West Fraser Timber Co Ltd (WFG) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to your West Fraser Timber Co. Ltd. second-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 risk and uncertainties.

Actual outcomes will depend on a number of factors that could affect the ability of the Company to execute its business plan, 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 & Chief Executive Officer. Please go ahead, Mr. Ketcham.

Good morning, and welcome to West Fraser's 2009 second-quarter conference call. As you know, West Fraser reported a second-quarter loss of CAD39 million versus a loss of CAD83 million in the first quarter of this year. Revenue in the quarter increased 8% to CAD667 million, reflecting an increase in lumber prices, partially offset by weaker panel board pulp and paper prices and a stronger Canadian dollar.

Production and shipments were up for virtually all of our products versus the first quarter. The Canadian dollar averaged $0.857 in the second quarter versus $0.803 in the first quarter. Our lumber business continued to lose money due to the extremely weak housing market in the US. In response to historically low US lumber consumption, we ran our lumber business at about 73% of capacity during the quarter. This is a slight increase over our running rate in the first quarter.

Through the first half of the year, we've reduced our lumber production by about 528 million board feet versus the first half of 2008, or by about 20%. We significantly reduced our lumber inventories during the quarter and are pretty close to our target inventory levels.

Product prices in our panel division fell about 2% to 3% during the quarter, and production increased marginally. Our plywood division operated near full capacity during the quarter, while our MDF division continued to operate at 75% of capacity, and our LVL operation ran at 37% of capacity.

In our pulp and paper division, we ran our mechanical pulp mills at higher rates during the second quarter versus the first quarter, as a result of improved demand. Mechanical pulp production is up 68% versus the first quarter, but was still below capacity. We are currently running full -- running at full production rates at both of our mechanical pulp mills.

Demand was reasonably strong in our kraft pulp division as well, but we took a 10-day regularly scheduled maintenance outage at our Cariboo pulp division which reduced our production in our kraft pulp business by 5000 metric tonnes. Demand in shipments were good in this division, although the US list price fell 4% from the previous quarter.

However, since pulp prices bottomed in May, we have seen roughly a CAD70 price increase over the last couple of months. Production at our Kitimat linerboard mill dropped by 45,000 metric tonnes or 38% from the first quarter, due to our regularly scheduled 14-day annual maintenance shutdown as well as a further 21 days of market related downtime.

The linerboard market is very weak, and US dollar list prices dropped 6% from the first quarter of the year. If demand continues to be weak, we will have to look at further market related downtime in the fourth quarter.

Finally, our joint venture newsprint operation performed well during the quarter. However, newsprint prices crashed in the second quarter, dropping 22% from the previous quarter, reflecting the continuing dramatic drop in North American demand.

On July 5, we shut our Alberta newsprint mill down for four weeks to make a major modification to the newsprint machine, which will contribute to reduced costs and improve quality going forward. The mill will start up in the first week of August.

During the quarter our federal government announced its intention to introduce the Green Liquor Transformation Act. This act is intended to provide a credit to producers of black liquor to fund approved energy production and environmental enhancement projects. Details of this plan are not known at this time. We expect to have a better understanding of this plan by the end of the third quarter.

On June 30, labor contracts expired for the majority of our unionized wood products labor force. Negotiations for a new contract are currently underway. It is too soon to predict the outcome of these negotiations.

We will soon enter the fourth year of the most severe depression in the wood products industry since the 1930s. The length and depth of this depression are unprecedented. Our strategy to navigate through these very tough times is to reduce costs, control production and preserve cash. Our people are very focused on this strategy.

We do, however, believe strongly in the long-term fundamentals of this business. When the current surplus of housing inventory is liquidated, our industry will benefit from increasing demand and prices, and efficient well-capitalized mills will benefit from a supply squeeze just as we have in the past.

At this point, I will turn it over to Gerry Miller, our CFO.

Thanks, Hank, and good morning, everyone. This morning we posted on our website a brief presentation on our second-quarter results. The presentation is on westfraser.com under Investor Relations and under Presentations. While I will make reference to several of the slides in that presentation in my comments, it is not necessary that you have the presentation in front of you for reference.

I will summarize the financial results for the quarter, review our financial -- summarize the financial highlights of the quarter, review our financial results, and then discuss our debt and liquidity position.

The second-quarter financial highlights, if we can call them that, as Hank alluded to, we continue to operate in a very challenging environment. And Hank touched on many of the factors that are affecting our businesses. Despite negative EBITDA in the quarter, we were able to reduce our debt by about CAD60 million, largely due to working capital reductions inventory and other working capital items.

We reduced our dividend in the quarter, and that will conserve approximately CAD19 million annually. Our focus continues to be on cash preservation and maintaining the balance sheet, and in July Moody's downgraded our debt. As far as our earnings go, and this would be slide 5 in the presentation, our net loss for the quarter was CAD39 million compared to the first-quarter loss of CAD83 million.

