West Fraser Timber Co Ltd (WFG) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Co. Ltd. third-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. Ketchum.

Good morning and thank you for joining our conference call, third-quarter conference call. I am here in our board room with Gerry Miller, our CFO, and our management team.

As you know, yesterday we reported a third-quarter loss of CAD198 million on sales of CAD679 million. This loss includes an impairment charge of CAD155.1 million as a result of the write-down of our Eurocan paper mill and certain sawmill assets. In addition, our earnings reflect a valuation allowance of CAD85 million with respect to future income taxes.

Gerry Miller, our Executive Vice President, Finance and CFO, will elaborate on these issues more fully in his report.

EBITDA for the quarter was CAD42 million compared to negative CAD10 million in the previous quarter. Increase in net cash was CAD80 million for the quarter. CapEx was minimal in the quarter as we continue to focus on cash preservation and strengthening our balance sheet.

As you know, last Wednesday we announced the permanent closure of our Eurocan liner board and kraft paper mill in Kitimat, BC. Our employees have worked very hard over the years to try to make this a financially successful mill, but it has consistently lost money.

Over the past year the combination of the deep recession, the rising Canadian dollar, increasing fiber costs, and intense foreign competition has led us to conclude that this operation will continue to lose money. Therefore, we have decided that we have no alternative but to close it. Again, Gerry will elaborate on the costs associated with closing the mill in a few minute.

This is an unfortunate conclusion to our 28-year history with Eurocan. I apologize to our long-term investors who have seen negative returns from this mill over many years and I am deeply sorry for the impact this will have on the lives of our Eurocan employees and their families, the town of Kitimat, and the Northwest region of the province.

This action is a grim reminder of that in an intensely competitive global environment all stakeholders must be cognizant of the fact that higher cost producers in our industry will not survive over the long run. That is why West Fraser has consistently invested in our plants and equipment to give our employees the tools they need to be competitive in severe market downturns.

But investment alone does not ensure success. That is why we continue to look for new and innovative ways to improve efficiency and reduce costs throughout the Company to ensure the future success of our business. And I will reiterate, all stakeholders must play a role in ensuring future competitiveness of each of our operations.

I will now briefly discuss our third-quarter division results. Our wood products business continued to perform well under very trying circumstances. Our Canadian mills operated at about 73% of capacity, while our US mills operated at 67% of capacity. Several of our US mills were severely curtailed later in the quarter due to unseasonably wet weather which reduced our ability to access logs. This has continued through October.

SPF prices were marginally higher in the quarter while southern yellow pine prices were about 5% lower compared to the second quarter. Log costs were down in both Canada and the US versus the comparable period last year. Log quality at many of our BC mills continued to deteriorate due to the mountain pine beetle epidemic. This severely impacts productivity, lumber recovery, and grade outturn.

Our log and lumber inventories are in very good shape throughout our system. Our panel division produced third-quarter EBITDA of $19 million. Plywood prices were up 24% from the previous quarter and we ran our three mills at full capacity. Medium-density fiberboard prices fell marginally and we continue to run our two MDF plants and our laminated veneer lumber facility on reduced schedules.

Since the end of the quarter plywood prices have dropped substantially at least partially due to the onset of the traditionally low construction period in Canada. Our pulp and paper division produced CAD19 million of EBITDA during the quarter. Both of our mechanical pulp mills ran at full capacity during the quarter after being curtailed in the first half due to low demand.

Our two bleach kraft pulp mills also ran at full capacity as demand for our products was strong and US dollar prices increased from the previous quarter by about 14%.

Inventories in our pulp divisions are in good shape and prices remain firm as we enter the fourth quarter. Our joint venture newsprint mill took extended downtime during the quarter to carry out significant efficiency and quality-enhancing improvements to the paper machine. As a result, production was down about 30%. US dollar-denominated prices declined for newsprint 22% from the previous quarter and 39% for the same quarter in 2008.

Our Eurocan mill ran reasonably well in the quarter, but the market remained weak and prices declined marginally from the second quarter.

On the whole I believe the Company performed well over the past three months while operating in the worst lumber market in 75 years. As mentioned, the challenges we faced were exceedingly low lumber and newsprint prices, a rapidly escalating Canadian dollar, continuing deterioration in the quality of logs to some of our BC mills, and huge black liquor subsidies given to the US pulp industry which has distorted pulp and linerboard markets.

Looking forward, we believe the lumber market will stay weak for some time although the inventory of existing and new homes is declining, interest rates remain very low, and the economy appears to be on the road to a slow recovery. This should lead to at least a modest improvement in housing demand in 2010. We expect pulp prices to remain strong through the remainder of this year and into the first quarter of 2010 due to tight global inventories.

West Fraser has earned $88 million of Green Transformation credits under the federal government's Green Transformation Program. We are working hard to identify the projects that will best enhance our long-term competitiveness. These projects must be completed by the first quarter of 2012.

