West Fraser Timber Co Ltd (WFG) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Co. Ltd. first-quarter 2008 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 risks and uncertainties in our annual MD&A which can be accessed on our website or through Sedar and as supplemented by our quarterly MD&As. Accordingly listeners should exercise caution in relying upon forward-looking statements.

I would now like to turn the meeting over to Mr. Hank Ketcham, Chair, President and Chief Executive Officer. Please go ahead, Mr. Ketcham.

Thank you, operator. Good morning and welcome to West Fraser's 2008 first-quarter conference call. I'm going to assume you've read our news release so I won't repeat the figures. While we reported a loss of $69 million, I actually look at it as a loss of $113 million in the first quarter. That's the operating loss plus interest expense all before taxes.

These results include a $33 million net decline in operating earnings relating to the write-down of the quarter ending inventories. Log inventories were high as is typical for the first quarter. Our reported loss of $69 million was after taking into account an income tax recovery of $47 million. We had negative EBITDA in the quarter of $31 million.

These disappointing results reflect continuing weak lumber prices, the large inventory write-down and some operational problems at our Kitimat and Hinton facilities. Our sawmills generally ran well during the quarter although a series of curtailments implemented during the quarter will result in a decline in lumber production and shipments going forward.

With respect to our operations, I'd first like to focus on our lumber business. SPF lumber prices continued to fall during the first quarter or 1 point sinking below the $200 barrier. Although the average benchmark southern yellow pine two by four price improved during the quarter, the lumber mill nets at our U.S. operations actually declined because of continuing weaker prices for wider dimensions. The lower prices not only eroded our net sales results but resulted in significant inventory write-downs.

If we eliminate the affect of inventory adjustments our operating earnings were off by about $5 million from the previous quarter. This would be a decline in sales partially offset by a weaker Canadian dollar and a decrease in log costs. We have seen a downward trend in log costs although it has been a slow process. We anticipate a continuing -- a continued weakening of log prices as demand for logs declines due to production curtailments.

We believe there's been a meaningful reduction in lumber production in North America over the last few months. These reductions typically take time to actually reduce supply to the market, but we believe there will be significantly less lumber available to the markets in the coming months. In our case we've implemented curtailments that have removed over 800 million board feet on an annualized basis.

We believe that the U.S. lumber markets will remain depressed for the foreseeable future due to the continuing weakening of the housing and credit markets in the U.S. In early March the NAFTA arbitration decision on the surge tax was handed down and the interpretation that West Fraser has supported was upheld for B.C. and Alberta, so no additional taxes will apply to our shipments for the periods under dispute.

Moving to our panel division, plywood prices were weaker in the first quarter as severe weather in Eastern Canada seems to have pushed back the building season. We're expecting some improvement this quarter as the Canadian housing market is still relatively strong. We saw stronger MDF prices in the quarter, although the business continues to be challenged by the strong Canadian dollar.

Our pulp and paper division once again had mixed results. Our two mechanical pulp mills, our Cariboo kraft pulp mill and our Alberta joint venture newsprint mill all operated very well with Quesnel River pulp achieving a production record for the quarter. Both the Hinton kraft mill and the Kitimat liner board and kraft paper mill experienced operational breakdowns in the early part of the quarter which reduced production and increased cost. Operational reliability is an absolute necessity for these two facilities and we obviously aren't there yet.

In terms of outlook, we may see some improvement in lumber and plywood prices but we aren't expecting any material recovery. The second-quarter results should benefit from the first-quarter inventory write-down. We'll be focused on reducing log costs over the balance of the year. Scheduled maintenance at Kitimat and Cariboo will negatively affect results of the pulp and paper division in the second quarter. We're continuing to focus on reducing our costs and we'll continue to constantly assess our operating strategy as circumstances change.

Martti Solin, our CFO, is currently away due to illness and we wish him a speedy recovery. In his absence Rodger Hutchinson, our VP and Corporate Controller, will now discuss some financial issues.

Thanks, Hank. I will add a few additional comments on the financial statements. First, I want to discuss the impact of inventory write-downs on the results. The impact of inventory write-downs on our earnings was $33 million; by segment it was $28 million for lumber, $2 million for panels and $3 million for pulp and paper.

The impact on earnings is the net difference between ending inventory write-downs of $88 million and write-downs to inventories on hand at the beginning of the quarter of $55 million. In effect, the current quarter benefits from the opening write-downs is that lower inventory value flowed through the income statement in the current quarter.

Note two to the financial statements describes a change in accounting related to inventory, specifically companies are now required to value raw materials inventories at the lower cost and net and realizable value. The majority of West Fraser's raw material inventories have always been valued on this basis, so this had little impact on our results.

We are also now amortizing the major maintenance shutdowns at our NBSK and liner board facilities over the period between maintenance shuts. Previously these costs were amortized on a calendar year basis. There was no significant impact on earnings from making this change.

Items in the results that are normally adjusted for by the analyst community include the foreign exchange loss on long-term debt of $10.6 million representing $0.21 per share on an after-tax basis and a gain of $6.4 million or $0.15 per share related to a substantively enacted tax rate reduction.

Included in other expense of $8 million for the quarter is a foreign exchange gain of $5 million on translation of U.S. dollar receivable balances. The remaining $3 million is made up of a number of other small items.

Lastly, I would like to comment on our liquidity position. Our long-term debt payments due over the next three years are -- in the current year we have nothing significant due; in 2009 we have a $150 million payment due in November; and in 2010 we have a $100 million payment due in March. We have a committed operating line available of $600 million of which $206 million was drawn at March 31st. The operating line is due in 2012. The line is subject to covenants that we monitor continuously.

