West Fraser Timber Co Ltd (WFG) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Co. Ltd. second-quarter 2008 results conference call. 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 and welcome to West Fraser's 2008 second-quarter conference call. Yesterday we reported earnings of $3 million or $0.08 a share, which was an improvement over the previous quarter's loss of $69 million or $1.60 per share. However, this improvement is largely attributable to significant inventory write-downs which occurred in the first quarter.

Although lumber prices improved during the quarter from the extreme lows of the first quarter, we are still in a very weak lumber market. We've recommended that rather than comparing quarterly results that you look at the first half of 2008 in which we suffered a loss of $65 million or $1.53 per share compared to a loss of $19 million or $0.45 per share for the first half of 2007; I think that presents a better picture of how difficult the current environment is.

In addition to weak lumber markets we continue to face operational issues at our Kitimat linerboard and pulp mills. I'd now like to give a brief overview of operations of each of our three segments.

First, lumber. We saw some price improvements during the quarter reflecting seasonal demand and the effect of previously announced curtailments, although we are still and historically weak markets, particularly in Canadian dollar terms. The price for wider dimension southern yellow pine also recovered from the first quarter low, although we haven't seen traditional premiums return.

The current price improvements are influenced more by supply than demand as the US housing crisis shows no signs of ending. We can't predict when a turnaround will occur and we're assuming that it could be a long way off.

Log prices continue to trend downward, although some of our US facilities are experiencing difficulties in sourcing sufficient quantities of logs at reasonable prices. Increasing log transportation costs may offset some of the log price reductions. Generally we don't expect material changes in log costs for stumpage in the third quarter.

Our operating strategy continues to be based on the availability of sufficient quantities of logs at prices that reflect the current weak lumber markets. Our current lumber production curtailments represent about 770 million board feet on an annualized basis.

Our mills are generally operating well. Lumber recovering and grade out-turn rates have been declining modestly over the last several quarters at certain B.C. lumber mills as a result of the beetle killed wood that's being processed.

We're not seeing any signs of recovery of US housing markets as the credit crisis has made the timing of a recovery even more uncertain. However, we continue to believe that when a recovery occurs we will be well positioned to take advantage of it.

Now a few comments about our panels division. Plywood production has improved, but a weakening of the Canadian housing market has resulted in lower plywood prices. Although we are anticipating the kind of collapse seen in the US, we're expecting a continuing softness in the Canadian housing market with continued pressure on plywood demand and prices. Also as a result of difficult market conditions, we continue to operate our MDF and LVL divisions on a curtailed basis.

Our pulp and paper segment had mixed results. The segment suffered a $1 million loss compared to earnings of $7 million in the first quarter. Scheduled maintenance at Kitimat and Cariboo resulted in lost production of approximately 16,000 tons at Kitimat and 11,000 tons at Cariboo. This contributed to an earnings decline, but operational reliability at Kitimat and Hinton pulp continue to be the primary challenge for this segment. Our two mechanical pulp mills, our Cariboo Kraft pulp mill and our Alberta joint venture newsprint mill continue to operate very well.

I'd like to make a few comments on our financial performance. Our net debt to capitalization ratio at the end of the second quarter was 24% compared to 25% at the end of 2007. Our $600 million committed facility was drawn down by approximately $75 million at the end of the second quarter. We currently anticipate that our total capital expenditures for 2008 will be under our $100 million target as we continue to closely monitor all projects.

In terms of unusual items affecting second-quarter earnings, the most significant were the inventory adjustments which had a positive impact on second-quarter earnings of approximately $44 million or $0.71 per share after tax. We also recorded a scientific research tax credit of $7 million or $0.11 per share after tax and a foreign exchange gain on long-term debt of $2 million or $0.04 per share after tax.

In terms of outlook, we aren't seeing any signs of a recovery of the lumber markets. We're continuing our efforts to develop markets outside North America. We are looking forward to completing a previously announced tender purchase from Weyerhaeuser which will help our chasm, 100 Mile House, and Williams Lake Mills cope with the eventual pine beetle downturn.

Cost escalation is a concern for our business. On July 1st, B.C. imposed a new tax on fossil fuel consumption. We're seeing price increases for chemicals and resins used in our pulp and paper and panel subsegments and transportation costs have been increasing as oil prices have moved higher. Fiber cost for the pulp and paper segments are also moving higher. As always, we will continue to work hard to mitigate the effects of this rising cost environment on our operations.

Those are my comments, Operator. And I'd like to read one forward-looking statement which I neglected to do at the beginning. Our news release contained a warning concerning forward-looking statements, that warning also applies to matters discussed on this call. With that, Operator, we'll open the phone lines to questions.

(OPERATOR INSTRUCTIONS). Don Roberts, CIBC World Markets.

Hank, a couple of questions. I'm curious, a little more detail I would appreciate on -- your comment on the southern operations where they're having difficulties getting the volumes they want of the logs at a reasonable cost. Is your sense this is simply due to higher delivery costs associated with energy that the wood suppliers are experiencing?

No, Don. My sense is that there's -- certain of our mills, there's a cost of which we just can't afford to process the wood and I think there are suppliers down there who choose to hold their wood off the market unless they get a price that doesn't correlate with the price we're willing to pay.

So what kind of operating rates are you experiencing down in those southern mills now then?

We're running probably -- we're down maybe 15% down there, something like that.

Okay. Switching gears here -- up in B.C., I think B.C. Hydro, they put out a call for green energy. Have you folks, especially on the pulp and paper side of the business, put any proposals in to take advantage of that or what are your thoughts on that if you haven't?