The major factor in the reduced loss in this quarter compared to the previous quarter is the foreign exchange gain of CAD30 million on our long-term debt, compared to a foreign exchange loss of CAD13 million in the first quarter. Our operating loss in the current quarter was CAD75 million compared to a loss of CAD90 million in the first quarter.

Compared to the previous quarter, the operating loss improved in our lumber segment, but the operating loss in our pulp and paper segment was significantly higher in this quarter compared to the previous quarter because of lower prices, the annual maintenance shutdowns in two of our mills, and the market downtime taken in our pulp and linerboard mills.

Interest expense in the quarter was slightly lower compared to the last quarter, as a result of lower debt balances and lower borrowing rates.

In other expense in this quarter, we incurred a foreign exchange loss on our accounts receivable, offset in part by a gain in our US dollar foreign exchange contracts. The income tax recovery rate in the quarter at 31% compared to 23% recovery rate in quarter one. Again, our net loss was CAD39 million or CAD0.91 per share, and we recorded negative EBITDA in the quarter.

Moving to cash flows, and this would be slide 6 if you are referring to the presentation, despite the operating loss and negative EBITDA in the quarter we were able to generate cash through working capital reductions and pay down some of our debt in the quarter. Before working capital changes, we used CAD5 million in operations. This result was very consistent with the prior quarter.

In the quarter we generated cash of CAD70 million from working capital compared to using cash of CAD11 million for working capital in the first quarter. This is the typical seasonal trend where we build log inventories in the first quarter and then draw these inventories down in the subsequent quarter.

While the majority of the CAD70 million relates to the reduction in log inventories, we reduced our lumber and pulp inventories and other working capital items in the quarter as well.

Capital spending was tightly controlled in the quarter, amounting to CAD5 million. In total we have limited our capital spending to slightly more than CAD11 million in the first half of the year.

In the second quarter the decision was made to reduce our quarterly dividend. This is the first reduction of our dividend since our first public -- our initial public offering in 1986, and the reduction in the dividend will conserve approximately CAD5 million per quarter going forward.

With the operating results discussed, we were able to reduce our debt in the quarter by about CAD60 million. The reduction was mainly on our current operating debt, but we also redeemed about CAD17 million of the October 2009 debentures, and those were at a slight discount.

Referring to our debt position, this would be slide 8 in the presentation. At the end of the quarter we owed on a net basis CAD589 million. In the first quarter Standard & Poor's downgraded our debt rating to BB+. In July Moody's downgraded our debt rating to Ba1.

DBRS still has us rated as investment grade with a rating of BBB-. All of these ratings have a negative outlook, largely due to the current industry fundamentals. With these rating changes, our cost of borrowing on our credit facility will increase somewhat.

Liquidity -- this would be slide 9 -- at the end of the quarter we had a small amount drawn on our committed credit facility, leaving a balance available under this facility of CAD567 million. We have CAD133 million of debt due in October and an additional CAD100 million due in March 2010.

If we make the decision to use this credit facility to repay all or part of these debt maturities, we will have more than CAD300 million of liquidity available after these repayments. The remaining portion of our long-term debt is not due until 2014.

Other than these repayments, our cash requirements are for operations, interest, capital spending and the dividend, and we believe our current liquidity provides us adequate flexibility as we move through this continued downturn.

We have been and continue to look at various options to fund the upcoming debt repayments, including using our existing credit facility if necessary.

On debt covenants, our credit agreement has a debt to capital covenant that triggers at a debt to capital ratio of 37.5%. If we hit this test, we are required to meet an EBITDA to interest test. Currently our debt to cap ratio calculated by our loan agreement is about 12 or 13 percentage points below the 37.5% debt to cap requirement. We are in full compliance with all of our debt agreements.

On foreign exchange and product hedges, at the end of the quarter we have foreign exchange contracts to hedge the value of the Canadian dollar. In addition, we have contracts to sell 60,000 tonnes of NBSK through to mid-2010 at a price of $710. These contracts have been put in place to mitigate the strengthening of the Canadian dollar and a potential reduction in pulp prices.

In summary, although we have a positive outlook on the future of wood products as well as our pulp and paper products, we simply do not know when we will see the recovery in housing and the economy. Through this downturn, as always, we are focused to manage our business to minimize our cost, maximize cash flows and maintain a healthy balance sheet.

Hank, over to you.

Good, thank you. We are now ready for questions if there are any.

Thank you. (Operator Instructions) Daryl Swetlishoff.

Thanks and good morning, gentlemen. A quick question on your production costs in lumber, very good delta from the previous quarter. Of the 18% can you give us some color -- the log portion I understand, but can you give us some color on what projects you undertook to reduce production costs or conversion costs on your lumber side?

