West Fraser Timber Co Ltd (WFG) 2005 Q2 法說會逐字稿

Welcome to the West Fraser Timber second-quarter results conference call. Please be advised that this call is being recorded. 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. It is Hank Ketcham, and I have with me Martti Solin, Sam Ketcham, and Ernie Thony to help answer questions. I will just briefly go over our second-quarter results. West Fraser had second-quarter earnings of $38 million or $0.88 per share, compared to earnings of $43 million or $0.99 per share last quarter, and earnings of $67 million or $1.79 per share in the second quarter of 2004.

On a divisional results basis, I will first deal with our lumber division. I will start by saying that all of our plants are operating well. The U.S. South is operating well, with the Huttig wrap-up coming along very well. EBITDA was $108 million or 18% of sales in the quarter, compared to $103 million or 20% of sales last quarter. Benchmark SPF prices averaged US$361 for the quarter compared to US$398 last quarter.

Railcar availability improved during the quarter, allowing for a better ratio of shipments to production. This contributed to the price decline, we believe, as more volume came on the market. This is continuing into the third quarter. Lumber inventories are continuing to come down nicely, as we continue to get better railcar availability and truck availability. Of course that is complicated somewhat by the truckers' dispute down here at the Port of Vancouver; but that hasn't had a significant impact on us to date.

In our panel division, EBITDA was $17 million or 13% of sales, compared to $22 million or 16% of sales last quarter. We had record MDF production for the quarter. Our plywood benchmark price was $358 FOB Toronto in the quarter, compared to $439 last quarter. Plywood prices dropped significantly from the prior year, we think primarily due to overall increase in structural panel production and lower exports to Japan, which were down about 45% in the first five months, and to the U.S., which were down about 20% in the first five months. In addition, we're seeing more imports into the U.S. primarily from Brazil. Demand in pricing for MDF we believe will be similar to last quarter, and demand for LVL, which is our engineered wood division, is strong; and favorable market conditions are expected to continue for the balance of the year.

In the pulp and paper division, our EBITDA was $15 million or 6% of sales in the quarter, compared to EBITDA of $30 million or 11% of sales last quarter. The decline in EBITDA is primarily due to planned maintenance shutdowns at our Kitimat operation, which removed 21,000 tonnes during the quarter, and at the two NBSK mills, which removed in total 22,000 tonnes during the quarter. I might add that the Kitimat mill established a quarterly production record for highest daily production for the fifth consecutive quarter, which is a continuing indication that operationally that Kitimat mill is doing better than it has ever done.

Our joint venture newsprint mill continues to be a solid contributor to results, even as newsprint consumption continues to decline. In the markets, the NBSK list price is down about $17 from the first quarter. BCTMP prices were down $20 to $50 during the quarter depending on the markets we ship to. Of course we undershipped the BCTMP production in the second quarter by about 13,000 metric tons, primarily market-related. Also I might add that there is about 6 to 800,000 metric tons of new BCTMP capacity coming on in Europe and China, which will put further pressure on BCTMP prices. Finally, pulp markets are continuing to be under pressure, with demand down about 5% year-to-date.

On the Weldwood integration, the integration is going according to plan. We continue to expect to achieve the $80 million of synergies over three years which we have talked about over the last six months. I can't be anymore specific than that at this point in time, but hopefully not too far into the future we can start to be somewhat more specific. I will add, though, that we spent the capital and started third shift at our Houston sawmill, which is a Weldwood legacy mill. That shift started up on July 18 and will add about $100 million of lumber production to the Company.

100 million board feet.

Excuse me, yes, 100 million board feet. It would be nice if it was $100 million. Vancouver offices, we have combined the two Vancouver offices and moved in on June 1; and we are continuing to build our staff at our Quesnel office, which will be our chief operating office, where we will consolidate both our IT and our lumber sales divisions. We expect to have that done by year-end. As I said, we continue to believe that we will achieve the $80 million of synergies, and the synergies are on track.

