West Fraser Timber Co Ltd (WFG) 2006 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the West Fraser Timber third-quarter results conference call.

During this conference 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 are 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 and 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.

Thank you. Good morning everybody and thank you for joining us this morning. Yesterday West Fraser announced its earnings and we had a third quarter loss of $8 million or $0.19 per share compared to earnings of $104 million or $2.41 per share last quarter. Our EBITDAR was $51 million compared to $82 million in the second quarter.

During the quarter a pretax log and lumber inventory write-down of $36 million was recorded to reflect the current low lumber prices. The after-tax, the write-down was $24 million or $0.55 per share.

On a divisional basis starting with lumber, our sawmills all operated well during the quarter. EBITDA was negative $10 million for the quarter compared to a positive $49 million last quarter. Of course these results include the $36 million inventory write-down that I just mentioned. The write-down equates to approximately $34 per thousand.

The benchmark SPF prices averaged US$278 per thousand for the quarter versus US$316 last quarter and we ended the quarter at US$248 per thousand. Yesterday the benchmark price was roughly US$230 per thousand.

Lumber prices are expected to remain low due to low U.S. housing starts and continuing high supply of lumber. Additional supply curtailments will be required before prices will improve significantly. Keep in mind that during the previous quarter the duty paid was 9% compared to 15% being paid now.

In Quesnel, our new sawmill is currently in start-up mode. The crews moved in this week. The mill is on budget and a few weeks behind in terms of our start-up but we had -- just relating to the tight labor market but we are happy with the outcome and we will be hoping that the start-up goes well.

During the quarter the Company entered into an agreement to sell as its 90% interest in the Burns Lake and Decker Lake sawmills. The sale is scheduled to close October 31, 2006. 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 13% of sales compared to $16 million or 12% of sales last quarter. During the quarter Canadian plywood prices were not impacted by the slowdown in housing starts as much as it was for lumber prices. However, prices have dropped significantly since the beginning of October in plywood. MDF demand has remained strong throughout the quarter. Pricing is reasonable.

In our pulp and paper division, EBITDA was $51 million or 18% of sales in the quarter compared to EBITDA of $18 million or 6% of sales last quarter. The improvement in EBITDA over the second quarter was due primarily to the return to normal production volumes and therefore normal production costs at the Hinton, Cariboo and Kitimat mills following our regularly scheduled maintenance outages in the second quarter.

The BCTMP mills continue to run well. High power prices during the quarter caused us to curtail production at the [Slade] Lake pulp mill by 2900 tons and at Alberta Newsprint by 1400 tons. In the fourth quarter of this year, we will start up our cogen plant at Kitimat and in addition, the restructuring that we previously announced at Hinton will get into full force when we shut down the wood room and begin operating the mill entirely on residual chips.

In terms of market, strong worldwide demand for pulp and a reduction in capacity during the first half of the year has resulted in a rapid improvement in U.S. dollar pulp prices throughout 2006. Paper markets haven't improved to the same degree so we look for moderating demand going forward. Nevertheless, our outlook for the remainder of the year is quite positive given the fact that worldwide inventories of pulp are modest and NBSK inventories are very low at 25 days of supply.

Linerboard markets are demonstrating similar supply/demand fundamentals as pulp. U.S. box shipments are up strongly in '06 and inventories are at lower than normal levels. We expect a reasonable fourth quarter which should bode well for stable market conditions going forward.

In terms of the U.S. lumber dispute on October 12 the new Softwood Lumber Agreement was implemented. The immediate impact on West Fraser was that shipments to the U.S. from October 12 are subject to a 15% export tax. West Fraser has US$424 million on deposit at September 30th. The refund at West Fraser's US$424 million plus interest of approximately $45 million is expected to be received when the U.S. Department of Commerce liquidates the deposits.

After a deduction for the agreed payment to U.S. interest is taken out and taxes at approximately 34% are charged on the balance, the net cash to be retained by West Fraser is roughly US$250 million. Although the timing of liquidation is uncertain, it is likely that the majority of the funds will be received within the next six months.

That is the end of my presentation. I would open the meeting to questions.

