West Fraser Timber Co Ltd (WFG) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Co. Ltd.'s 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. 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 are supplemented by our quarterly MD&As. Accordingly, listeners should exercise caution 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.

Okay, thank you operator, and good morning and thank you all for joining our 2009 fourth-quarter conference call. As you can imagine, we are going to be putting 2009 into our rearview mirror. The Canadian forest industry has never faced a more challenging period.

In 2009, housing starts reached post-depression lows, lumber prices and inflation adjusted dollars dropped to levels not seen since the 1970s and the Canadian dollar continued to rise against the US dollar. As a result, Canadian softwood lumber production dropped to 55% to 60% of capacity by the end of the year.

In addition, pulp prices dropped significantly in the first six months of the year before posting a strong rally in the latter half of 2009 due to the strength of the Chinese market. With all of these challenges, I am quite pleased with the way West Fraser has weathered this storm and I'm particularly pleased with our fourth-quarter results.

While the Company reported a loss of CAD20 million in the fourth quarter, when you deduct the nonrecurring asset impairment restructuring charges, the foreign exchange gain on long-term debt, and a tax adjustment, we actually had a profit of CAD12 million for the fourth quarter of the year. In addition, we produced relatively strong cash flow which allowed us to end the year with a very healthy balance sheet.

With respect to our lumber and panel operations, we continued to drive down our costs and improve our efficiency, particularly at our Canadian lumber and panel operations. During the year, we eliminated third shifts at three of our Canadian mills, reduced hours and took temporary downtime in addition to the earlier indefinite closure of two mills. As a result, our stated Canadian lumber capacity has dropped from 4 billion feet to 3.5 billion board feet.

In the fourth quarter, we ran our mills at 85% of this capacity and we are currently running at 95% of capacity. In three weeks, we will start up a third shift at our Hinton, Alberta sawmill which will substantially reduce costs at that mill and also reduce wood chip costs into our Hinton Kraft pulp mill.

Our three plywood plants ran at full capacity during the fourth quarter while our two medium density fiberboard mills ran at about 60% of capacity due to weaker MDF markets. Finally, our laminated veneer lumber plant ran to orders but produced solid EBITDA given the reduced running rates. On balance, we had a good quarter in our Canadian wood products division.

Our 15 US mills operated at 60% of capacity during the fourth quarter due to very wet weather in many areas in the south which significantly reduced log availability. As a result, southern yellow pine lumber prices have rallied strongly reflecting reduced supply due to the wet weather. During the quarter, three of our US mills continued to be indefinitely curtailed.

At the end of the fourth quarter, our lumber, panel and log inventories were at optimum levels in Canada while we continued to struggle with log supply at several of our US mills. We also had a strong quarter in our pulp and paper segment, particularly when you eliminate the costs associated with the closure of our Eurocan operation.

Our pulp division turned in a strong performance. We continued to improve productivity at our two mechanical and two Kraft pulp mills. This division ran at full capacity during the quarter. Our joint venture Alberta newsprint mill also ran well in the quarter after taking four weeks of downtime in the third quarter to install new equipment on the paper machine. Even with declining newsprint demand and pricing in North America, ANC continues to have a very good cost structure backed up by superior product quality.

Our Eurocan mill produced its last reel of paper in January and is currently in the process of final shutdown. We will have ongoing costs at this facility for the next several quarters as we complete the shutdown and remediate the site.

Going forward, our pulp and paper division will consist of 11.1 million tons of competitive lower-cost mechanical and Kraft pulp and 135,000 tons of low-cost newsprint. In 2010, we are cautiously optimistic about the business. We expect pulp prices to stay strong at least through the second quarter. The continuing strength of the Chinese economy is critical to maintaining tight supply demand fundamentals in this business.

With respect to wood products, we believe that supply has finally reached some sort of equilibrium with demand. We are cautiously optimistic that housing starts will improve to above 700,000 units in 2010 which may allow for periods of better pricing during the year. But the fundamentals of the housing business remain very challenged due to the overhang of foreclosures in the US. So we are planning for only a moderate increase in lumber demand and prices in 2010.

We continue to work to develop offshore markets for our lumber business. In 2009, we gained market share in Japan and have expanded our shipments to China as well. There is a lot of potential in the Chinese market in the future and we intend to be a major participant there.

