West Fraser Timber Co Ltd (WFG) 2008 Q4 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the West Fraser Timber Co. Ltd. fourth quarter results conference call. During this conference call, we will be making certain statements about potential future developments. These forward-looking statements are intended 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. 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, and is 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, Chairman, President, and Chief Executive Officer. Please go ahead Mr. Ketcham.

Thank you Operator, and thanks for joining us. First of all, I would like to say we have Management on the lines from our Quesnel and Vancouver offices; I'd like to make sure that they are on mute, please.

So, good morning and welcome to West Fraser's 2008 fourth quarter conference call. Yesterday, we announced a loss of CAD70 million for the fourth quarter, which included a CAD28 million net negative adjustment of the quarter ending lumber and log inventories, based on expected lumber sales values and a CAD46 million exchange loss on translation of long-term debt.

We had positive EBITDA in the quarter of CAD10 million. These very poor results reflect continuing weak lumber prices, which declined sharply near the end of the quarter, as well as the sharp falloff of pulp markets during the quarter. Curtailments reduced production in our Wood Products and Mechanical Pulp Divisions.

With respect to our operations, I would first like to focus on our lumber business. Lumber prices continued to weaken during the quarter, reflecting the collapse of the housing market and deepening credit crisis. We curtailed production in both our Canadian and US operations late in the quarter, due to the extremely depressed prices. Early in 2009, as demand in prices reached historic lows, we announced and have implemented further significant curtailments. Currently, our lumber production is at approximately 70% of capacity.

The Canadian dollar weakened 14% during the fourth quarter, which provided some benefit to our Canadian operations. We've seen a decline in log prices, and overall we have been focused on cost reduction and cash preservation throughout the Company. With the increased curtailments, our per unit costs have increased .

In BC, we continue to run our sawmills on a diet heavy to beetle-killed pine. Our people have done an amazing job adapting to this [furnish] and allowing us to extend our salvage program. In Alberta, we are hopeful that cold temperatures experienced earlier this winter will reduce beetle population and allow the Province to continue effective control efforts. In 2008 we announced two agreements to acquire BC Timber tenures, which we view as valuable investment in response to the mountain pine beetle epidemic. As we have disclosed, we haven't completed these transactions, but we are still working on them.

Moving to our Panels division, our Plywood business continues to react to a weakening Canadian housing market and current oversupply. Prices were virtually unchanged verse the third quarter, but have fallen off significantly in the past few weeks. Our operations are running well, and we continue to improve productivity, but the markets are challenging.

Results from our LVL business continue to be poor, reflecting the depressed state of US housing markets. The MDF industry is under going a fairly significant reorganization, with closures and curtailments. Our MDF operations were curtailed during the quarter, and we don't expect to get back to full production until the US housing markets begin to recover. Canadian dollar prices for MDF, however, improved somewhat verse the third quarter.

Our Pulp and Paper divisions saw an end to a period of strong markets, which basically collapsed near the end of the quarter. The global economic slow down disrupted pulp markets, and prices weakened rapidly. We were forced to curtail production at our two mechanical pulp mills, which up to the fourth quarter have been running well and contributing to overall earnings. The significant lumber production curtailments have resulted in increased fiber costs for most of our Pulp and Paper operations.

The first quarter of 2009 has so far been very difficult. We have announced and implemented significant curtailments of both Lumber and Pulp operations. The outlook for Pulp and Paper is tied to the global economy, which is currently in a deep recession. We don't see any meaningful recovery over the next few months. Lumber prices are at unsustainable levels, and we believe that in the absence of demand improvement, more production must come out before prices will stabilize at more normal levels. Although the short-term outlook remains very bleak, we believe that there could be some improvement later in the year, if supply and demand balance is achieved. Gerry Miller, our Executive Vice President, Finance and CFO will now review our financial conditions.

Thank you, Hank and good morning to everyone on the call. I thought I would touch on a few of the financial highlights if I can call them that. As Hank said EBITDA in the quarter was positive at about CAD10 million, down from CAD77 million in Q3, but higher than what it was in the fourth quarter of 2007. Cash from operations before working capital changes was positive in the quarter at about CAD25 million. In the fourth quarter, we increased our operating loan by about CAD13 million, but in the year, on a net basis we re-payed about CAD120 million of our debt. Again, as Hank already mentioned at the end of the year, our debt to cap ratio was around 24%.

As required by Generally Accepted Accounting Principles, we have valued all of our product and raw material inventories at the end of the year at the [lower of] cost and at realizable value. This resulted in a lower before tax earnings of around CAD30 million in the fourth quarter, compared to about CAD5 million in the third quarter, and CAD7 million in the fourth quarter, 2007. On a annual basis, the effective, again, before tax, was approximately CAD24 million in 2008, and about CAD34 million in 2007.

With the current state of the markets, there is an increased focus on asset valuation. We've looked at all of our assets, including goodwill, and in accordance with Generally Accepted Accounting Principals, made an appropriate assessment, and concluded that the carrying values of all of our assets are appropriate at the end of the year. These assessments necessarily included various assumptions and projections, and as a result, our valuation assessments may change in the future, as conditions change.

