West Fraser Timber Co Ltd (WFG) 2006 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the West Fraser Timber first 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 depend on 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 their 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.

Good morning, and thank you for joining us this morning. I have a number of our Vice Presidents here with me to answer any questions that you may have later on in the call. I will just go over the earnings and make a few comments and then open it up for questions.

West Fraser had first quarter earnings of $6 million or $0.14 a share as compared to earnings of $9 million or $0.20 per share last quarter. Included in earnings is an after-tax charge of $25 million or $0.58 a share related to the restructuring of our Hinton pulp operations. This was disclosed in an earlier news release but essentially it entails the closure of our oldest two pulp machines, as well as the closure of our woodroom. In the first half of '07 we will spend $20 million to upgrade the remaining pulp line; the net effect will be an annual reduction of 70,000 metric tons of kraft pulp from this facility.

In our lumber division the plants all operated well during the quarter with a production increase of 124 million feet over last quarter. This primarily relates to the addition of a third shift at one of our sawmills, more operating days during the quarter and increased efficiency at most of our operations. EBITDA was $91 million or $0.17 a share compared to $66 million or 14% of sales last quarter. Benchmark SPF price averaged $343 for the quarter versus U.S. $327 last quarter. Lumber duties expensed in the quarter were $22 million compared to $29 million last quarter, reflecting lower deposit rates and active in December of '05.

West Fraser's duties were lowered in December to a total of 9.21% from 17.28% the previous quarter as a result of the [bio] determination in the second administrative review. Later in the call I am going to ask Wayne Clogg, our Vice President of woodlands, to discuss stumpage changes that have been announced in the province. But first I will finish off my comments on the rest of the operations.

Also in our lumber division, the planned sale of our Burns Lake and Decker Lake sawmills is expected to conclude in 2006. These are former Weldwood mills. We've been ordered to sell by the Competition Bureau as part of the Weldwood transaction. The mills represent about 320 million feet of capacity and 450,000 cubic meters of annual allowable cut.

In the our panel division EBITDA was $16 million or 13% of sales compared to $13 million or 10% last quarter. All plants operated well during the quarter. Plywood benchmark price averaged Canadian $375 for the quarter compared to $389 last quarter while MDF prices weakened somewhat during the quarter.

Our pulp and paper division EBITDA was $13 million or 5% of sales in the quarter compared to EBITDA of $10 million or 4% of sales last quarter. We had record quarterly production at our Kitimat mill which we're very pleased about, we continue to drive costs down at that facility. Our joint venture Newsprint mill continues to be a very solid contributor to our results.

The U.S. lumber dispute -- I'll just make a couple of comments -- the Canadian industry continue to receive positive rulings during the quarter. In March the NAFTA panel issued a final ruling confirming Canadian softwood is not subsidized and on April 7th, the U.S. Port of International Trade ruled that the Byrd amendment does not apply to Canada. So we continue to have significant legal victories in this dispute, and we want to continue to encourage our federal government to make sure that in any discussions or negotiations with the United States they are led by the belief that we are winning this case.

Finally, I just wanted to say that we have pulp maintenance scheduled -- pulp maintenance scheduled at all three of our kraft pulp mills in the second quarter. That will take a total of 45,000 metric tons of pulp out of production during the quarter. With that I might ask Wayne Clogg to make some comments on the stumpage changes here in British Columbia.

Thanks, Hank. Hank asked me to comment on two significant changes in BC interior stumpage that have recently been announced I guess and enacted. The first is the change on April first of this year in the way logs are graded at the scale, and the way damaged timber particularly from mountain pine beetle is worked into the timber appraisal process. So effective April the first our new schedule of log grades for the interior BC and there are changes in the appraisal methodology for calculating stumpage on beetle killed timber.

The changes are designed to be revenue neutral across the interior, but the general impact will be an increase in stumpage relative to the first quarter for areas where there are high percentages of beetle kill and conversely lower stumpage for areas that aren't impacted by the beetle kill. The ministry of forests in order to enact this change calculated an automatic stumpage adjustment for every active timber mark in the interior. And that was based on the historic levels of off grade delivered to each appraisal point in the interior.

