMP mills in China. And they're in one province. So the real question is are we actually going to see a significant impact on the marketplace?

That at this point has not been the case. Demand for BCTMP has grown tremendously over the last six or seven years. Canada obviously is a big exporter to China in BCTMP, and we fall into that as well. With that being said, there's a lot of new paper and board capacity coming on in China.

So it's really a question of can they fiber (ph) these BCTMP mills. What type of product quality are they going to produce? Is any of that product going to leave their mills and find its way into the marketplace? I think if you answer positively to all those three questions then I think we would be concerned. But at this point in time we don't see all those three things lining up for those producers.

And I would imagine that Canadian shipments of BCTMP into China will not decline in any significant way on a year-to-year basis. I mean there are fluctuations during the year. Just to give you a bit of sense on that, it's not a kind of a knee-jerk answer, we spent a lot of time a couple of years, in the last two years taking a look at this. Because this is such an important market for us.

But we continue to look at growing this business in all markets. It is still a new product. There are still a lot of opportunities for market penetration. So it may create a few bumps in the road, but I think long-term it's not going to be a significant issue for our business.

In the Asian market, have you seen BCTMP priced more off the hardwood price or the softwood kraft price in terms of a discount?

It depends a lot on the grade and the product and the end use and so on. But I think generally you can say it is priced off hardwood.

Hank, final question for yourself. Now that you have got quite a stable of assets that you are dealing with, and I gather in the next six to 12 months you'll be very focused on getting the synergies and getting the two operations together. But past that point if you take a look at your portfolio, any areas that you see yourself being deficient in any product lines? Or that you would like to grow the business with the next five years, in terms of demand in North America for certain grades of either wood products or paper and forest, or paper and board?

I think as we've said on a number of occasions, our real expertise is wood products. We just want to keep finding opportunities in the wood products side that -- either in products we are in, or products that we're not in and would like to be in, or products that we're not in because somebody like me made a wrong decision a few years ago.

But we're just going to keep looking for opportunities to grow the Company as we have in the past. I can't be any more specific than that. We want to be a major player in the business and only in the businesses where we can make money.

As you combine the two sales philosophies of Weldwood and West Fraser, on the wood products side -- and you mentioned the two differences -- is it a happy marriage between the two? Or is one going to take over the other?

That's going to depend on the numbers. We're doing an evaluation that hopefully will end up as a numeric result where we bland mill nets with costs and so forth, and hopefully the result will fall off the bound (ph).

What is history showing you? If you look at the historic numbers? Since we are not -- obviously we were not party to the Weldwood numbers, except when they were a public -- or (multiple speakers) IP numbers, but --

If you can appreciate this is a kind of an in-Company discussion and we're going to keep it that way. Obviously I just can't comment on that.

No problem. Best of luck. Thanks.

(OPERATOR INSTRUCTIONS) Rick Skidmore from Goldman Sachs.

Just a follow-up, two questions. One, historically you have done a dividend increase with regards to the shares. Any thoughts on that front? And Martti, if you can comment on the balance sheet, 31% debt to cap, generating good cash flow, generated a lot cash flow last year. Thoughts on use of cash going forward, aside from just building the new sawmill. Thanks.

I don't have any specific comments on the dividend. We are going to keep looking at it. We do have kind of a general payout policy, and we want to stick to that. So we will be looking at that in the months ahead.

Rick, in terms of a use of cash flow, obviously, last year we generated a lot of cash. It was one of those unusual years when we were not a cash paying position in that particular year, and didn't pay the installments, and therefore we basically recorded a pretax earnings and cash flows.

We have as Hank mentioned earlier, we are spending a capital as required, the 100 million sawmill here, and the other stuff which we need to do, will I think very nicely look after the immediate cash flow issues. 31% is somewhere in a reasonable range of the capitalization we would like to be.

Thank you.

Thank you. There are no further questions registered at this time. We thank everyone for their participation in today's conference call. Please disconnect your lines at this time and have a nice day.