Other income in the fourth quarter relates mainly to foreign exchange gains on trade receivables in the each of our business segments, and that was about CAD15 million. The balance relates to various other items. It should be noted that in the fourth quarter, we changed the presentation of other income in our segmented information, and we've allocated to the applicable business segments, the other income related to the gains and losses on foreign exchange on accounts receivable in those segments. The result is no change in total.

In the fourth quarter, we entered into several put and call foreign exchange contracts. At December 31, 2008, this series of contracts extended monthly at about $20 million, through to December 2009. These contracts provide protection against the Canadian dollar, strengthening about CAD0.87, but limit the benefit of the Canadian dollar weakening, on average below CAD0.74. Since the end of the year, we've entered in to further contracts that will settle in January and February 2010.

Our capital spending in 2008 amounted to about CAD47 million. Throughout the year we've significantly curtailed capital spending to conserve cash. Our expectation for this year is much the same, a limited capital program to reduce our cash outflows.

Interest expense was lower in the fourth quarter compared to the fourth quarter last year for two reasons, borrowing was lower in 2008 compared to the fourth quarter 2007, and floating interest rates were also lowered in the fourth quarter 2008 compared to 2007. Our liquidity position is as follows, we have a committed operating line of CAD600 million, of which CAD30 million was drawn, and about CAD30 million was to support letters of credit at the end of the year. This leaves about CAD540 million available.

In the third quarter, we were successful in obtaining an amendment that allows us to increase this line by CAD100 million, subject to finding lenders to take up this additional amount. We have long-term debt repayments in the fourth quarter 2009 and the first quarter of 2010, and they are CAD150 million and CAD100 million respectively. We will be looking at various alternatives to finance these maturities over the next couple of quarters, but our current committed credit facilities allow us the room to repay these amounts out of our current credit lines, if we are unable to refinance these maturities in a suitable fashion.

With our current view for 2009, we are actively managing our cash flows to minimize our borrowings and maintain our liquidity position. With that, Hank I will turn it over to you.

Thank you, Gerry. And I think we are now ready for questions.

(Operator Instructions) The first question is from Paul Quinn of RBC Capital Markets. Please go ahead.

Thanks. Good morning. Question on the 250 Canadian, the 250 million in debt that's coming due before March 2010, looks like from the MD&A that you think you will be able to refinance, have you been talking to the banks, what are the options there?

It's Gerry, Paul, we haven't got our options all figured out at this point. One of the things we are going to do over the next couple of months is understand exactly what those options are, and then decide what we should do going forward. But at this point we don't fully have all of that in place.

Okay. Just on the operations side, it looks like MDF plants are running at a 75% operating rate. Should we hold that going forward? And then also on just the Pulp and Paper side, with the various down times, any guidance that you can give us on sort of production, that you anticipate for 2009 at this point would be appreciated.

Currently we have been running MDF at 75%, and I don't think until we - - it's hard to say, but we are going to continue that until we see some market improvement. That's not to say that if the markets deteriorate we wouldn't take more down time.

And on the Pulp side, that's our Mechanical Pulp Division, which is Quesnel River Pulp and Slave Lake Pulp, which are curtailed to the tune of about 30%, and actually probably more than that now, 35% or 40%. That's related to high inventories, weak demand. And again, we see that going forward, and we will react up or down as the market changes.

Okay. Just lastly, just a question on the Stuart Lake deal, obviously that hasn't closed. What are the - - you mentioned the re-structured deal, can you give us a little more color on that one?

On Stuart Lake?

Yeah.

It's not a restructured deal. I mean, we are continuing to have discussions with the owners and trying to figure out a way that we can complete that deal that's acceptable to them and acceptable to us, and I don't know whether we are going to come to an agreement or not.

That's all I had, thanks guys.

Yep.

Thank you. The next question is from Sean Steuart of TD Newcrest. Please go ahead.

Thanks, good morning everyone. Hank, wondering if you can talk a little bit about the Craft Pulp side of the business, and you've talked about all the down time you are taking on the mechanical side. But can you go through I guess the maintenance schedules for the NBSK mills, and thoughts on potential market down time as well?

Well, currently we are not planning on any maintenance down time. Sorry, planning on any market related down time, but again, the markets are changing rapidly, and so we are going to continue to monitor that, and do what we think is right. But we don't have any immediate plans for market related down time there. We do have an outage, our annual maintenance outage, at our Cariboo Pulp facility, which I think is in the second quarter. And our Alberta facility, Hinton Pulp, will not be taking extended maintenance down time this year.

Okay, that's all I had, thanks.

Sorry, Shawn, that's Craft Pulp, but our Kitimat operation will take it's normal market related down time, sorry, maintenance down time in the second quarter as well, and we are evaluating whether we need to some market related down time there too, but we haven't come to determination there yet.

Thanks a lot, Hank.

Thank you. (Operator Instructions) There are no further questions registered at this time Mr. Ketchum.

Okay, well I think that's great. Thank you very much for joining the call. Look forward to talking to you on another quarter, thank you.

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