West Fraser Timber Co Ltd (WFG) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber second 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 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 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 ever to Mr. Hank Ketcham, Chairman, President, and Chief Executive Officer. Mr. Ketcham, please go ahead.

Okay, good morning, and thank you for joining us this morning. West Fraser had second quarter earnings of $104 million, or $2.41 per share compared to earnings of $6 million, or $0.14 per share last quarter. Our press release identified a number of nonrecurring items included in the second quarter earnings. Among these was an after-tax gain of $51 million recorded from the sale of our interest in the power purchase agreement, the sale price obtained was compelling and we were able to substantially protect the power position of our Alberta assets by concurrently purchasing an increased interest in the power output generated from a newer, lower-cost power plant.

During the quarter, an after-tax gain of $9 million was recorded related to an agreement for compensation for appropriated timber rights under the B.C. Government's Forestry Revitalization Plan. Proceeds of $31 million include $29 million related to the 1.275 million cubic meters of timber returned to the province and $2 million related to other assets. EBITDA in the quarter which excludes these nonrecurring items was $87 million compared to $115 million in the first quarter.

Moving on to our divisional results. In our lumber division, plants are all operating well. EBITDA was $49 million or 10% of sales compared to $91 million, or 17% of sales last quarter. The benchmark SPF price averaged U.S. $316 for the quarter, versus $343 U.S. last quarter, which combined with a 3% increase in the value of the Canadian dollar versus the U.S. dollar was a predominant reason for reduced profitability in this division.

The Quesnel sawmill rebuild continues to be on time with the projected startup early in the fourth quarter. The benchmark SPF number two and better lumber prices declined through much of the quarter, ending the quarter at U.S. $300. Current prices are approximately $290. June housing starts were at a seasonally adjusted rate of 1.85 million units, down 5% from May, and 8% from June of 2005. Certain key housing markets, Florida and parts of Arizona, appear somewhat oversupplied and it's likely that there will be a slowing in building until the market absorbs the existing units.

With regard to wood costs, a new timber pricing system was enacted for the B.C. Interior on July 1. Under the new system, stumpage will be based on timbers sales data from publicly auctioned timber. The impact of this change is not expected to be significant for the balance of 2006.

During the quarter, we commenced the process to sell the Burns Lake and Decker Lake saw mills, acquired in the Weldwood transaction. The mills represent 365 million feet of capacity and 450,000 cubic meters of annual allowable cut.

In our panel division, EBITDA was $16 million, or 12% of sales compared to $16 million, or 13% of sales last quarter. Our MDF plant set a quarterly record for production and shipments. The plywood plants and LVL plant also ran well with production increasing over the prior quarter. Our Canadian plywood business is in much the same situation as our dimension lumber business. Supply is readily available, and prices have stabilized at the 330 Canadian FOB Toronto basis -- 3/8 inch basis, down from an average of $375 in the first quarter. MDF demand has been strong and is providing a positive pricing environment.

In our pulp and paper division, EBITDA was $18 million or 6% of sales in the quarter, compared to EBITDA of $13 million or 5% of sales last quarter. Improvement in EBITDA occurred despite planned maintenance shutdowns at our NBSK and linerboard mills. The scheduled maintenance shutdowns at our NBSK and linerboard mills reduced production by approximately 60,000 tons, as opposed to the planned 45,000 tons. This obviously had a negative impact on our profitability.

The BCTMP mills are running well, and our BCTMP and joint venture newsprint mills are running well and contributing to profitability. Strong worldwide demand for pulp and a reduction in capacity during the first half of the year has resulted in a substantial decline in worldwide inventories. This has led to a rapid improvement in U.S. dollar pulp prices during the first half of '06.

Our outlook for the remainder of the year is quite positive although we have some concerns as we look to 2007, given the increase in southern hemisphere capacity. Linerboard markets are demonstrating similar supply demand fundamentals as pulp. U.S. box shipments are up 3.2% in '06 and inventories are at lower than normal levels. We expect a strong second half of the year.