I guess of note, as we mentioned last quarter we have started the new sawmill in Quesnel. The footings are in the ground. We expect startup early summer of 2006.

As it relates to the U.S. lumber dispute, the first thing I would note is that the NAFTA panel ruling on July 21 confirmed that West Fraser is exempt from dumping. We have roughly $41 million of dumping duties on deposit in the United States. We met in Washington a couple of weeks ago, as an industry, to try to find out if there is some potential to negotiate a deal. We had some good discussions, and all the Provinces have gone home to further discuss their specific issues and try to find out if we can come up with some form of common negotiating platform.

I think with that I will turn it over to Martti Solin.

Thanks, Hank, and good morning, everybody. I only have a couple of small comments before your questions. You will note that the interest expense for the quarter is higher than the previous quarter, and it includes 2.6 million write-off of deferred financing charges, which relate to a debt which was prepaid during the quarter, and a revolving facility which was replaced. I'll get back to those two items in a minute.

Other income of 5.1 million includes a gain of about 3.6 million relating to selling to the BC government some nontimber assets, meaning roads and bridges, and some forestry planning work in the Terrace area. This is part of the timber takeback arrangement with the BC government; but no, that does not include as yet anything the takeback volumes.

As you will see in the cash-flow statement we prepaid a 100 million bank debt, which was part of our acquisition financing. That payment was made out of the available cash on hand. At the same time, we entered into a new five-year committed (ph) revolving facility for $500 million at terms which are more favorable than the previous one-year revolving facility we negotiated at the time of the acquisition.

Finally, as Hank already mentioned, but let me just repeat it, the CapEx spending is higher because of the various projects now in full gear. Obviously the Quesnel sawmill rebuild will be a key item for the next 12 months. That is all I had. I think we are available for your questions.

(OPERATOR INSTRUCTIONS) Don Roberts from CIBC World Markets.

Hank, you had mentioned with regard to the truckers' dispute that it doesn't have a significant impact so far. Is your sense on how long this has to continue before it does, or do you just have enough options that it is not really a threat to you?

Well, it is a threat and it is having some effect on us. We're not shipping some inventory. But we do have an ability to warehouse the inventory for a period of time. So I think in the immediate term we are not seeing a significant effect. But we're certainly not shipping all the inventory but we should be.

We are also switching some of the container business to break-bulk.

And the implication of that is, you can move it by truck more?

Well, you can haul directly from our facilities, where we keep some of our export, directly to the dock. The truckers' strike sort of focuses around the container movements.

Hank, also, just in terms of, I guess, considering moves going over forward, you are focusing on the Weldwood right now. We have just had in the last week or so IP announce their further transformation that they are looking at, including designating all their solid wood and at least some of their timberlands as non-core. Is that something that you folks would look at? Would you just focus on lumber or would you also consider some of the panel assets that are down there?

Well, I think probably like everybody else it is interesting that they are doing that. I wouldn't want to comment on what our interest or non-interest might be, Don.

Lastly, a clarification; maybe I missed it. This is for Martti. Martti, did you put in there the translation loss on the U.S. dollar debt? Because that was estimated around 5 million, but what was the actual number?

The actual number is what was in the statement. The actual number is $7 million.

Okay. I just missed that.

You don't tax effect that, so that is about, what, $0.15 a share.

Okay. Thank you. That's it.

John Duncanson, Jennings Capital.

I had a couple questions for both Hank and Martti. First of all, any update on the Burns Lake divestiture?

No, there really isn't at this point in time.

Any chance this will happen before the end of the year?

We are going through a couple of issues. But we do have a ruling from the competition bureau, and we certainly intend -- if we get through a few hurdles -- our intention is to comply with that.

Just on lumber inventories, can you give us an idea how much you have drawn down the inventories that you had at the end of the March 30 quarter?

On lumber we probably have drawn down -- during the quarter, I think we drew inventories down fairly (multiple speakers) 15 million feet.

15 million?

Yes. But I think the important thing is July has been a good shipping month for us, too. So because of the increased access to transportation, John, we are continuing to draw it down.

