West Fraser Timber (WFTBF.PK)

Q3 2011 Earnings Call

October 25, 2011 12:00 pm ET


Henry H. Ketcham - Chairman, Chief Executive Officer and President

Edward R. Seraphim - Chief Operating Officer and Executive Vice-President

Larry S. Hughes - Chief Financial officer, Chief Legal Counsel, Vice President of Finance and Secretary


Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Pierre Lacroix - Desjardins Securities Inc., Research Division

Richard A. Kelertas - Dundee Securities Corporation, Research Division

Stephen Atkinson - BMO Capital Markets Canada

Daryl Swetlishoff - Raymond James Ltd., Research Division

Sean Steuart - TD Newcrest Capital Inc., Research Division



Good morning, ladies and gentlemen. Welcome to the West Fraser Timber Co. Ltd. Third Quarter 2011 Results Conference Call.

During this conference, West Fraser's representatives 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 Risks and Uncertainties in the company's annual MD&A, which can be accessed on West Fraser's website or through SEDAR and as supplemented by the company's 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.

Henry H. Ketcham

Thank you, operator, and good morning and welcome to West Fraser's Third Quarter Conference Call. Yesterday, we reported adjusted earnings from continuing operations of $3 million on sales of $705 million. Our adjusted earnings are a true reflection of how the company performed during the quarter.

Larry Hughes, our CFO, will discuss our earnings in more detail in a few minutes.

EBITDA during the quarter was $66 million versus $62 million in the previous quarter. The depreciation of the Canadian dollar versus its U.S. counterpart improved our operating earnings during the quarter, but resulted in a greater long-term debt liability due to our U.S. borrowings.

From an operational standpoint, the company performed well during the quarter, although lumber production declined by roughly 4% of the to slightly lower product activity at our Canadian division, partly due to the implementation of capital projects at some of the mills and reduced operating hours at our U.S. division, reflecting very weak lumber demand and prices.

Benchmark lumber prices were 2% higher for SPF and 2% lower for Southern Yellow Pine. This, combined with a lower overall efficiency of our U.S. mills versus our Canadian mills, resulted in a significant drag in our lumber earnings.

As we stated in the past, we'll need to continue to spend capital on our U.S. assets to bring them up to the same standard of efficiency that we enjoy in our Canadian mills. We're in the middle of that process right now with major projects underway at several of our mills.

Costs in our lumber division were well contained compared to the second quarter. However, compared to the third quarter of 2010, Canadian log costs are up 15%, while U.S. log costs are down 5%. The significant increase in Canadian log costs can be attributed to increased purchase log costs, higher fuel costs, longer haul distances and a very tight labor market. Lumber shipments through the quarter were higher than production, which has allowed us to keep our lower inventories at acceptable levels.

Mountain pine beetle infestation in B.C. continues to negatively affect our productivity, rate recovery and lumber recovery. The beetle has not reached epidemic proportions in most parts of Alberta at this point, and we're hopeful that continued government industry collaboration, combined with a cold winter, will further retard the spread of the beetle in that province. To date, we are not experiencing any significant reduction in operating parameters at our Alberta mills.

On November 9, Canada will formally respond to the charges leveled against the B.C. industry under the Softwood Lumber Agreement. We will vigorously defend our actions, and the case will go to arbitration in February. While we are confident of the merits of the Canadian defense, we cannot predict the outcome.

Our panel division performed well during the quarter, with our 3 plywood mills operating at full capacity, while our MDF and LVL operations continued to operate on reduced schedules to match supply with demand.

The Slave Lake fire in May adversely affected plywood productivity in the quarter following production interruptions at the Slave Lake veneer mill. Plywood prices and MDF prices were slightly higher versus the second quarter, but lower than last year by 5% and 8%, respectively.

While the plywood market in Canada remains strong, prices continue to be under pressure due to the significant increase in imports from the U.S. as a result of the weak housing market in that country and the large swing in currency valuations over the last couple of years.

Our pulp & paper division also performed well in the quarter. Production was good at all mills, although we continue to periodically curtail production at our Alberta-based mechanical pulp and newsprint mills when electricity costs reached certain specific levels. At that point, the company makes more money selling electricity onto the grid than making pulp. Electricity-related curtailments resulted in a reduction of several thousand tonnes in the quarter.

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