(OPERATOR INSTRUCTIONS) John Duncanson, Jennings Capital.

Good morning, Hank. Just two questions. Capital expenditures for '06 are still on target for about $205 million. If you had any sort of number we could use for '07?

CapEx -- you are right about CapEx for '06 and for '07 we haven't finalized our cap and operating plans. That will be done in the next two to four weeks. But maintenance CapEx in our company is probably around $80 million. And so certainly in times like these, we're going to be very careful about what we do but I can't give you any more guidance than that.

Okay. And just one other question. There was no -- your sale of Burns Lake, there was no proceeds mentioned. Is that -- can give us an idea of what you got for it or is that still --?

Well, we've agreed with the buyer that we wouldn't announce that now. But I can tell you that we had a competitive auction with a number of bidders and I think we are happy that we got a fair price.

So when the deal closes, we should know the price then I guess? Right?

Yes.

That is all I had, Hank, thanks.

Don Roberts, CIBC World Markets.

A couple of questions. First of all I know most of your chip prices are under formula but with the sort of closures we're seeing, what is your outlook on where chip prices in the market will average out do you think over the next year or so?

Most of them are on formula, Don. Obviously if there is a reduced supply, chip prices could rise either because costs go up if you have to roundwood chip or obviously if you have to bring them in from farther away. But I don't have a sense as to how that's going to play out right now, Don.

Was that a bit of an evolving story just again with the -- as you continue to process the beetle wood. What is your sense right now on focusing on the quality implications, again, as you are just seeing this quarter after quarter in terms of both recovery and grade mix?

Yes. Well, again right now it's kind of hard to say. The wood is dryer on average and we are seeing slight declines in recovery. Hard early on to attribute that specifically to beetles but we get more breakage in the mills and I would say you'd have to say that there is some reduction in quality and recovery due to the beetles for sure.

And lastly, if you just update us on the ongoing transportation challenges, how did those sort of work out in this quarter? Versus previous ones and I guess looking forward as well?

I think -- I may be corrected by our transportation man here -- but I think that in general car supply is adequate. The issue here in British Columbia and Alberta is service, getting the cars to the mills in a timely fashion and on a regular basis. So we've been having good dialog with our carriers and I hope we will make some progress there.

Okay, I will turn it over to other folks. Thank you.

Rick Skidmore, Goldman Sachs.

Good morning, Hank. Just a question with regard to lumber, can you restate where you saw your average lumber prices for SPF in the quarter? And it sounds like where they are now are around 230 if I heard you correctly. And does that imply that any of your mills are EBITDA negative at the current pricing?

So the benchmark SPF prices averaged 278 for the quarter and I think we said that it's roughly -- yesterday roughly around 230, something like that. It's tough out there. I don't want to comment on individual mill operations though.

Would you say that there is a greater probability in the next quarter or so that West Fraser may take any lumber down time?

Well, a greater probability than when market prices were higher I guess you'd have to say that. But let me put it this way, like everybody else we are intent on cost, on a cost focused culture. Our mills are modern and efficient throughout our system, no required capital at any of them really of a significant nature. So it's the same old thing. Times are tough and we're just going to have to look at individual mill operations on a daily basis. I wouldn't predict how that is going to sort itself out.

And then just two other questions. You mentioned on the Canadian plywood price that it had fallen significantly in October. Can you just give a sense of where it is today relative to the average in the third quarter?

We're up about 10%.

Okay. And then last question just strategically as you look at your balance sheet and you are getting at some point in the near future a meaningful amount of cash back into the business, how do you think about the strategy going forward at West Fraser? Is it still to grow in solid wood or are you looking elsewhere across the wood products industry like structural panels?

Right, well, we would like to continue to be a good strong solid wood and structural panel operator if the opportunity were to arise in North America and that hasn't changed. So we'll just continue to look at opportunities.

Thank you.

Mark Bishop, RBC Capital Markets.

Thanks, several of my questions have been answered. But just if you could provide a little bit more insight into the MDF? Obviously prices have been quite stable. That business seems to be doing fairly well. What is the dynamic that continues to keep that going despite obviously the weakness in the structural side and how do see it playing out for say the next six months or so?