So higher shipments and looking like the third quarter. Just on your plywood, the panel operations, but I am referring mainly to the plywood side, the operating margins seemed to slip quite -- obviously slipped considerably. Was it all price? Or was there -- can you sort of address what -- have costs gone up that much between second quarter and first quarter?

Plywood prices were down very significantly, as you know, on a Canadian dollar basis. Down 18%. The mills were running well. We had a -- there's a couple of issues. We had a fatality at our Williams Lake facility in April which significantly reduced production there as we dealt with that issue. And I believe wood costs are up.

So I think it's a combination of things. But I think fundamentally price is the primary driver there and (technical difficulty) and the mills are running well.

Just a final question for Martti. Martti, can you give us an update on what you're looking at for total CapEx for 2005? And also any sort of preliminary number we could use for 2006?

Dealing with 2006, I don't have anything to give. From a planning purposes, we have suggested in the past that use the amortization figure as a rough guide for now. I think we have in a previous call suggested that this year we will be pushing towards a 200 million CapEx number because of the Quesnel sawmill.

John Duncanson; Thanks very much, that is all I had.

Rick Skidmore, Goldman Sachs.

Can you talk about the U.S. sawmills and the results out of those facilities? I think that in the past you have alluded to that they have not performed as well as you would like; and that perhaps is because you haven't really owned the timber. Given that there seems to be a lot of timber available out there or at least coming available, would that be something that you would be looking to do, is own timberlands to help the U.S. sawmills?

I can't say that we still fully understand the relationship between timber and mill ownership down there, but we continue to look. Southern yellow pine, unlike SPF, southern yellow pine was selling for roughly $393 in the first quarter, $433 in the second quarter. So while SPF declined roughly 9% -- or with the duty in 15% -- during the second quarter, (technical difficulty) 10 (ph) percent. So that's kind of -- that's been one of the differences in the performance of the two divisions.

I guess one final comment is that we only have two mills down there. One is performing above design capacity and has only reached that in the past year. The other one is still on ramp up and is running at 80% to 90% of capacity. So we expect that to kind of ramp up to full capacity. That will improve operations down there.

We have noticed that it takes quite a bit longer, at least in our Company, to get things ramped up down there than up in the North. So we are working on that.

And then if I might ask a question of Martti. Martti, can you explain the share option expense? It looks to be a contributing factor in the quarter.

Then just to be clear on the nonrecurring items that you had mentioned, there was a 2.6 million interest charge; and then you had a 3 million gain in the other. Are those the only nonrecurrings that are in those numbers?

Yes. The share option expense is the -- we used the final share price for the quarter to measure that. Therefore it is strictly a change in the share price multiplied by the outstanding options in the money, which becomes the expense or gain for the period. It was a small gain in the second quarter.

In terms of the two other items you asked, the deferred write-off of the deferred charge is a -- so that is in the interest expense; and I explained that. And the gain in selling some of our timber related assets, which is in other income, yes; those are the key other items. In any company of our size, they are a little bit (indiscernible). But nothing worth commenting.

Thank you.

(OPERATOR INSTRUCTIONS). Pierre Lacroix, Desjardins Securities.

(indiscernible) I have a question about the Kitimat mill. In the second quarter, can you maybe give us some indication about the profitability of the mill? I know you that you took some down time there. But at the normalized level of production in Canadian dollars at $0.82, what it looks like?

We are underwater. At an $0.82 dollar at full production we're still underwater at that mill.

Good. In terms of your strategic plan regarding that mill, are you planning to simply operate that? Are you planning any cost reduction? Or you might consider to sell it down the road?

We are totally focused on getting the maximum efficiency in production and cost reduction out of that mill; and there is still a ways to go. We are, for example, in the initial stages of building a co-gen plant which will significantly reduce our power costs up there. We have plans to continue to drive costs down. We have got a good focused management up there.

But the linerboard business with a strong Canadian dollar, us being one of the only linerboard businesses in Canada, it makes it a struggle. So our job is to just continue to maximize the efficiency and the costs out of that -- the cost reduction out of that mill, which we will do. But it is not a particularly pretty sight right now.

