West Fraser Timber Co Ltd (WFG) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Company Limited first-quarter results conference call. During this conference call, we will be making certain statements about potential future development. 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.

The 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 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, Chairman, President and Chief Executive Officer. Please go ahead, Mr. Ketcham.

Thank you. Good morning and welcome to West Fraser's 2009 first-quarter conference call. As you know, West Fraser reported a first-quarter loss of C$83 million versus a loss in the previous quarter of C$70 million. EBITDA was negative C$18 million in the first quarter versus positive EBITDA of C$10 million in Q4. Revenue in the quarter fell 17% from the previous quarter to C$619 million, reflecting both lower prices for virtually all of our products and significant production curtailments at a number of our operations.

On a positive note, the Canadian dollar averaged just over C$0.80 in the first quarter, which was 3% lower than in Q4 '08 and 19% lower than in Q1 '08.

Demand was weaker for virtually all of our products in the quarter, reflecting the deepening global recession and the continuing collapse of the North American housing market. Constructions of new homes averaged 523,000 units per month in the first quarter, which is the lowest level of housing starts since World War II.

As a result, we took significant downtime at our Canadian US lumber and panel operations, as well as our mechanical pulp mills in order to control inventories. We reduced production in our mills in the quarter as follows. At our Canadian sawmills, 305 million feet, or 30% of capacity and at our US sawmills, 205 million feet, or 40% of capacity. This represents an indefinite curtailment of 1.1 billion board feet on an annualized basis at our Canadian sawmills with an additional 140 million feet of temporary reductions taken in the quarter. In our US operations, this represents 700 million feet of production on an annualized basis with an additional 40 million feet of temporary reductions taken in the quarter.

A one-week curtailment was taken at two of our plywood mills in the quarter. Our MDF plants operated at approximately 75% of capacity, similar to the previous quarter. Our LVL operation operated at 55% of capacity, also similar to the previous quarter. No downtime was taken at our NBSK mills, but in addition to the 25% reduction in operating rates implemented at our BCTMP mills in late 2008, we announced a further 50,000 metric tonne reduction in mid-February of 2009 that will continue until May of this year. This effectively reduced BCTMP production in the quarter to less than 50% capacity. We ran our kraft pulp mills, our liner and kraft paper mill and our joint venture newsprint mill at full capacity during the quarter.

In our wood products business, Q1 prices were as follows. SPF was C$155 a thousand or down C$30 from the previous quarter. Southern yellow pine was down C$33 from the previous quarter. Plywood was down C$24 and MDF was down C$17.

In our pulp and paper business, demand weakened significantly in the quarter for all of our products. Benchmark prices in the US in US dollars for NBSK linerboard and newsprint were down $112, $31 and $40 respectively from the previous quarter.

Looking forward, the housing market is still very weak, reflecting extremely high housing inventory levels and the overhang of foreclosures on the market. However, housing affordability in the US is better than it has been for nearly 40 years and US 30-year mortgage rates hit record lows in the past few weeks. This bodes well for a significant rebound in the market when the inventory of unsold houses reaches a more normal level.

Demand for both kraft pulp and mechanical pump has improved somewhat in the past few weeks, but demand for linerboard and newsprint continues to be very weak. In the second quarter, we will take our annual maintenance shutdown at Cariboo pulp, which will result in reduced production of approximately 4000 metric tonnes in the quarter. At Eurocan, we will take our annual maintenance shutdown of 14 days and will take a further 21 days of downtime to reduce inventory levels at this plant. This reflects the weak linerboard and kraft paper markets. As a result, production will be reduced by 50,000 metric tonnes of this plant during the quarter. I will now turn the call over to Gerry Miller, our CFO.

Thanks, Hank and good morning. As Hank said, our loss for the quarter was C$83 million, or C$1.94 a share, compared to C$70 million, or C$1.63 a share in Q4. The increased net loss for the quarter compared to the prior quarter is due mainly to the following factors. The operating loss increased by C$26 million over the prior quarter as our pulp and paper segment experienced much weaker pricing and we took additional market-related downtime in our mechanical pulp business. Interest costs were very consistent quarter over quarter at just under C$9 million. The foreign exchange loss on our long-term debt was much lower in the current quarter as the Canadian dollar weakened only by about 3% during the quarter compared to about 14% during the prior quarter.

The foreign exchange loss relates to the translation of our US dollar-denominated debt at each period-end based on the period-end exchange rates. The exchange loss was C$13 million in the current quarter compared to C$46 million in the prior quarter. Other income declined substantially in the current quarter to C$3 million from about C$16 million in the last quarter.

A significant component of our other income is the foreign exchange translation gain or loss on US dollar-denominated current assets and liabilities in our Canadian businesses with the largest item being the US dollar-denominated accounts receivable. In the current quarter, the lower translation gain on our accounts receivable, because the dollar weakened only 3% compared to 14% in the prior quarter, accounted for about C$10 million of the difference. In addition, other income includes an unrealized loss on Canadian/US dollar foreign exchange contracts of about C$5 million in the current quarter compared to about C$2 million in the previous quarter.

The last significant component in the increased loss from the prior quarter relates to the income tax recovery. In the current quarter, we reduced the rate at which we are recognizing losses that can be applied to reduce future income taxes. This change reflects a more conservative accounting treatment with respect to these loss carryforwards.

On the cash flow statement, in the current quarter, our operating activities used about C$6 million in cash before changes in working capital items. This compares to cash generation of about C$25 million in the previous quarter. The decrease relates mainly to the lower EBITDA in our panels and pulp and paper segments in the quarter.