Each licensee had the option of accepting that automatic adjustment mechanism or to go out and recruise the affected timber stand and using the new methodology calculated new stumpage rate. So for each of our divisions in the interior we are now going through each of our active timber marks and making the decision of whether we want to accept the automatic adjustment number or recruise the stand and calculate a new stumpage rate. The other change to stumpage is the announced change moving our stumpage system from the current compared to value pricing system to a market-based pricing system. The change was announced by the Premier on the sixth of April and the change will be effective September the first. In very general terms it moves the interior to a system where the average stumpage rate for the interior will now be based on the price achieved at auction for standing timber sales. This is a change that was expected and was part of the forest revitalization plan that was announced in March 2003.

Okay. Thank you, Wayne. I think with that we would like to open the call up for questions.

(OPERATOR INSTRUCTIONS) [Dimitri Kolomitsan], Dundee Securities.

Good morning. This is Richard Kelertas. Hank, can you -- I can appreciate that you are going through now looking at your stumpage systems and recalculating quite a few things. Is there any guidance you can give us? Have you done any simulation studies looking at what your stumpage prices would look at or your stumpage costs would look like for the second quarter or for the balance of the year if you had done and used the first quarter as a benchmark? And then made the formula changes? Any idea what that may do to your stumpage levels?

I will let Wayne give you a general answer to that, Richard.

Richard, are you referring to the log grade changes or the market-based pricing system?

The log grade changes first. I don't think you probably you have some simulation studies on the market-based system and we can talk about that, as well.

Just two things I should say before I give you a number. The first is that the level of off grade material has been increasing significantly. So in the first quarter we would have seen the sort of the highest historic levels that we have had. And the reason I am saying now Richard is that if any number taken from the first quarter is going to be more significant.

Right.

I don't remember what the second thing was. Anyway, as I said, the ministry gives us the opportunity to either accept their automatic calculation or to recruise and we are in that process now. But we have taken the automatic adjustment number for our crowned licenses, some of which are long-term and some of which are shorter term licenses and annualized that number and compared it to the first quarter which is what you are asking. And in our case in the BC interior that impact is in the $2to $3 a cubic meter range. That is for our quota wood only. And I would view that as, I would say a worst case because we would have a choice of accepting that number or recruising and in cases where there is a higher level of attack the stumpage impact will be less.

Can you give us an idea what your cut was in the first quarter on quota?

I would have to get back to you with that number. We consume very roughly in the BC interior 10 million cubic meters annually. Of that roughly 57% of that volume comes from crown licenses either long or short term licenses.

And what was the -- any idea of the percentage of beetle killed wood on that in the first quarter?

Again I would have to get back to you if you want a more accurate number.

No problem; just trying to see what the impact cost is on your cost side. And then just finally on the new auction base system again any guidance you can give us there of what the simulation studies have shown?

I believe the province has done some modeling against the January first and the April first target rate. The new system as we understand it will simply be a methodology for choosing the target rate. It won't change the distribution of stumpage. So the ministry has indicated to us that their modeling has indicated no material change in the January first and April first testing. But of course we can't comment what it will be in September.

Okay, and just finally in terms of your lumber markets, specifically what kind of margins or margin improvements you saw the first quarter. I guess obviously you get a surge in orders with the spring building season plus all the reconstruction work after the hurricanes. What did you see in terms of your margins versus your commodity based products -- wood products versus your specialty products or any improvements on your mix in the first quarter versus the fourth quarter? Did you see a higher end requirements for longer lengths, wider widths during the first quarter compared to the fourth?

I can't specifically comment on that. Our SPF prices are up somewhat, and duties are down, so our mill nets were up as a result of that. Is Chris McIver on the phone?

Yes.

Can you comment on --?

I don't think there was really any change. We didn't see any change on the lengths and width distributions.

Finally, Hank on the Weldwood did you have a number on the synergies by chance or were they fully worked in in 2005 and you didn't really see anything extra in the first quarter?

I can't say that we saw anything specific in the first quarter. I think what we said on our call at the end of the year is that we -- I can't remember the exact number -- but we are well on target to achieve the full $80 million this year sometime, and there's no question that will happen.

Do you have a run rate for the first quarter then?

No. I think our run rate -- I can't remember what we said the last time but I think our run rate was 60 million or 65 million after the year end, and we're not our really cracking it particularly right now. We are continuing to make the improvements; I don't think we're going to continue to crack it, Richard. We're going to get there.

No problem. Thank you.

Mark Bishop, RBC Capital Markets.

Just a question regarding transportation. This is kind of the second quarter that you have highlighted it at least in your release. Could you give us an idea of I guess first, what kind of impact the rail issues may have had on your shipments in the first quarter; how much more could you have achieved ballpark. And so what you see going into the second quarter on rail? Second is what are your suppliers, how are they responding to your concerns? An just a bit of an indication of what you expect your alternatives will be in terms of cost and availability.

