West Fraser Timber Co Ltd (WFG) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the West Fraser Timber fourth-quarter results conference call. During this conference call, we will be making certain statements about potential future developments. These forward-looking statements are to provide reasonable guidance to investors, but the accuracy of these statements depends upon a number of assumptions and is subject to various risks and uncertainties. These statements are not guaranteed by the Company, and 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 Risk Factors in our annual MD&A, which can be accessed on our website or through SEDAR. 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.

Welcome and thank you to those in the East for staying late. We just finished our Board meeting here today, and that's why the call is a little later than usual. So we appreciate you attending.

West Fraser had fourth-quarter earnings of $9 million or $0.20 a share, compared to earnings of $18 million or $0.42 a share last quarter. Our results continued to be negatively impacted by the appreciation of the Canadian dollar and by higher energy costs.

On a divisional basis, in our Lumber division, our lumber plywood, our plants are all operating well, with ten mills setting annual production records during the quarter. EBITDA was $66 million or 14% of sales during the quarter, compared to $52 million or 10% of sales last quarter, quarter three.

Benchmark SPF prices averaged $327 US for the fourth and the third quarters, so no change there. We expensed lumber duties in the quarter of $29 million, compared to $39 million in Q3. West Fraser's duties were lowered in December to 9.21% from 17.28% as a result of the final determination in the second administrative review.

Capital expenditures in the Lumber segment for the year totaled $147 million. Roughly 45 to $50 million of that was spent on the new Quesnel sawmill complex which we are currently building. But we also spent capital on the Weldwood plants to move onto third shifts at two of our sawmills. One of those sawmills came onstream on third shift late in the summer. The other one just got up and going on its third shift at the beginning of the year. We also spent a fair bit of capital on projects related to increasing our lumber recovery throughout the division, a significant amount of money on energy systems to reduce our reliance on natural gas and certainly on some high payback cost-related items as well.

The markets were reasonable during the year, as a result of record housing starts in 2005. But we expect those housing starts to moderate in 2006. And of course, we expect increased supply of lumber into the US in 2006, particularly from Europe. And that should dampen prices. Or we expect, anyway, that will dampen prices as the year goes on.

In our Panel division, EBITDA was $13 million or 10% of sales, compared to $14 million or 11% of sales last quarter. The plywood benchmark price during the quarter averaged $385 Canadian compared to $359 last quarter, and MDF prices weakened during the quarter. We expect panel prices, particularly plywood prices, anyway, to kind of follow the same pattern as lumber prices during 2006, because of the same factors relating to housing starts and supply.

On the Pulp & Paper side, EBITDA was $10 million or 4% of sales in the quarter, compared to EBITDA of $8 million or 3% of sales last quarter. The rising Canadian dollar certainly hurt our pulp and paper mills as well as it did our other operations. The mills ran well during the quarter, with record annual production at Slave Lake, Hinto. In Eurocan, we had some unscheduled maintenance downtime at Eurocan during the quarter, during the last -- actually, in December.

Our joint venture newsprint mill continues to be a solid contributor to our results. One of the significant capital projects we are carrying out in our Pulp & Paper side is the co-gen plant in Kitimat, which will significantly reduce our electricity costs; it's about a 20 MW plant we are putting up there. It will come online late in the summer.

In terms of the markets, we expect pulp prices to increase in the first half of 2006, due to capacity reductions in North America. But, on the other hand, capacity increases coming online in the southern hemisphere will increase supply in the second half, and that will put pressure on prices.

On the linerboard side, we have experienced strengthening linerboard prices towards the end of 2005, and we expect that trend to continue in 2006, based partly on reductions in capacity in North America and good fundamentals in that business right now. And the same is true for newsprint, as I just mentioned, for linerboard. So we expect strengthening price of newsprint in 2006 -- largely as a result, of course, of capacity closures.

In 2006, we expect to spend somewhere in the neighborhood of $200 million on CapEx in 2006. Our depreciation is approximately $250 million annually, so we'll spend roughly 70 or 80% of our depreciation on CapEx in 2006. The large part of that spending, roughly $70 million in 2006, is going to be related to the completion of our Quesnel sawmill project, which we expect will come online in the third quarter of 2006.

As it relates to the integration of Weldwood, that's basically complete. We feel very strongly that we have achieved roughly $70 million of the synergies that we announced on a run-rate basis in 2005. In other words, by the end of 2005, we were enjoying the benefits of $70 million of synergies. And we fully expect to get the other 10 that we announced, for a total of 80 million, this year. And we will be looking for additional synergies above and beyond our announced synergies, but we are very comfortable that we will achieve the $80 million this year.