I'll now ask Gerry Miller to make some comments.

Thanks, Hank, and good morning, everyone. As Hank said, our net loss for the quarter was CAD20 million or CAD0.47 per share. The loss includes asset impairment and restructuring charges, a gain on the translation of our US dollar denominated long-term debt, and an income tax valuation allowance. The asset impairment and restructuring charges relate mostly to the decision to exit the linerboard and kraft paper business at Eurocan and close the mill.

The charges include accruals for severance and other closure costs. Additional costs which we are not yet allowed to accrue will be recorded and expensed in future periods. We anticipate that these additional costs will not exceed CAD20 million.

The foreign exchange gain on our US dollar denominated long-term debt resulted as the Canadian dollar strengthened compared to the US dollar by about CAD0.035 from the end of the third quarter. The $300 million US dollar denominated debt is due in 2014. As in the previous quarter, included in our earnings is a valuation allowance on our future income taxes in this quarter of about CAD3 million. This allowance relates to the income tax loss carryforwards, the benefit of which we are not allowed to recognize for accounting purposes. 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.

Excluding these items, we would have reported earnings of CAD12 million or CAD28 per share.

For the quarter, EBITDA, which we define as operating earnings plus amortization and non-cash asset impairment charges -- sorry -- that was CAD0.28 per share.

EBITDA, which we define as operating earnings plus amortization and non-cash asset impairment charges, was CAD17 million. Restructuring charges of CAD47 million mostly related to the closure of the Eurocan mill were included in EBITDA. Adjusting for these nonrecurring restructuring charges, EBITDA would have been CAD64 million in the quarter compared to CAD42 million in the last quarter.

After adjusting for restructuring charges, each of our business segments was EBITDA positive in the quarter.

Selling, general and administration expenses were higher in the quarter than in the third quarter, mostly the result of higher share based compensation costs compared to the third quarter. Excluding the expense related to share based compensation, selling, general and administrative costs were up marginally in the current quarter compared to the previous quarter but for the year, they were down 6%. Interest expense was lower in the quarter reflecting our lower total debt.

In the quarter, we used cash of CAD22 million in operating activities. This includes a seasonal buildup of log inventories and pension funding payments. Pension funding required in 2010 is expected to be approximately CAD22 million compared to funding of CAD92 million in 2009.

In the fourth quarter, we repaid the debentures that were due in October. The repayment was made from cash balances on hand as well as we accessed our credit facility.

Capital spending was CAD6.5 million compared to about CAD1 million in the third quarter. The capital spending increase was mainly in our lumber business.

Overall, our net borrowing increased CAD21 million in the quarter, which is attributed to seasonal increase in our log inventories. We continue to be very focused on maintaining working capital at appropriate levels across the organization.

At the end of the year, our total borrowings was about CAD495 million and our debt to cap ratio was about 24%. In the third quarter, we initiated the process to amend our credit agreement to increase the debt to total capitalization ratio that is used to trigger an interest coverage test in the agreement. The amendment also provides for an exclusion of certain subordinated debt from the calculation of the debt to capitalization ratio for the purpose of the credit agreement. In exchange for the amendment, we agreed to grant security on our assets.

The amendment provides the Company with a significant increase in borrowing flexibility that may be required in the event of an unexpected economic downturn. The banking amendment was concluded in January. With the amendment and the year-end deposition, we have a strong liquidity position going forward.

Subsequent to the end of the year, we repaid the CAD100 million term note that was due in March. The repayment will reduce our borrowing costs in the current quarter.

The last comment on the balance sheet is that in this quarter we expect to receive a refund of 2006 taxes resulting from our 2009 loss carry back. We estimate the refund to be approximately CAD75 million.

Hank, I will turn it back over to you.

Okay, thanks Gerry. In conclusion, we are cautiously optimistic about our prospects for 2010. We believe it is possible lumber markets may improve slightly and we are well positioned to take advantage of any uptick. We are running at 95% of capacity, our lumber inventories are at optimum levels, our log inventories in Canada are also at optimum levels while our US log inventories are still challenged at certain facilities.

Our cash flow is good and our balance sheet is strong which should allow us to begin spending money on high payback capital items as soon as we are sure that the worst is behind us.

With that, operator, I'll turn it over to you for a question period.

(Operator Instructions) Bill Hoffmann, RBC Capital.