Labor contracts in the BC lumber industry expired in June. Negotiations have proceeded at an exceedingly slow pace with very little progress to date. We hope that the parties will be able to reach an agreement on a new contract that recognizes the need to improve efficiency and reduce costs in order to preserve existing jobs and create new jobs through further investment and diversification.

I will now ask Gerry Miller to make some comments.

Thanks, Hank, and good morning, everyone.

Last night we posted a brief presentation that highlights some of the financial points that we will be making on this call. The presentation is located on our website, www.WestFraser.com. It's not necessary that you refer to this presentation during the call as we will not be referring to the presentation directly.

Our net loss for the quarter was CAD198 million or CAD4.64 per share. Adjusted for asset impairments including the future income tax asset valuation allowance, the foreign exchange gain on the translation of our US-denominated debt, and the gain on our derivative financial instruments the loss was about CAD34 million or CAD0.78 per share.

EBITDA, which we define as operating earnings plus depreciation and non-cash asset impairment charges, was CAD42 million compared to negative CAD10 in the last quarter. Each of our business segments was EBITDA positive in the quarter.

Selling, general, and administrative expenses were reduced by 9% in the third quarter compared to the third quarter last year and nearly 8% in the three quarters this year compared to the three quarters in 2008. Interest expense was likewise lower, reflecting lower interest rates and lower total debt.

Overall for the quarter we generated net cash before any debt changes of CAD79 million. Of the total CAD16 million was generated from operating activities and CAD64 million came from working capital reductions.

Working capital and capital spending continued to be very tightly controlled as we manage our cash flows through this continuing market downturn. Working capital in particular, excluding any seasonal effect of log inventory reductions, has been a significant source of cash this year.

Our quarterly earnings include four items that are non-operating or otherwise unusual. Going through these from small to large, we had a net gain on derivative financial instruments of CAD7 million, CAD5 million after-tax. Included in this are gains and losses on US dollar foreign exchange contracts and NBSK swap contracts. The derivative financial instruments outstanding at the end of the quarter are disclosed in the financial statements.

We had a foreign exchange gain on our US-denominated long-term debt as the Canadian dollar strengthened compared to the US dollar by about CAD0.75 from the end of the second quarter. The $300 US-denominated debt is due in 2014.

Included in our earnings is a valuation allowance on our future income taxes of CAD85 million. This allowance relates to income tax loss carryforwards, the benefit of which may not be realized within a reasonable period going forward. However, as the actual carryforward period of these losses is quite long, we fully expect to get the benefit of these losses in the future.

The last of the unusual items is the asset impairment charges of CAD155 million. In each accounting period we review the valuation of our assets and, as required by Generally Accepted Accounting Principles, we adjust asset values down if we determine that estimated future cash flows are not sufficient to recover the cost of the particular asset.

Included in our asset impairment charges for this quarter are charges related to certain sawmill assets that are currently curtailed. The total of these is CAD17 million. The most significant charge relates to the valuation of the Eurocan mill which we announced will be permanently shut down at the end of January. The total of this impairment is CAD138 million, which includes the fixed assets, certain inventories, and a write-off of deferred maintenance shutdown charges.

Included in the announcement of the Eurocan shutdown is an estimate of future cash charges related to the shut down. A total of this estimate is CAD70 million and includes an estimate of severance costs, contract cancellation costs, and an estimate for future costs associated with the physical closure of the mill and the site. Of the CAD70 million approximately two-thirds will likely be included in Q4 earnings with the balance included in earnings in future quarters.

In the MD&A we have provided selected, previously undisclosed financial information regarding this operation. We expect that once the mill is closed in the first quarter of 2010 we will disclose the ongoing costs of closing the mill as a discontinued operation. While we estimate that the future cash cost of closure will be CAD70 million, we believe that this will be offset by the cash provided through the reduction of working capital that is currently invested in the business.

At the end of the quarter including the asset impairment and tax valuation allowance charges, our net debt-to-total capital ratio was largely unchanged from the end of the previous quarter and from the end of last year at approximately 23%. During the quarter we reduced our net borrowings, total borrowings less cash, by CAD79 million and for the three quarters we reduced our net borrowings by CAD111 million.

Subsequent to the end of the quarter we fully repaid our 2009 debentures using our cash balances and our credit facility. At the end of the quarter we had liquidity of about CAD500 million after allowing for the debenture maturity in October. The next scheduled debt repayment is in March when 100 million term notes become due. With this repayment considered, our liquidity remains above CAD400 million.

In September Standard & Poor's downgraded our debt to BB flat with a continuing negative outlook. This is the second downgrade by S&P this year. The downgrade results from the continuing poor fundamentals of the housing and lumber markets and the affect on our profitability. We recognize the benefits of having an investment grade rating and will work diligently to improve our ratings in the future.

With that, Hank, I will turn it back to you.