We expect to complete the sale of the sawmilling assets at Burns Lake and Decker Lake, as required by the Competition Bureau, sometime in 2006, although that could extend under certain circumstances. And finally, I'll just comment that we are encouraged by the continuous string of wins that we are getting on the softwood lumber trial, and we expect to get positive decisions, positive results from the courts in the spring and the summer of this year. And so we believe very strongly that the case Canada has been making all along that we are not subsidized is being held up, and we believe that at some point, the rules of NAFTA will have to apply. And by the same token, we're going to be an eager and contributing participant, in terms of trying to find a way to negotiate with the other side in a way that respects the wins that we are getting at NAFTA, but also respecting the fact that it would be nice to have some certainty to the trial going forward.

I think, with that, Martti Solin, our CFO, has some comments.

Hank covered the key business issues. I will make a couple of very brief comments on the statements to hopefully clarify some items. If you look at the balance sheet, a note to make is that we finalized available purchase price allocation, and that resulted in small (indiscernible) in assets and liabilities and about a 13 million reduction in goodwill. And you also will note, if you look at the statements more closely, that the item called other liabilities is down about 50 million from the previous quarter-ending balance sheet, or about 60 million from last year. That is largely due to the funding of the pension liability we inherited from Weldwood.

And talking about the pensions, I just might add that our pension plans are in a good shape, in spite of the lower discount rate used to calculate the liabilities. And just to give you a little sense of what change the pension plan assumptions meant for the pension plan, the net impact of the updated assumptions resulted in a 68 million increase in pension liabilities.

While obviously not happy with the 2005 profitability, for the reasons Hank commented and we have been discussing in earlier conference calls, it is quite pleasing to note that our debt-to-cap ratio is around 29%, after having spent 1.1 billion on Weldwood acquisition, and being able to spend all the required capital in 2005.

Hank mentioned in his comments that the sale of (indiscernible) and Decker Lake -- and the statements, you will note that there is a caption called Assets for Sale, and that's where we now show those assets. And a just a note to make that we will not charge amortization on these assets, pending the sale.

Turning to the P&L, Q4 results tend to have some year-end adjustments in kind of finding the final tax rate for the year, or finalizing silviculture liability accruals or results [depend on] compensation accruals. And this year, of course, is no exception in that regard, although I may add that this type of a change is -- had a lot smaller impact on this year results than last year.

Other than those unusual items disclosed in our release, the net impact of these other items was very minor. To clarify, the scientific and research tax credit, that refers mostly to or relates mostly to Pulp & Paper segment activities, [trials] for new grades, those credits being recorded as a reduction in the cost of goods sold in the fourth-quarter statements, and we disclosed that in our note. So, as you can see, excluding these identified one-time items, our earnings for the quarter would have been $0.11 or about $5 million. In terms of the cash flow, you will note that we ended up the year as a 255 million amortization, which is about 10 million than we talked about in some previous quarters, and this new level is our run rate going forward.

I think that completes my comments. Before turning back to the operator for questions, I should mention to you that we will be speaking tomorrow morning in a conference first thing in the morning. It will be webcasted, and if you need some further clarification -- I'm assuming that the nature of the [clarification] is such that we can give it to you -- you should try to reach us this afternoon because we will be tied up tomorrow.

So if you have any questions, Hank and I and others are happy to entertain them.

(OPERATOR INSTRUCTIONS). Frederic Beausoleil, National Bank Financial.

The three items that you state on the front page -- I assume these are after-tax? And I'm just wondering -- the 3 million relating to the Red Earth sawmill, what would be the amount pretax? And am I right to assume that would be in the Lumber segment, perhaps in SG&A?

Pretax and after-tax is the same amount, and that has been included in other income expense?

It's in SG&A.

SG&A, sorry. SG&A.

And then, when we back out the share option expense from your corporate expense, the corporate expense appears, actually, to show a benefit. Is there anything in particular in this quarter? Typically, you have a 5 to, I guess, 7 million negative amount there.

That's what I referred earlier, is the type of results-related compensation items in the fourth quarter go up or down, and they are down this year. That will be one item.

Daryl Swetlishoff, Raymond James.

Hank, do you have an estimated savings Kitimat co-gen plant going forward?

It's a pretty quick payback, so it will be roughly somewhere between 7 and $10 million a year, something like that.

Stumpage rates for the quarter appeared low, somewhere in the $12 for cubic meter range. Can you give us some guidance going ahead, what you see both with stumpage and just other harvesting costs going forward?

I'll pass that over to Wayne Clogg, our VP of Woodlands.

I'll apologize, Daryl; I don't know what that particular number is. But stumpage in the BC interior -- and I usually go with the base rate, which is the average rate for sawlogs. And it rose slightly, going into the first quarter, from 24.67 in the last quarter of last year to 25.16. And I think, as you know, the BC government has announced changes to interior log grades which will affect stumpage, and they will be effective April 1st. And at this point, we don't have enough information to accurately predict what the impact on us would be.