Did you issue any target in terms of cost reduction at Kitimat?

I'm sorry.

Did you release previously any target of cost reduction at that mill?

No, we did not.

And you're not going to put a number out?

No.

Okay. Second question, impact of the down time in the second quarter in the pulp and paper division. Do you have maybe a number of the impact on EBITDA during the quarter?

We haven't calculated that number, no. But if you look at the difference in the pulp and paper section, it is about $15 million. The down time represents most of that.

Okay, excellent. Finally, in terms of your marketing strategy for the lumber division, with the integration of Weldwood, do you have any update on that marketing strategy? Are you going to take the West Fraser model? Or are you looking at taking some of the former Weldwood model?

Pierre, we are basically going to use some of both. With the production that we have now, I think it is prudent to use both models.

Thank you very much. That is all I have.

Mark Bishop, RBC Capital Markets.

Just a question on your lumber. The lumber costs for the quarter versus last quarter looked like they went up a little more than we had expected. I'm just wondering if you could give us maybe a little bit of color on perhaps where the major cost drivers were. I thought stumpage may have been a bit of an offset; but I expect you have seen higher transportation costs.

Also, if you could comment on, as you get more into the beetle wood, whether or not you're actually seeing an impact of processing beetle wood on your cash conversion or your LRFs?

I can't be particularly specific on the costs on the lumber side. Nothing out of the ordinary there. I can say that our production is better than the previous quarter. Our lumber recovery is better than the previous quarter. And the mills all ran well. So I can't really comment further than that. To me, things went pretty well during the quarter, so that's really all I can say. There's nothing specific there that I can comment on.

In terms of the beetle situation, it’s affecting us in a couple ways right now, but not significantly. We are probably getting a little bit more fall down; and of course we are having a tougher and tougher time getting export-grade lumber due to the bluestain. That is currently the issues. I don't think it's having a particular effect on us yet. But certainly as time goes on I suspect it will.

Thanks, Hank.

Rick Skidmore, Goldman Sachs.

I just wanted to follow-up, Hank, if you might, on the lumber situation. There has been some comments by the new U.S. Department of Commerce person with regards to the duties. Can you just shed light on what really is the discussion? Is that just a negotiating tactic with regards to not giving back any of the duties that the U.S. has collected? Maybe just update us a little bit on that front and what the Canadians -- obviously they want it back; but perhaps are willing to concede a little bit to get this resolved.

Well it's a very fluid -- obviously there is a very fluid set of discussions going on right now. But I think that if you ask, will we get our money back? It is West Fraser's view that we continue to be successful in the litigation. A good example of that is West Fraser's regular wins on the antidumping file.

We believe that if we follow this thing through we will ultimately achieve victory on the trade file issue. We believe that the United States -- well, we know the United States said they won't give our money back; but we believe that legally they are going to be compelled to give our money back. That will probably take a couple of years to follow through.

The extraordinary challenge decisions should come down in the next few weeks, and we believe that will be a positive decision for us, which will continue to keep the wheels moving towards an ultimate victory. On the other hand, as you know, the two industries met in Washington to discuss a settlement, and I can't comment on that, other than to say that everybody is working to find out if there is some form of compromise solution that works for both the U.S. and the Canadian side.

Just changing to the pulp business, can you talk about what you are seeing in the pulp business currently? Do you expect that NBSK prices continue to deteriorate? Or does it seem like things have leveled off here? And the Chinese perhaps are coming a bit back into the market again, and would you expect pulp to get a little bit better going forward or a little bit worse?

I guess our view is that we're pretty close to the bottom of the market, and that -- hard to know. I don't know if demand will come back particularly. But if it doesn't you will start to see some curtailments, and that will be the indication of the bottom of the market. We expect that we're just about there now.

Thank you.

There are no further questions registered at this time. The conference is now ended. Please disconnect your lines at this time. We thank you for your participation, and have a great day.

Thank you.