With respect to the softwood lumber dispute, on July 1, Canadian U.S. government representatives agreed to the terms of a softwood lumber agreement. In order to be implemented, the Canadian Parliament must pass legislation and both sides must withdraw their litigation. Also, our government has indicated that 95% of the Canadian industry must consent to the distribution of duty deposits as specified in the agreement. On July 21, the U.S. Court of International Trade ruled that current lumber duties are illegal. This was a strongly worded decision in Canada's favor.

The Court ruled that all softwood duties collected since November 4 of '04 should be refunded to Canada, plus interest. We expect that within the next few weeks, the Court will hand down a decision with respect to duties paid since May of 2002. In the absence of an agreement, West Fraser expects that, given the various rulings in place, all duties paid will eventually be returned. West Fraser has $409 million U.S. on deposit at June 30.

That concludes my remarks and I will just ask Rodger Hutchinson, our Vice President and Corporate Controller, to make a few comments.

Thank you, Hank. I will just add a few additional comments on the financial statements. As Hank mentioned, the annual maintenance shutdowns at our NBSK and linerboard mills were extended resulting in reduced earnings. For your information, the impact on EBITDA of the unforeseen issues was approximately $5 million, which represents $0.08 per share after-tax.

Included in other expense for the quarter is a foreign exchange loss of $12 million on translation of U.S. receivable balances and U.S. operations. This represents $0.19 per share after-tax.

The tax rate for the quarter was impacted by a variety of factors. Those factors are described in note 9 to the financial statements. But for future reference, a tax rate of approximately 33% for regular income items and 16.5% for the translation gain or loss on long-term debt is reasonable for us.

Turning to the cash-flow statement, the proceeds of $29 million from the government ten-year take-back and $68 million from the sale of the power agreement are not shown. In the case of the ten-year take-back, the agreement was reached on June 30 and the proceeds will be received in the current quarter. In the case of the power agreement, we exchanged our proceeds for an additional interest in another power agreement and so no cash was received.

Operator, that concludes my comments, and we would now like to open the phone lines for questions.

Thank you, gentlemen. We will now take questions from the telephone lines. (OPERATOR INSTRUCTIONS) Daryl Swetlishoff of Raymond James.

Thanks, and good morning. Just a question about current lumber markets. Internally and assuming a $0.90 dollar, what do you view as a sustainable trough for Western SPF 2x4?

Daryl, I think I will just ask Chris McIver, our VP of Lumber Sales, to answer that question.

Daryl, this is Chris McIver. It's a good question. I think, today, the current market is around $280, and I don't think that's a sustainable level. I think a sustainable level is probably at least $20 higher than that.

Okay, so $300 at a sustainable basis, okay. Prices do seem a little lower than sustainable to me as well. Changing gears a bit, looking at the interior, currently, can you remind us what your percent of B.C. Interior harvest comes from beetle kill timber?

Daryl, I don't have an exact figure for you. If it is important, I can dig that out, but it is significant. I think I have said on previous calls that our mills, Smithers, Houston in the Burns Lake area, Fraser Lake, Quesnel, Williams Lake, and 100 mile mills are all on a substantial diet of beetle kill timber, so much of our B.C. production is in damage spend.

Okay, perhaps I will follow up with a call, just to get the exact figure.

Yes.

Okay, that's it for me.

(OPERATOR INSTRUCTIONS) There are no further questions registered at this time. We have a question from Mr. Paul Quinn of Salman Partners.

Yes, just a couple questions. One is on just some background color on the maintenance shut -- it sounds like they were extended. What were the issues involved at each of these mills?

Gerry Miller is our VP of Pulp Operations. He'll answer that.

I guess the issues were related to some found work that we -- unexpected work that caused a bit of a delay. And the other thing was, there was some -- we had some issues with getting the right number of contractor maintenance resources to some of the operations, so that caused a delay in each of the shutdowns also.