What was the impact? I understand there was a change in that same regard in August. What was the impact then?

I think I know what you are talking about now. That was the adjustment to manufacturing cost, a sort of an interim adjustment on --

Right.

Yes. I would have to give you an off-line estimate there.

Rick Skidmore, Goldman Sachs.

Just a quick question on the Lumber business. It looks like the Lumber margins actually were better, even though you had flat pricing. Can you just elaborate on some of the deltas that you had in the quarter from a cost standpoint? Certainly, the Canadian dollar had a negative impact, but what were some of the positive things that you saw in the quarter from a cost perspective?

Well, I'll tell you something. Maybe I'll just pass that off to Gary Townsend, who runs that division. Gary, are you there?

Yes, I am. Basically, it was to do with improvements in the Weldwood plants starting to kick in, plus prior-year capital projects in our old West Fraser plants are starting to kick in and reducing our costs.

Primarily synergies or something to that effect from Weldwood. What did stumpage do, third quarter to fourth quarter, in terms of stumpage rates?

Again, if you look at the BC interior base rate, it declined. It was 27.75 in the third quarter and 24.67 in the fourth quarter. So there was a decline there. In Alberta, the rate declined on sawlogs for large mills from 14.20 in the third quarter, roughly, to 7.60 in the fourth quarter.

On Lumber, what will be your sort of 2006 nominal capacity, if you will, or expected capacity in 2006 on the Lumber side, including the ramp-up of Quesnel?

I think that's roughly 4.7 billion feet.

Mark Bishop, RBC Capital Markets.

Just following on from Rick's question, just on the Quesnel ramp-up, you mentioned it's going to ramp up in the third quarter. What contribution do you expect in 2006 from the mill, just in terms of volume or operating rate before it gets to the full run rate?

Gary, can you deal with that?

That's a good question. What we plan to do is in probably August/September, we will be training people. We will move one crew across from the old mill until we get the new mill ramped up. And then, as we do that, we'll bring the other crews across and gradually shut down the old mill. It's going to be, I don't know, maybe -- the total production out of the two combined is going to be about the same as if we kept running the old one, because of the drop in one and the startup of the other.

On the US operations, switching to those, could you comment on the fiber situation in the last quarter, what you saw occur with costs and availability on fiber, and what you are seeing currently in the first quarter?

We actually had a pleasant surprise, I guess. Normally, the wet season in the South begins in the fourth quarter and extends sometime into the first. And it was an unusually dry winter, so we maintained good inventories throughout the winter season. I think you saw some of the fires in Texas, for instance, in December.

And sort of cost per unit -- did that change much at all?

We've seen a decline in the market price of gatewood, because most of the mills have a fairly good inventory position down there.

And that's carrying on into the first quarter, then?

So far.

And just switching to Pulp for a moment, with the increase in harvesting beetlewood and processing beetlewood, are you seeing any change in your overall furnish mix, spruce and pine? Is it heavier to pine now?

Oh, yes, indeed. Yes.

Are you experiencing any change, then, in the actual quality of particularly the NBSK pulp? And is that becoming an issue at all with any of your customers?

We're not really seeing much of a change. Things are changing gradually, but it's not an issue with our customers at this point.

And in terms of bleaching, do you see some additional costs associated with addressing the whiteness of the chips?

No, we haven't really seen that yet. The only thing we've seen is there's fewer extractors in the wood, and we are not getting some of the [weights] in the wood, and the cooking chemicals have actually gone down a little bit.

Hank, just one final question on transportation. Are you seeing any improvement in your service from your rail providers, any change in rates expected or some improvements in availability?

We are not seeing any improvement in service; we are very concerned about it. We think it's one of the biggest issues facing the Company. I think it's a big issue facing the industry.

And your question on rates -- there's pressure on rates to go up. So I would combine pressure on rates to go up with unsatisfactory service is not a very good picture.

How do you see the industry addressing that, or the potential for the industry to address that in the near to medium term?

It's very difficult, because of the significant lack of alternatives. So we just have to keep working away on the issue. I guess individual companies are doing it, and our associations are certainly working on the issue, too. But it's not a very -- there are not any obvious solutions here right now.

(OPERATOR INSTRUCTIONS). Sean Steuart, TD Newcrest.

Martti, just one question. The other expense line this quarter -- can you tell us what that is?

Typically, and this quarter is no exception, FX is a key item, and that's most of it. It's a net items, but the FX is most of it.

There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Ketcham.

That's good. I guess we'll have our meetings at 6:00 Eastern time all the time from now on. Thank you very much for joining us. Appreciate it. Gives a call if you have any further questions. Thank you.

Thank you, gentlemen. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation, and have a great day.