Yes, good morning. Hank, I wonder if you could talk a little bit about -- you mentioned that you are running at a 95% operating capacity in the sawmills right now. And I just wonder what amount of volume flexibility you still would have by adding additional shifts as opposed to any potential restart of the permanently idled or temporarily idled facilities?

Well, at 95% capacity, we are going to be putting a shift on as I mentioned in Hinton in early March. We've got a little bit of leeway but not very much.

And then with regards to the other sites, what will it take for you guys to start to address wanting to add those back into the market, the other indefinitely idled sites?

Well, we've got -- we haven't really addressed that at this point in time. I don't see that happening any time in the near future in these operations.

Okay. Thank you. And then Gerry, just a question for you. The Eurocan wind down from a working capital standpoint, can we assume that there's CAD30 million or CAD40 million of working capital release as you shut down that site?

Well I think if you look at -- we had about CAD90 million of working capital involved in that business so we expect to get that full amount as we wind down the business.

Okay. And then with the release there, that working capital plus your tax refund, do you just want to talk about your capital structure strategy here. Is that all for debt reduction or target for capital spending targets this year?

I think we are going to reduce our debt and we are going to look at our capital options also. So I mean it's not like we have it earmarked for anything specifically.

And what do you expect to spend on capital in 2010?

I think our capital spending would be roughly CAD90 million.

Okay. Thank you.

Pierre LaCroix, Desjardins Securities.

Thank you very much. Just one question on your strategic view going into the next cycle and knowing that you've been quite active towards 2005 and 2006 on the M&A front. How do you position yourself into the next cycle? Do you expect to be active in the early part of the cycle or you may prefer to wait for good cash flows before getting active again on the M&A side?

Well I can't really comment on that, Pierre, but I will say we've got a lot of high payback capital items internally. We've got lots of stuff we can do internally in our Company. And we also -- we did lose our investment grade rating and we are very intent on getting that back as soon as we can.

Okay, that's fair. Maybe just a follow-up on that and given the Alberta infestation with pine beetle, is it something that urge yourself a little bit more in term of diversifying away from BC and Alberta in terms of eventual expansions?

Well, we want to -- we are at a size where we would like to continue to expand our geographic diversification. The mountain pine beetle, we haven't given up in Alberta. I mean, the mountain pine beetle is there but the provincial government is attacking it pretty aggressively as is the industry. So we still have lots of opportunities like I say inside our own Company whether it be in Alberta BC or the US south to improve our operations and we are going to be quite focused on that.

Okay, thank you very much.

(Operator Instructions) Sean Steuart, TD Newcrest.

Thank you, good morning, everyone. A couple of questions. Gerry, just wondering if you can help us reconcile the unit costs in the lumber segment. Can you go through just for Q4 the inventory revaluation, the impact that had and also the reforestation accrual adjustment you would have recorded this quarter?

So Sean, the reforestation adjustment in the quarter was CAD16 million before tax of course before tax. And the impact as a result of the inventories was around CAD12 million for the Company and about I think about CAD8 million for the lumber division.

Okay. Next question, Hank, the lumber shipments this quarter were down a little bit sequentially. That's a different trend than we have seen from some of your competitors this quarter where we saw some growth from Q3. Can you just speak to your sales mix this quarter geographically, how much was going to the states versus Canada versus offshore?

Well, basically we shifted our production during the quarter and that's a result of having broader inventories well into line earlier in the year. So I think that we don't really have much to add to that, Sean. And our shipments are predominantly US and Canada with roughly 10% going offshore.

And the split offshore between Japan and China?

A little bit more in Japan than China but China is a growing market. We have taken market share in Japan too so we have increased our shipments to Japan and are continuing to increase our shipments to China.

Okay. And then Gerry, just one last question. The CapEx guidance you gave of CAD90 million for 2010, I am assuming that's net of the credits in Canada under the green transformation program?

Yes, Sean, that does not include the green transformation credits that we would have and that we've got a long list of very good programs for those. And it also includes just so we are clear the timber acquisition that we announced last year that we have not yet closed.

Okay, that helps. Thanks very much guys.

Benoit Leprade, Scotia Capital.

Yes, my question has been answered already. Thank you.

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

Well, thank you operator and thank you all for joining the conference call and we will talk to you in another quarter. Thank you.

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