Okay, secondly, Hank, you mentioned the July 21 CIT decision and the 95% approval. It looks like West Fraser's deposits are somewhere around 8% of total, so you are abstaining from the agreement could sink it. What is your position on this at this point?

We have -- our position is it's a fluid situation, and we have supported -- we have supported a move to find a good agreement that Canada can work with that's fair on both sides of the border. Fair cross Canada and we'll continue to press for an agreement that accomplishes those things. We think the current agreement needs some help.

Okay, so can I take that as you're not in support of this current agreement?

You can take that we are still working to find things. We are still evaluating our position and I wouldn't say one way or the other right now.

Just lastly, on the Quesnel rebuild here, looking at past notes here, I thought this mill was going to be up in the summer and I see it's early Q4. I guess I got delayed as well as -- is the budget still around $105 million or did that go up as well?

The budget is somewhat higher than that, but I think we have spoken about that a couple quarters ago. We don't see any -- we currently don't see any trending upward on the budget. And in terms of startup, if we are off on startup, it might be by 2, 3, 4 weeks, but on this project, we are fairly happy with where we sit.

Okay, great. Thanks.

Mark Bishop of RBC Capital Markets.

Thanks and good morning. A couple of questions, first, Hank, I think you mentioned that we saw a good uplift in your MDF performance, in part, because MDF pricing and I'm just wondering if you were or if Zoltan's on the line, could characterize sort of what is going on with MDF markets? It looks like we have seen a disruption in particle board. Maybe provide some positive impact in North America MDF. I'm just wondering if that looks like it is going to be sustained for any real length of time?

Well, unfortunately, Zoltan chose not to come this early in the morning, so I am going to have to handle his division for him. There has been strength in both particle board and MDF over the spring and summer. That might -- we are in kind of a seasonally slower period for MDF, so that's probably going to affect us, but the fundamentals are there for -- to maintain for some time the pricing in MDF, we believe.

The fires and the various closures have not been the catalyst for short-term strength in MDF, so the demand is still fairly strong?

That seems to be the case, yes.

Okay, just on the -- back on the pulp shuts, I don't know if you offered any sort of impact in terms of quantifying the cost or overall cost in millions of dollars in the quarter. Is that something you could provide some insight on?

Yes, it is Rodger again. In my comments, in terms of the extra cost from the extensions, it was $5 million before tax, or $0.08 a share.

Sorry, Rodger, that is on the extra 15,000?

That is the extra 15,000 tons and the extra maintenance cost associated with the extensions. In terms of the regular planned shutdowns, the impact on profitability was about $7 million and after-tax that is about $0.11 a share.

And just a question on capital, I didn't see it in the note, but what should we be expecting for the rest of '06 for capital or where do you see all of '06 rounding out?

We will likely spend approximately $200 million. Now, some of that might roll into 2007, so that is an approximate figure.

Okay, and then just looking at capital spending in 2007. Once you get through the Quesnel, where do you start to see your focus on additional spending? Is it more focused on energy projects or what should we be expecting in terms of that focus?

I don't think it will change from what it has been for -- we are just going to keep upgrading our mills in the areas where we have got the good paybacks. Certainly, we're going to want to continue to find ways to reduce energy consumption and fossil fuels. But I don't see any particular change in what we have done in the past, just find those areas in each one of our mills that need upgrading so we have technologically advanced facilities.

Any additional capital plan for Kitimat?

Nothing out of the ordinary at this point.

We do have the Kittiner restructuring that we talked about a couple of quarters ago, I guess, last quarter.

Right, right.

We do have some capital in 2007 to upgrade the pulp machine.

Okay, thanks very much.

Sean Steuart of TD Newcrest.

Thank you. Hank, I got on the call a little bit late. I noticed in the text you touched on Burns Lake and Decker Lake and the processes underway. Can you give us an idea on the time frame we can expect? Is this by the end of the year or over the next quarter? Is it more near-term, maybe?

