West Fraser Timber Co. Ltd. (WFG) Q3 2010 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. Welcome to the West Fraser Timber Company Limited Third Quarter 2010 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 plan. Including those matters described under risks and uncertainties in our annual MD&A, which can be accessed on our website, through CEDAR 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, good morning and welcome to West Fraser’s Third Quarter Conference Call. Joining me today is Gerry Miller, our Executive Vice President of Finance and CFO, and several members of our senior management team. We’ve posted a summary of this presentation on our website at www.westfraser.com for those of you who would like to follow along on that. Yesterday, we reported the third quarter net earnings after discontinued operations of $45 million compared to $63 million in the previous quarter. Lower -earnings in the third quarter reflects significantly lower prices for lumber and plywood compared with the second quarter. EBITDA during the quarter was $109 million and cash provided from operations was $116 million. As a result of our strong cash generation of $410 million through the first three quarters of the year, we ended the quarter with a net debt to capital ratio of just 6%. Our strong balance sheet and cash generation has allowed us to pay down our operating line, commit to a more normalized capital program for the next 12 months of at least $150 million in our wood products division and double our quarterly cash dividend from $0.03 to $0.06. Gerry will more fully discuss the financial position of the company in a few minutes. Before that, I would like to make few comments on the company’s wood products and pulp and paper divisions. Starting with wood products, our lumber division produced EBITDA of $49 million in that quarter compared to $75 million in the second quarter. The reduction on EBITDA is primarily due to a 16% decline on SPF of lumber prices versus the second quarter and a 34% decline in Southern Yellow Pine prices. As a result of the more precipitous drop in Southern Yellow Pine prices, our U.S. lumber division was a significant drag on earnings in the quarter. Our Canadian lumber division operated virtually full capacity while our U.S. operation operated at 75% of capacity reflecting the higher cost structure in several of our mills and the collapse of Southern Yellow Pine pricing, particularly for wide woods in the quarter. In Canada, our well-capitalized and efficient mills performed well. In addition, we benefited from strong exports to Japan and China during the quarter. Shipments to China have been particularly strong and have supported stronger SPF pricing in the North American market. The beetle epidemic in the interior of B.C. has pretty much run its course. Most of the mature pine in the central interior is dead or dying. In those mills in which we are processing predominantly dead pine, our lumber recovery, productivity and grade outturn continued to suffer. Our mill personnel have done a very fantastic job of adapting to the declining wood quality through equipment modification and improved processing techniques. Cold weather in parts of Alberta last winter has temporarily retarded beetle activity in some of our operating areas giving industry and the provincial government more time to attack the affected areas. Subsequent to the end of the quarter, the U.S Government requested consultations with Canada relating to stumpage charge for beetle-killed timber in BC interior. If the dispute is not resolved through consultations, either side may require that the dispute be referred to arbitration. Last week, we reached agreement with the United Steel Workers of Canada on a new 4-year contract covering most of our unionized mills in BC. The ratification process is currently underway. Our panel division performed well in the third quarter producing EBITDA of $20 million and an EBITDA margin of 18%. Our plywood mills operated at full capacity. Our plywood prices declined significantly towards the end of the quarter as U.S producers ship more heavily into the Canadian market due to the continuing weakness in the US housing market and the strengthening Canadian dollar. Our MDF and LBL operations continue to operate in a reduced-base reflecting the significant oversupply in these markets. Our pulp and paper division operated at full capacity during the quarter and benefited from continuing strong pricing from BCTMP and NBSK. We’ve built an excess pulp inventory early in the quarter due to reduced purchases from China. But sales volumes have improved recently and we anticipate bringing our inventories into line in the coming weeks. Global pulp inventories are in good shape and while prices have declined recently, we expect them to stay reasonably strong in the coming months. Most of the closure cost of our Eurocan operation are now behind us. We’re in the process of selling whatever equipment we can and should sell all our remaining product inventory by the end of the year. Looking forward, we believe wood product markets will remain depressed for the foreseeable future due to overbuilt housing market in the US. However, the growing strength from the Chinese market combined with our low-cost structure and our commitment to invest significant capital in our facilities in the coming months will we believe allow us to outperform the industry. In addition, the continuing strength in the pulp markets and improving cost structure of our kraft pulp mills will drive further earnings improvements in this division. Now, I will turn you over to Gerry to discuss our financial position. :