Our free cash flow for the quarter was a use of cash of $60 million calculated as cash from operating activities less additions to property, plant and equipment. I believe it would be misleading to extrapolate our first-quarter use of cash over the balance of the year as the first-quarter cash flow was impacted by seasonally low wood product prices and the March 31st inventory balance represents the peak of our investment in inventory.

That concludes my comments and, operator, we will now take questions.

(OPERATOR INSTRUCTIONS). Stephen Atkinson, BMO Capital Markets.

Thank you. Are you able to give us some guidance as to the difference in maintenance in the second quarter versus the first? Meaning in the amount.

The pulp mill maintenance you mean?

Yes, yes. Like will there be more in the second than the first?

Stephen, it's Rodger. We have our shutdowns in the second quarter, so normally what that does is it increased the cost due to production. We do defer a lot of those shutdown costs over the balance to the next major maintenance shut. But we don't give any guidance in terms of the increase in maintenance, no.

Okay, but the first quarter was adversely affected by operational problems anyway.

Yes.

Are you able to give us some color on that?

On the operational problems in the pulp mills?

Yes, yes. Well, at Hinton or Kitimat I think was mentioned in the write-up.

At our Hinton mill it's basically we're continuing to have some issues on our dryer which relate to the reorganization and the modernization of that facility. But we think we've got those pretty well behind us and on May 7th we're going to do one final installation which should effectively correct that.

And at Eurocan we've had a couple of significant problems in our steam plant which have taken the mill down and that's been a disappointing -- we've had a disappointing quarter there. And by the way, we've had a disruption there for two or three days and this month as well. So April is not going to be a good month at that plant either.

And in terms of CapEx for the year, we had $100 million. Should we lower that or -- given that you spent about $14 million in the first quarter?

No, I think $100 million should be about right?

Okay. And do you expect any changes in wood costs in the second versus the first quarter?

In the second quarter we've got most of our wood in the yards, so we're not going to be bringing very much wood, if any, in the second quarter.

Okay. Thanks so much.

(OPERATOR INSTRUCTIONS). Patrick Yung, Raymond James.

Good morning. A couple of questions. One on stumpage, do you have any guidance as to how that might shape up over the next couple of quarters?

As I say, in the second quarter -- sorry, there's a train going by outside, I apologize. In the second quarter we don't anticipate -- it might drop a little bit, but we're not going to be bringing very many logs in. So it's not going to have a significant impact. And we would anticipate a slight weakening in the third quarter, although the provincial government is in the process of looking at some regulatory issues that could have an effect on timber pricing from the third quarter on and we're not sure how that's going to work itself out.

That's useful and good to hear that lumber is moving. Second question is on the mountain pine beetle. Any impact on recoveries? Any update you can provide on that front?

It hasn't changed significantly. As I mentioned in our last conference call, our recoveries in LRFs and productivity are essentially down in British Columbia and up in Alberta where we haven't felt the effects of the mountain pine beetle. But we're not seeing any significant further deterioration from where we were over the last three to six months.

Okay, that's useful. The last question is on the operating line. Can you share with us what are the nature of the covenants, if you can go into the specifics -- i.e., whether it's more balance sheet oriented or EBITDA type covenants?

Patrick, it's Rodger. We don't share the specific covenants, but they're normal covenants associated with operating lines of this type. But as to the exact nature, we don't share that, no.

But I guess my question would be you don't expect to reach any of those anytime soon?

Yes, we do not expect to reach them.

That's all I had. Thanks a lot, guys.

Paul Quinn, RBC Capital Markets.

Just a follow-up question on I guess Hank's statement on the regulatory issues that the Ministry is going to change on stumpage. What are those specifically you're referring to?

Let me ask Wayne Clogg, our VP of Forestry, to answer that, Paul. Wayne?

As you might know, the B.C. government is looking at -- once again at log grading. They made a change previously and eliminated grade 3 and went to grade 4. They're looking at the actual definition of grade 4, whether it appropriately identifies a pulp log from a saw log and some options around that. So we also have an MPS update due on July 1st, and the Ministry is doing a lot of work with data right now to try and see what that regression looks like.

So the changes in log grade, is that expected to be -- that could be a material effect for you guys, right?

The province has said that any change that they make will be revenue neutral to the province. So it depends where you operate, what your profile is, that sort of thing, Paul.

Okay. In terms of overall sawmill operating rates, do you have sort of a -- could you share with us sort of what, on a going forward basis, you expect Canada to run at and what the U.S. is going to run at given the curtailments you announced?

We couldn't really tell you that other than to say that we think that the shipments to the U.S. from Canada in the first quarter -- I think it's public information -- is off about 34%, something like that. So compared to '07 we're certainly seeing significantly more capacity off the market. I think the same is true down in the U.S. So I think there is a significant amount off the market or coming off the market as we speak.

Okay. And just lastly, on log costs, I guess they're somewhat trending down across Canada. What's happening with log costs in the U.S.?

They're trending down marginally, but -- they are trending down but some of what we're going down there in our operations is -- we're taking capacity out hoping that supply and demand of logs will get into a better balance and reduce log costs more. But certainly they're coming down gradually.

Okay, great. That's all I had. Thanks, guys.

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

Okay. Well, if there are no further questions we will thank you for joining us and hopefully we'll talk to you about better results in the next quarter. Thank you. Bye.

Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.