Don, it's Gerry Miller. We have participated, we put -- through our joint venture mill, Cariboo, we've put in a proposal for Phase I which it's biomass, Phase I of the biomass coal.

Okay. And when do you expect to hear on that?

Well, I think it's going to be over the next several months. We've got to go through the process with B.C. Hydro and they've got a long list of people that are in and we're one of them.

Okay. I've got another question, it's more strategic. I'll go back to the end of the queue. Thank you.

(OPERATOR INSTRUCTIONS). Daryl Swetlishoff, Raymond James.

Thanks a lot. Hank, just a question. You mentioned a bit about cost inflation that you're seeing across a lot of your inputs. What's your sense about the sustainable price floor for lumber? I mean, can we get back to the first-quarter levels or do you think that there's enough cost inflation and resulting downtime that will allow for a higher floor price when the seasonal aspect wears off here?

Hard to say. We never thought we'd get to that what you call floor price in the first quarter. That surprised us we got that low. And of course, it also relates to the variation in the cost of the Canadian dollar as well. So -- but that was pretty brutal. I can't really answer that question. We'd be surprised if it went back that low, but you never know, it did before.

Fair enough. And just on your log costs in B.C., we saw the July 1st stumpage adjustment, the annual adjustment based on bid price data. Is West Fraser surprised at the lack of a bigger downward adjustment there? And if so, what do you attribute it to?

Let me let Wayne Clogg, our VP of Forestry, answer that.

Daryl, I think we're all getting used to the [MPF] system, it was only introduced in 2006, so this is only our second annual adjustment. As you know, there was a year of data dropped and a year of data brought in, and it's quite a complicated process putting it together. So I think subjectively we expected to see a bigger drop, we were a little bit surprised that there wasn't. But the net effect was that stumpage came down slightly July 1st, as you know.

Yes. I guess just from observing it and you think how could conditions really get worse. And so from that outside party it does look, for us anyway, that it should have been a bigger drop so you'd share that sense. Any sense what you'd attribute it to? Are the bids just still too high? Are money-losing bids being made or can you add any color on that, Wayne?

I'm no statistician so I won't pretend I know exactly how the regression works. I think that the amount of dead timber stands being harvested and the amount of off-grade in the dataset does play into that somewhat.

Okay. Thanks for that. I'll turn it over.

Hugues Bourgeois, National Bank Financial.

Good morning. You mentioned in the press release on page 9 that the new fossil fuel tax could add probably $3 million for the remainder of the year, so we, I guess can think of about $6 million a year. I'm just trying to get a feeling on how does that compare to, for example, if your biomass bid proves to be successful, how would that bid or that added capacity or profit let's say -- how it compare to that added cost around the fuel tax?

It's Gerry Miller. We don't know what the outcome of our bid into the B.C. Hydro power (inaudible) -- what it's going to result in. We've only bid in. We're not accepted and they've got to go through a process. So it's difficult to know whether we can offset the increased cost from the carbon tax -- just don't know. And the carbon tax is $6 million next year, it's going to increase over the next couple of years as it's fully implemented I think through 2012.

And is the Cariboo bid the only one that you have currently?

It is the only one that we put in for -- and the coal at this point is what B.C. Hydro is calling Phase I. And so that's the only bid that we've put in.

Okay, thank you.

You're welcome.

Sean Steuart, TD Newcrest.

Good morning, thanks. Most of my questions have been answered. Hank, just one question on your downtime expectations in the pulp and paper segment through the remainder of the year in terms of maintenance that's scheduled?

We have maintenance scheduled at our Hinton pulp mill in September. I think that's about a 10-day downtime, so about -- if the mill's running well that's about 10,000 tons that will be coming out.

And nothing beyond that at all?

Not this year, no.

Okay. That's all I had. Thank you.

(OPERATOR INSTRUCTIONS). Don Roberts, CIBC World Markets.

Hank, again, this is more of a strategic question. And we've -- in the past I think you had mentioned that you were interested at one point in getting exposure to the OSB business. We've got a pretty down and dirty [andeuce] market right now, but there are assets out there. Without sort of speaking of specific assets what are your thoughts right now on trying to get exposure? Is this simply not the time given sort of I guess the focus on preserving cash or what are your thoughts?

Don, obviously our company would like to continue to grow in the areas that we think have potential for profits down the line. But we've got a lot of internal projects that are on hold, as I'm sure many companies do. We've got some -- there are other opportunities out there. So I can't specifically answer that question, but, number one, we want a strong balance sheet because we don't know when things are going to turn around. And number two, we do have a lot of great internal projects that can make us money right away.

And then we have to -- we always do have to look at opportunities as they come along, but I would say that would be priority. We've got to prioritize those three aspects of what we're doing here. And we've got a good solid balance sheet. But, as I said, we don't know when this market is going to turn around, we don't know what the Canadian dollar is going to do, so we want to be very careful in how we look at things.

Could you just refresh us again in terms of your targets with regard to say debt to total capital numbers, what's the maximum you would push something up to?

I guess it depends on your outlook of the future. But right now today I would say that we're going to do our best not to drive it up too much further from where we're at.

Okay, thank you.

Richard Skidmore, Goldman Sachs.

Good morning, guys. It's actually Bob Trout in for Rick. Just a very quick question. Could you refresh on what your sensitivity is to a CAD0.01 move in the Canadian dollar?

$14 million roughly.

After-tax?

Yes.

Okay. And that's -- I guess that's an earnings number?

Yes.

Okay. All right, thank you.

(OPERATOR INSTRUCTIONS). There are no further questions registered at this time, Mr. Ketcham. Thank you, ladies and gentlemen; that concludes today's conference. I would like to ask all participants to hang up their lines at this time and thank you for your participation.