Right, well as you can see we under shipped our production during the quarter, and certainly we are fully capable of shipping our production if we have transportation. So at a minimum we were to ship our production we would have some excess inventory we would have shipped that too. So I don't have a specific there but we are not getting -- we haven't gotten consistent rail supply to meet our needs. We are trying to -- we are working on alternatives. As you know, we are using our ocean vessels, trucking to the greatest extent possible. Obviously when you are up in the interior your options are quite limited when you only have one rail line coming into your facility. So we are working our hardest and are trying to be cooperative with the transportation providers. But this is a problem I think that the whole country faces and we're just trying to work through it.

So I guess in 2004 we saw for different reasons I guess a similar prices. Are you expecting to see the shortfall in rail availability even more a concern in the second quarter or do you see the issue subsiding a little bit?

I would have no reason to say either way. To me its -- every week is different, and we are just -- I can't say whether it will get better or worse in the second quarter.

I guess part of this relates to your comment in the release regarding the unseasonable mild weather in the first quarter led to probably better demand. Do you think we did see a little bit of volume effectively stolen from the second quarter with better performance in the first quarter?

I hope not, but I can't answer that. Again, I can't really comment on that.

Okay. Finally just quickly on MDF I think you said that your mill nets had improved or sorry, had decreased. It looked like at least the public industrial panel prices went up a little bit. Was it the thinner board pricing that went down or was that mix related?

I'm sorry would you --

On MDF.

Sorry -- would you ask that question again?

Just on your MDF prices, I think you said in your opening statements that MDF mill nets went down, and it looked like panel prices for MDF industrial panel prices went up, and I am just wondering if that was mix related or what was the driver there on the MDF side.

Actually MDF marginally but not -- there is no significance there.

Okay. Thanks very much.

John Duncanson, Jennings Capital.

Good morning, Hank and troops. Just a question on the Quesnel sawmill rebuild, Hank. As I understand it that is the existing mill operated through the first quarter, no disruption to that facility or --?

No, that facility is operating -- it will continue to operate full hours until we start to transfer people into the new facility.

And that is still early or late fourth quarter?

Well, I am hoping it is late third quarter.

Okay, and the new capacity still 550?

On two shifts.

550, two shifts, okay. And that leads to the second question, too, just on the CapEx for 2006. You spent $54 million in the first quarter but I assume that would be logging roads and others as well. Just wondered if you could just give us an update on what you look to spend in 2006. And obviously the Quesnel sawmill is a major single item if you can just break out what the total would be and what Quesnel would be of the balance.

Well, Quesnel I think we've already announced is around 115 to 120, something like that over a period of time. And like I say, it will start up hopefully in the third quarter. The rest of the CapEx is -- we have a CapEx budget somewhere between 180 and 220, 225 this year.

And maintenance would be -- your maintenance costs CapEx is still fairly low at sawmills? I mean relative?

Yes.

50, 65, 70 -- or.

Our vice president of operations says yes, so I have to agree with that.

Okay. Thank you very much.

Sean Steuart, TD Newcrest.

Hank, one question. You touched on productivity improvement at Kitimat. Are you able to quantify whether or not per ton basis or overall I guess once the cogeneration is fully factored in the cost improvements you are expecting to see at that facility from call it two years ago to now pro forma?

I couldn't give you an exact answer there. Gerry?

I think what we're thinking at Kitimat is the cogeneration is going to annually once we get it up and going, probably in the $15 to $17 a ton kind of range. And then there is other improvements that we've made. But we haven't kind of quantified it from two years ago.

Okay. Thanks a lot.

(OPERATOR INSTRUCTIONS) Paul Quinn, Salman Partners.

Thanks. Hank, just on transportation issues, I see sort of you weren't able to ship about just under 38 million board feet of lumber, but this is sort of one-third of the problem that you had last year in Q1. What is the state of your lumber inventories right now?

You mean excess lumber inventory?

Right.

We have some excess lumber inventory.

Normal levels, or is it --?

Normal levels from our point of view is exactly the right amount, so it is an excess of what we would consider normal but it is not unmanageable at all.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) There are no further questions registered at this time; I would like to turn the meeting back over to Mr. Ketcham.

Thank you very much everybody for joining the call, and if you have any further follow-up questions just give one of us a call. Thanks again.

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