Thanks Hank and good morning everyone. For the quarter we earned $45 million after discontinued operations on sales of $707 million. EBITDA in the quarter was $109 million representing an EBITDA margin of 15%. Sales, EBITDA and earnings were lower in the quarter compared to the second quarter mainly the result of lower prices for both SPF and Southern Yellow Pine lumber. Our EBITDA and EBITDA margin this quarter, compared to the previous quarter were lower in the lumber segment, similar in our panel segment and higher in our pulp and paper segment. Our lower consolidated EBITDA and earnings compared to the second quarter are partially the result of higher selling, general administrative expenses which relate mostly to an increase in share-based compensation cost. The change in share-based compensation cost was $18 million in the quarter compared to the previous quarter and expense of $8 million in the third quarter and a recovery of $10 million in the second quarter. The higher expense in the current quarter relates to an increase in our share price which closed the quarter up 15% from the beginning of the quarter. Interest expense was slightly lower from the previous quarter as average debt levels were lower in Q3 than in Q2. Also, one of our three rating agencies, Standard & Poor’s, increased its debt rating to BB+ in September. This rating increase only marginally reduced our interest expense in Q3 as the rating change was made late in the quarter. The change will reduce the future borrowing rates and stand by charges on our operating line. In the quarter, we recorded a foreign exchange gain on a long-term debt of $11 million. The gain is a result of the strengthening of the Canadian dollar by nearly $0.035 from the beginning of the quarter to the end of the quarter and the translation effect on our US denominated $300 million debt. The income tax rate in the current quarter was slightly higher than in the previous quarter, mostly due to the earnings mix across the various jurisdictions in which we operate. The resulting diluted earnings per share after discontinued operations was $1.04, in the quarter compared to a $1.46 in the second quarter, Diluted earnings per share for the three quarters of the year was $2.95. Our earnings from continuing operations resulted in a positive cash flow from operations of $79 million in the quarter down from $130 million last quarter. Working capital was reduced in the quarter providing cash of $38 million. Maintaining optimal working capital levels remains our key focus across our company. In the quarter, we increased our dividend to $2.5 million per quarter. In the current quarter, we invested $10 million in property, plant and equipment. This compared to about 6 million in capital investment in the second quarter. In September, we announced an additional capital that would be directed to strategic profit improvement projects in our lumber business over the next 18 months. This capital is in addition to the green transformation capital which has been allocated in our pulp and paper business. Overall, we generated a $113 million in the quarter from continuing operations. From discontinued operations, the closure of the Eurocan mill and the associated linerboard and kraft paper business, we generated $6 million from a reduction of inventories and the collection of accounts receivable. The closure of that operation is proceeding as planned with the expected total cost of the closure to be less than the guidance we provided in Q4 2009. In addition, we are moving on selling various assets of the site and these asset sales will continue to next year. On the balance sheet, with our positive cash flows, we have been able to increase our cash balance and reduce our net debt position. At the end of the quarter the net debt to capitalization ratio was approximately 6% down from 12% at the end of the last quarter. And as I mentioned earlier, one of our ratings agencies, Standard & Poor’s increase debt rating from BB- to BB+ near the end of the quarter. This upgrade puts our rating by each of the 3 rating agencies one notch below investment grade where our credit rating was before the downturn.

That’s it from us. Operator, we will now be ready to take questions.

Thank you. (Operator Instructions) The first question is from Richard Skidmore of Goldman Sachs, please go ahead.

Pierre Lacroix - Desjardin Securities:

Pierre Lacroix - Desjardin Securities:

Pierre Lacroix - Desjardin Securities: Henry H. Ketcham: Pierre Lacroix - Desjardin Securities:

Richard Skidmore – Goldman Sachs:

Richard Skidmore – Goldman Sachs:

Richard Skidmore – Goldman Sachs:

Richard Skidmore – Goldman Sachs:

I think basically, our view of it is that the Chinese market, they really took a bit of pause through the first two months of third quarter and now they have been back much more active. So whether that will carry on for the next several months, we can’t say, but I’d say for the last 2 months or so, it’s been fairly back to normal. Richard Skidmore – Goldman Sachs: Great. Thank you.

That is probably roughly correct. Yes. Paul Quinn – RBC Capital Markets:

Into Asia it’s 50% . Paul Quinn – RBC Capital Markets:

Paul Quinn – RBC Capital Markets: Okay. I guess the question, maybe you can answer in a general way, do you see the cost improvement at your kraft side continuing over the next 4 quarters?

Well, I think that’s our expectation. I think a big part of it is, I think you saw that in our record production and we expect that to carry on definitely. Paul Quinn – RBC Capital Markets: And just maybe a question, I guess back to you, Hank. Just on capital structure you’ve now got a squeaky-clean balance sheet once again. You’ve opened up sort of the company wallet for some CapEx expenditures, do you start to feel confident about further growth opportunities at this point?

I think just like probably everybody else we have no idea what the future holds in terms of the U.S. economy. So, we will continue to be, I would say, cautiously aggressive in terms of our capital spending. So our number one priority is to continue to invest in our existing operations and certainly we are interested in strategic opportunities and we just have to look at whatever comes along on an individual basis. Paul Quinn – RBC Capital Markets: Thanks guys. Henry H. Ketcham: Thank you.

(Operator instruction). There are no further question registered at this time.