Thank you. Operator, I think that is the end of our presentation so we would be available now for questions.

(Operator Instructions) [Bill Hoffman].

Good morning. I wonder if you could address sort of two things. One, the first thing you had -- a present turnaround in the panel's business in the third quarter obviously driven by pricing. Could you just give us a little bit of guidance on how you are seeing demand here in the fourth quarter? We know about the normal seasonality. But I am just wondering if there is anything more than normal seasonality.

And then the second one is also in the pulp segment trying to get a sense of your view on pulp markets. You talked about strength going into Q1 2010. We are obviously seeing prices go up here and just wondering what you are seeing from an order standpoint there.

As it relates to the panel segment, we had strong pricing in the third quarter, as I mentioned, but definitely demand has fallen off significantly. Prices have fallen dramatically and I think that housing is not all that bad in Canada. So I guess we attribute it primarily to the traditional, as I mentioned, on my report the traditional slowing of construction in Canada during the fall and winter months.

Although I have to say that construction is not as good as it was a year ago this time, so there is probably some -- it relates probably to a weaker environment. But still Canada is not doing that bad so we would expect -- I think we would expect pricing to rebound somewhat as we get through into the new year.

In terms of pulp, the fundamentals are pretty darn strong. China is a big part of the strength in the market. Inventories throughout -- global inventories, as I mentioned, are very constrained so we don't see any reason not to anticipate pretty good prices well into next year.

And the pulp side, do you expect to be running here flat out until second quarter when you get to your next maintenance downtime? Is that the schedule?

Yes, we will be running full.

Okay. Quick question for Gerry just from a working capital standpoint. Can you just help us with this seasonal log build? When do you start moving into the seasonal log build and how big do you expect to have to go this year?

I think, Bill, our seasonal log build is -- kind of starts later this month and maybe into December and we will go through until March I think. You can kind of go back and look at our results in the past and get what it has been in the past. With operating at less than 100% we don't expect it to be as large as it has been in prior years.

Okay, thank you. And then just sort of following on that one, down in the south with the wet conditions are you able to get in and get logs at this point in time or what is the status down south?

No, we have had serious disruptions at several of our plants primarily in the western part of the south. We are hoping to get some of them back to full operation this week, but we are very weather dependent down there because we carry such low log inventories.

Okay, thank you. That is helpful.

Sean Steuart.

Good morning, everyone. A couple of questions; wanted to follow up on the panel earnings this quarter. You talked about, Hank, the strong rebound in Canadian plywood prices. I am just trying to reconcile that with your shipments this quarter which were down about 17% sequentially. Is some of the price strength maybe related to just volume constraints this quarter as well?

Well, you are just going to have to let me think about that for a minute, Sean. You know, our shipments -- I guess I am going to have to pass this one over to somebody who knows what he is talking about.

Well, I don't think anybody knows what is going on there, Sean, to be perfectly honest.

I will follow up maybe.

I apologize for that. You caught us on that one. We will get back to you on that, Sean.

Okay. Just one other question for Hank or Gerry I guess. You didn't really spend anything on CapEx this quarter. Just wondering what we can expect for the fourth quarter and if you have formulated any budget for 2010. And if so, how much of what you are going to spend in 2010 might be offset by the Green Transformation proceeds?

Okay. Well, look, we have got mass confusion in this room related to that last question so we will try to recover here a little bit.

We spent very little in the third quarter. We don't expect to spend much in the fourth quarter either, although we do have some significant payback items that we are going to start to do a little bit with.

We are in the process of developing our 2010 capital operating budget. And as I said, our fundamental goal here is to maintain a strong balance sheet and so we will weigh our capital plans with making sure that the balance sheet stays strong as we have done over the last two or three years.

We do expect some time this quarter to complete the Weyerhaeuser timber transaction, which we bought some timber from them down in the south Cariboo and that probably is going to be -- we would expect that to be finalized this quarter. And we have previously disclosed the cost of that to the Company.

Okay, that is all I had. Thanks, guys.

Thank you. There are no further questions registered at this time. I am sorry, Daryl Swetlishoff.

Thanks. Just a question on -- maybe you could give us some color on the structure of the Alberta industry on the lumber side and what are your expectations with respect to whether we end up in surge going forward next year?

I think we will be in surge for part of next year. I can't speak for any of the other operators in Alberta, but we have got some pretty good operations over there. Currently I don't see them operating at a different rate than they are operating today and we are in surge today. So I think it just -- we would expect a little bit more of the same going into next year.

Okay, thanks. That is all I had.

Thank you. There are no further questions registered at this time.

Well, I might just -- after massive study here I am told that we reduced our plywood inventory below sustainable levels in the second quarter. So I guess we are just building back to a more reasonable inventory level in the third quarter. Apologize for the confusion.

So if there are no more questions, we appreciate everybody joining the call. Thank you very much and we will talk to you in the fourth quarter. Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation and have a nice day.