We didn't really take -- didn't do any projects per se. It is a continuing focus on cost reduction. We probably took out some production in mills that weren't meeting our -- that shouldn't have been producing at the levels -- at the price levels that they were at. And log costs came down as a result of just significantly reduced production in the province.

Okay. Gerry, the run rate on CapEx, CAD11 million for the first half of '09, is that a reasonable number to use going forward?

We are going to continue to manage our capital very tightly. We do have -- in front of us we do have the purchase of the timber tenures that we've previously announced, and that is going to have to be dealt with. But we are going to continue to manage our capital very tightly, Daryl.

Lastly, just reflecting on those terrible fires we are seeing in the Okanogan, I know you don't operate there, but what are the forestry conditions on the ground in Prince George and Quesnel? Is it -- is tinder dry up there as well?

No, not at this point in time. It has been a pretty good season up there. And up until a few days ago the forest fire hazard, at least in the central interior, wasn't all that bad.

That is good. Thanks for that. I will turn it over.

Bill Hoffmannn, RBC.

Good morning. Just a couple quick questions with regards to the finance side of the equation. You mentioned this debt to capital ratio; for your 37.5% you get an interest coverage test. Just curious about whether you thought about will you have to do any asset impairments likely for your fiscal year-end coming up? That is really the first question.

And the second thing is, have you talked to the banks about using the line to refund some of those debt purchases at this point?

Well, as far as our asset impairments, we as a matter of course every quarter, we look at our assets. And at the quarter to the extent that we are required, and at the end of the year we will look at it. Up to this point, I mean we have done whatever we believe that we should have to do under current GAAP. So don't know about the end of the year, but we are not anticipating anything at this point.

I think as far as the banks, we expect that we are going to be able to use those, use the credit facility to make our debt repayments. And we don't have any indication at this point that that wouldn't be available to us.

Thank you. And then just one more question. You mentioned the foreign exchange hedging. Can you give us some idea of like what levels the hedging was done at and about how much notional, just so we get a sense of how much of a hedge it is versus your earnings?

Well, I think we described it. It is in one of the notes to the financial statements which we put out yesterday. But we have about -- just a little bit more than CAD200 million currently hedged through at various times over the next year or so.

Okay, thank you.

Sean Steuart, TD Newcrest.

Thank you, good morning, guys. Just a couple of questions. First on lumber inventories, you have done a good job of drawing finished product inventories down pretty consistently over the last three years and particularly this year.

Hank, just wondering if you can talk about your comfort with current finished product inventory levels and potentially opportunities for further working cap reduction over the next few quarters?

Well, we have gotten our -- our inventories in general except at a couple of our -- except maybe at a couple of our pulp mills are in very good shape. I mean we are going to continue to push them down as much as we can. But there is not much left there, to be honest. We are pretty satisfied with the inventory levels in the Company right now.

Okay. Next question, Gerry, revisiting the revolver. I think you have an opportunity to increase it by potentially up to CAD100 million, subject to your syndicate agreeing to that. Have you started discussions towards potentially increasing the amount you have available to you?

Sean, the accordion allows us as you say to increase the facility up by CAD100 million, subject to finding lenders. And we have had some discussions in that respect.

Okay, and just nothing obviously developed yet. And then final question, Gerry or Hank, just any guidance you can give us on pulp and paper downtime expected through the remainder of the year? I think you mentioned the potential for market downtime at Kitimat in the fourth quarter, but anything at the pulp mills plant?

We don't anticipate anything at the pulp mills at this point in time. Just currently our only anticipation would be possibly at the linerboard facility.

Okay, that is great, guys. Thank you.

(Operator Instructions) Jon Barnett, Covalent Partners.

Good morning. Just a quick question here on the inventories. Just trying to understand, if you will, the positive CAD47 million for the period-end valuation on lumber. I guess is this the corollary to the -- in the inventory note it says that the inventories are written down by CAD40.6 million.

So I'm just trying to -- help me better understand the CAD47 million. Is that essentially blowing that right down through cost of goods sold for the current period? Is that what I am looking at?

Yes, Jonathan. Up here because of the seasonality, we have high inventories in the winter. And then we do have to do the accounting valuations at the end of the quarter. So with the high -- with the combination of the high volumes and then the valuation, we write them down to net realizable value at the end of the first quarter, and then we realize that benefit in the second quarter. We have basically a lower log cost.

I see. Okay, thank you. That is all.

Thank you. Today's Q&A session has been concluded. I would now like to turn the meeting back over to Mr. Ketcham.

Okay. Well, thank you very much for joining the call this morning, and certainly we will be around if anybody has any follow-up questions. Again, thank you. We will talk to you in the third quarter. Bye.

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