In the quarter, we invested nearly C$11 million in non-cash working capital. This compares to about C$28 million in the prior quarter. Because of the seasonal buildup of log inventories, a more comparable statistic might be the increase in working capital in Q1 last year where we invested nearly C$43 million in non-cash working capital.

Lower inventories, both volumes and values, and a cash receivable in the current quarter, account for the majority of the difference. In the quarter, we invested approximately C$6 million in property plant and equipment compared to just under C$10 million in the prior quarter. As we have discussed in the past, we are taking a very tight approach to capital spending in light of the current business fundamentals.

Overall, we increased our net debt by about C$28 million in the quarter compared to the prior quarter during which we reduced our current net debt by about C$7 million and compared to the first quarter of last year where we increased our net debt by about C$56 million.

In the balance sheet, the current portion of long-term debt has been increased to reflect the fact that we have two debt maturities coming due in the next 12 months. The first is the maturity of debentures due in October of about C$150 million and the second is a C$100 million term loan that matures in March 2010.

We continue to look at various options in the capital markets to fund these maturities, including using our committed credit facility. At March 31, our C$600 million committed credit line was drawn by approximately C$53 million and had an additional C$30 million in support of various letters of credit leaving more than C$500 million available. In addition, we have the ability to increase the total under this facility by an additional C$100 million, subject to signing up new lenders. The current credit facility is committed until March 2012.

With our current projections applying what we believe to be prudent and conservative stress-testing, we believe that our current liquidity will be more than sufficient to see us through the current market downturn. You will all be aware that in March one of our rating agencies, Standard & Poor's, downgraded West Fraser's debt rating from an investment grade rating of BBB- with a negative outlook to a subinvestment grade rating of BB+, again with a negative outlook.

About 10 days ago, Dominion Bond Rating Service confirmed its rating of West Fraser's debt as investment grade, but changed their outlook from stable to negative to reflect its assessment of the current market conditions. With this downgrade, we now have two rating agencies currently rating us as investment grade and the third, Standard & Poor's, rating us as non-investment grade.

Lastly, as we moved into this recession, we have been very focused on the collection of our accounts receivable. Through the downturn, we have increased the level of scrutiny across all of our accounts and made changes to specific accounts that we have felt necessary. While we have taken a few hits, we have managed to keep our bad debt expense to what we believe very low levels. Hank?

Good, well, thank you, Gerry and we are now going to open it up for questions.

(Operator Instructions). Sean Steuart, TD Newcrest.

Good morning, everyone. A couple of questions on the pulp and paper segment. Hank, you talked about the extensive downtime at Kitimat through the second quarter. Is it possible to put a dollar impact on cost structure as we look ahead to try and model that sort of extensive downtime?

I can't do that right now.

Okay, and you mentioned the one or the small maintenance shut, I guess, at Cariboo. Can you just go through the rest of the kraft pulp downtime planned through the year?

Well, Hinton -- we only have two kraft pulp mills, so Cariboo takes its 14 day shut in this quarter. Hinton has moved to 18-month intervals, so it won't take any downtime this year.

Sorry, Hank. It has to take -- I think there's a two-day or a three-day water inspection.

Okay.

Later -- I think in the third quarter.

All right.

Okay, and I know it is obviously a smaller part of the overall picture, but you built quite a bit of inventory at the newsprint mill this quarter and I know it is a low-cost asset, but do you plan to take any market-related downtime there?

We have some downtime planned for the third quarter regarding the installation of some new equipment, which should help up to get that inventory under control. That is 5 to 10 days, something like that.

Okay, that's all I had. Thanks, guys.

(Operator Instructions). Paul Quinn, RBC Capital Markets.

Yes, thanks. Good morning. A couple of questions. One just on lumber inventory. I noticed, in Q1, it was down this year versus sort of the average build in Q1 for the last five years. Is that because there was no transportation issues this quarter?

Well, transportation -- I mean car availability is certainly somewhat better due to the market downtime, but we are taking -- we are curtailing operations and shipping lumber at the same time. So we had -- we did have too much lumber inventory over the last six months. Part of it is related to -- we didn't start our planer mill -- our new planer mill in Quesnel up until six or nine months after the new sawmill got up to full production. So we built a lot of rough inventory and we are moving through that now. That will be totally cleaned out by mid-May.

Okay. And just so I can -- I know you guys have done a pretty good job, but I seem to be a little slow here, just trying to understand what your downtime is on the lumber side. I guess should we just think of it as 1.1 million in Canada and 700,000 in the US or is there going to be additional temporary stuff in Q2 as well?

It's 1.1 billion in Canada.

Sorry, yes.

So it was about 30% down in Canada and about 40% down in the US and I can't give you any better guidance than that. That is where we are at today. We evaluate it on a weekly basis, on a daily basis really and so we will be making every decision either on curtailments or on renewed production just based on the numbers that we see on a daily basis.

And just an overall sort of assessment of the market, do you see we are sort of at the bottom here or are you expecting rougher times ahead or are we on the way up or where are we?

Well, I think it is really hard for me to believe that it can get worse. I mean look at the -- you just can't keep going on like this. These are unsustainable prices. But how long you can go I don't know. We are concerned about the Canadian dollar of course. That has a big impact on what might happen in the future. But beyond that, I think the industry has gradually downsized itself to the point where -- I don't -- we are not feeling any strength in the market, but I think -- I do think we have to be -- I think we have to be pretty close -- at the bottom. That's what I think.

Great. That's all I had. Thanks, guys.

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

Okay. Thank you very much for joining us this morning and hopefully, we will be able to report better earnings in the future. Thank you. Bye.

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