Well, MDF isn't a structural panel obviously so its market is different. There is -- supply/demand seems to be in good shape but fundamentally I think you have to assume that if there is a continued significant slowdown in housing and all of the things surrounding new home building and existing R&R, you are not going to see -- obviously MDF is probably going to feel the effects of that as well. It hasn't yet.

Okay. Just wanted to check. What are you actually using for a benchmark plywood price? Is it a CSP 9 mil that you use?

Yes, CSP 9.5 Toronto.

Right, okay. And just a question on stumpage. I was just curious quarter-over-quarter; could you provide us any indication of what your change in stumpage rate would have been?

What it was I think our stumpage is down about $1 from the second quarter.

Okay. And obviously we would assume that stumpage should be down again given the weakness this past quarter?

I can't specifically answer that question because we do have a new stumpage system in place in the province and I think everybody is trying to figure out how it is going to play out. There is too many unknown variables floating around out there right now for us to make that prediction I think.

Okay, thanks, Hank.

Sean Steuart, TD Newcrest.

Thank you. A couple of questions, guys. First your lumber price realizations this quarter didn't fall as much as we would have expected given the prints, and I was just wondering if there is maybe a mix issue there or it is just a lag your realizations not catching up with the print and random links?

It sounds to me consensus here is a lag. I'll just have to report to you that around the table that is what I'm being told.

Okay. And second question is on Kitimat, obviously running well now. Wondering without maybe giving specific numbers if you can give us an idea of the magnitude of margin improvement there and maybe just review again with the cogen expected cost savings on the back of that project?

Sure, I'll let Gerry Miller who is in charge of our Kitimat operation.

The cogeneration project which will get going this quarter I think we said we're looking at maybe about a 15, 15, $17 per ton cost reduction as a result of that. And as far as margin improvements, there have been some improvements up there certainly and with the better operations and the better pricing. I don't want to get into specifics about what those are.

Okay, thanks a lot, guys.

Kevin Mason, Equity Research.

Good morning. Just had a couple of questions I just wanted to look back onto some of the inventory issues in the quarter. I noticed that lumber inventories went up marginally but -- which isn't that much of a worry but also looking back in history, Q3 is usually a pretty good quarter for drawdowns. I was just wondering if you could talk to how can we (indiscernible) build this quarter?

I'm sorry, what was the last sentence there?

Just wondering why we saw an inventory build this quarter when historically Q3 is usually a pretty good quarter of inventory drawdowns?

Well, well I think we had toward the end there we had gotten our inventories down to enough to draw down. We had our inventories -- we do have our inventories in pretty good shape. So we have gone into some third quarters in the past with high inventories and had to draw them down but we've done that over the course of the year and we are in pretty good shape.

And just on LVL, it seemed the difference there with production versus shipments, was there a shipment problem there or was it just a build in inventory? It seemed a fairly dramatic jump.

At the end of September, at the end of the quarter, the inventory did build. The market has for LVL started to slow down a bit. We did have orders for that build and we will be making that up a good chunk of it anyway in October. But the market for LVL is getting a little more difficult.

Are the prices reasonably steady or have they started to come off a bit?

They've started to come off a bit particularly in Canada.

Are we talking like sort of $1 a cubic foot type number or --?

Somewhere in that range.

And just one last question. Just with respect to plywood and sort of touching on the quality issues, Toco had sort of announced in their release with their closure that they announced on plywood that part of it was due to the quality issues surrounding the beetle wood. Are you seeing that similar issues in your fiber basket?

We will see over time the same issues that we're going to have in -- that will be in front of us in lumber will be there in plywood. I can't specifically say that it's a significant issue today but the wood is drying out.

Okay, thank you.

Thank you. There are no further questions raised at this time. I will turn the meeting back over to Mr. Ketcham. Please go ahead, sir.

Thank you very much. If there are no further questions I appreciate you all joining us and certainly as usual if there were questions that were not answered or you have further ones, call me, Martii Solin, Rodger Hutchinson at any time. Thank you.

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