I think it depends on the level of activity interest. We are kind of just in the beginning phases of the process, and we want to make sure that it is a full process and I don't really want to -- I don't want to kind of give you any indication at this point in time. We will just see how it rolls out.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Daryl Swetlishoff from Raymond James.

Thanks, just one follow-up on stumpage rates. Just the changes on July 1 you mentioned no significant impact in '06. Assuming prices and harvest rates and everything else are the same in '07, do your internal models provide any guidance where stumpage might go, just isolating the change to the market-based pricing system?

Hank, do you want me to --?

Yes, this is Wayne, our VP of Woodlands. Wayne Clogg.

Daryl, I thought you were going to leave me alone on stumpage this morning.

Not this time.

The [MPFB] system that was implemented July 1 uses the same method of distributing stumpage as the old system. The only change is that the rate is determined based on average log selling prices now rather than lumber selling prices. So there is less of a direct link between lumber selling and stumpage than under the old system. So it is very hard to say that in a given lumber market that stumpage will do this or that.

That being said, I think that the weakness in lumber will translate into sort of stable or maybe lower stumpage through the log market. The other thing with the system is that this particular system better reflects the effect of mountain pine beetle damage to timber on average in the interior, and as the stands deteriorate, that will have somewhat of a downward pressure on stumpage.

With that downward pressure, would that begin to materialize in '07, and I guess that would be phased in over, is that correct?

Yes, generally, if you take July 1 '06 as a starting point, it will deteriorate as the stands deteriorate to the point where they are no longer used and then it will change.

Any quantification of any kind of magnitude that we might expect or is that too early at this point?

I think it is too -- there are so many moving parts in this that it is hard to determine, but if you speak to the ministry, the July 1st change, I think average stumpage rates in the interior moved up about $1.80, and of that, just over a dollar was due to the change to the new system and the rest was -- would have occurred anyway under the old system, if you will. So that kind of gives you an order of magnitude. It was not a significant change to go from the old to the new system, in other words.

Okay, thanks very much. That's it for me.

Joe Licursi from BMO Capital markets.

Hello. Yes, are you there?

Yes.

My question is on the corporate and other -- it's a financial question. There was a gain of about $4.6 million. Can you tell us what is in there and what can we expect for next quarter going forward?

Sure, Joe, it's Rodger. Joe, what is in there is, I mean usually it rounds out to an expense of $2 million or $3 million, so that is what you can expect going forward. That's general corporate items from around the Company that end up in administration. It ended up being positive this month because we had a recovery in our share option expense of $5.5 million so that's the major component in there.

I see. I just have one more question on the stumpage. In the quarter itself, was there any increase, like on account of the new policy?

If you're talking about the market-based pricing system, that came into place July 1st.

I was talking about the April 1; I think it was April 1.

April 1, there was a change in log grades and in methodology for evaluating beetle stands. Generally, we don't log a lot of volume in the second quarter. So that did not have a big effect on us.

So I guess, going forward, when you restart your harvesting, we should think in the $1 to $2 per cubic meter, is that correct?

Yes, again, we are very early in the -- in our log grading now. We're just beginning to scale and understand the system better. But I think, if anything, it is maybe less of an impact than what our earlier estimates were.

Okay, I think that's okay. The one last question, like on the assets that you have to sell, the Burns Lake and Decker Lake, plus, do you expect to make any profit on that from a book point of view, or should we assume it is at book value?

It's a typical sale process, so our interest is in getting the highest price we can. Don't know what it will be.

I can live with that. Thank you very much.

Thank you. There are no further questions registered at this time. I will turn the meeting back to Mr. Ketcham.

Okay, thank you, and thank you very much. And certainly, our people will be around today and next week if anybody has any questions, follow-up questions, just give a call. Thank you very much for joining us. Bye.

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