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Executives

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

Analysts

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

Pierre Lacroix - Desjardins Securities Inc., Research Division

Richard A. Kelertas - Dundee Securities Corporation, Research Division

David Elstone - Equity Research Associates

Stephen Atkinson - BMO Capital Markets Canada

Daryl Swetlishoff - Raymond James Ltd., Research Division

Sean Steuart - TD Newcrest Capital Inc., Research Division

West Fraser Timber (OTCPK:WFTBF) Q3 2011 Earnings Call October 25, 2011 12:00 PM ET

Operator

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 excise 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% due 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 during 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 reach 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.

During the quarter, mechanical pulp prices increased marginally, but are off roughly 12% from the third quarter of 2010.

NBSK prices were slightly lower in the third quarter and off about 7% from the same quarter last year. We took our Hinton Alberta and NBSK mill down on October 1 for a major capacity expansion and cost-reduction program. It's currently in start-up mode.

We are proceeding well in our $88 million of Green Transformation projects, which when completed, will improve production at certain mills, reduce costs and improve our environmental performance.

Looking forward, we don't anticipate any improvement in the U.S. housing market for the foreseeable future. We anticipate continuing strong demand for our products from Asia, particularly China.

Our third quarter lumber shipments to Asia amounted to roughly 25% of our total lumber shipments. We're concerned about some weakening in the pulp market, as inventories are rising and pulp pricing is coming under pressure.

In spite of these headwinds, we're confident that our strong balance sheet, our reasonable cash flow and our significant capital spending program will ensure that we remain one of the low-cost producers in the industry. Given our geographic diversification, our low cost structure, our modern and efficient mills and our very strong balance sheet, we're in a good position to continue to weather this 5-year depression in our industry and benefit significantly when markets improve.

I'll now turn it over to Larry Hughes to more fully discuss our financial results.

Larry S. Hughes

Thank you, Hank, and thanks to everyone joining us today. We have a series of slides on our website in the Investor Relations presentation section that I'll be referring to during this presentation.

Slide 2 contains an advisory concerning our use of terms such as EBITDA, adjusted earnings or loss and adjusted earnings per share.

For the third quarter, we reported earnings from continuing operations of $6 million, resulting in basic earnings per share of $0.14. Earnings after discontinued operations for the quarter of $37 million included the gain from the sale of the Eurocan deep sea wharf, which makes this result not particularly useful as a measure of our operational performance.

As shown on Slide 3, which reproduces part of Note 14 from our financial statements, the diluted earnings per share from continuing operations was negative $0.29 per share as a result of the required deduction from earnings of $18 million of the recovery on share options. We believe that because of the size and volatility of the share option expense or recovery, the earnings per share on a diluted basis is also not very useful as a measure of our operational performance.

Now for something that is hopefully more useful, Slide 4 reproduces a table found on Page 3 of our MD&A, which identifies and quantifies several nonoperational items, which affected our results. If we adjust the $6 million of earnings from continuing operations, which excludes the effect of the Eurocan wharf sale, to further remove that gains on the long-term equity-based compensation and the sale of the Terrace sawmill and then add back the $22 million loss related to the translation of U.S. dollar-denominated debt, the result is adjusted earnings from continuing operations of $3 million or adjusted earnings on a per share basis of $0.06 for the quarter, $37 million or $0.87 per share for the year-to-date.

Note that we have used the basic rather than the diluted weighted average number of shares in this calculation. As Hank mentioned, we believe that the adjusted earnings amounts more accurately reflect how the company's operations performed in the period.

Other nonoperational items include interest, which was essentially unchanged compared to the second quarter, reflecting ongoing low borrowings; gain on the translation of current U.S. dollar-denominated monetary items of $12 million compared to a loss of $1 million in the second quarter, reflecting a strengthening of the U.S. dollar against the Canadian dollar; and a $4 million provision for income taxes compared to $6 million in the previous quarter.

The company's effective tax rate for the quarter was 36.3%, compared to the statutory rate of 26.5%. The full reconciliation of the tax rate is included in Note 12 to the third quarter interim statements. The key items in the variance were: the foreign exchange loss on long-term debt, which is taxed at capital gains rates; the equity-based compensation recovery, which is nontaxable; and a $6 million change in the tax valuation allowance.

Under IFRS, we are required to revalue our defined benefit pension plans at the end of each quarter if changes flowing through other comprehensive earnings. For the third quarter, the effect of the revaluation was a charge net of income taxes of $82 million and for the year-to-date, a charge of $90 million. The actuarial gain or loss will fluctuate with changes in long-term interest rates and the return on planned assets.

Slide 5 is the summary of some key cash flow items. Cash generated from operating activities during the quarter, before working capital changes, was $57 million and after working capital changes was $77 million, compared to $54 million and $115 million in the second quarter, reflecting the reduction in the spring breakup log inventories in Canada during the second quarter.

Capital expenditures for the year-to-date, exclusive of Green Transformation Program projects, totaled $83 million. And we are expecting to spend about the same amount during the fourth quarter.

Our balance sheet remains strong with net cash on hand at the end of the quarter of $208 million and the net debt-to-capital ratio of 6%.

In the quarter, we also renegotiated our $500 million committed revolving line of credit to take advantage of reduced spreads and to extend its term to September 30, 2016.

Hank, that concludes my comments.

Henry H. Ketcham

Okay. Thank you, Larry. We'll now open the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Daryl Swetlishoff of Raymond James.

Daryl Swetlishoff - Raymond James Ltd., Research Division

Just a couple of questions. First, there's been some talk about potential changes to the U.S. building standard codes. I was wondering how that might affect West Fraser with your U.S. South operations?

Henry H. Ketcham

Right. Okay, Daryl. So yes, so there is an issue down there. It's currently under investigation. And so the code standards for Southern Yellow Pine are being reviewed. I think, there's a bit of a -- it's a bit confused right now, but I think early in the new year, we're going to be -- have more clarity on what the new standards might be, if they are changed, in fact.

Daryl Swetlishoff - Raymond James Ltd., Research Division

Are there any changes that you might make with respect to your MSR capacity just in anticipation or the risk that some of those building codes do in fact change?

Henry H. Ketcham

Well, we do have the ability to increase our MSR capacities. So that's a possibility for sure.

Daryl Swetlishoff - Raymond James Ltd., Research Division

Okay. Just the other thing I'm kind of interested in is, Hank, just your bioenergy strategy. Could you talk a bit about what your intentions are there? What you've done to date? How much capital you've allocated? And what you expect to get in terms of megawatts and how that might fit into the rest of your strategy going forward?

Henry H. Ketcham

Daryl, you're really laying into that one. So -- I mean, we're -- I mean, like others, I think we've got some great programs underway with our $88 million of Green Transformation funding to -- and the range of projects range from cogen, more electricity to electricity conservation. Some of it will improve productivity at our mills. And going forward, we do have a small group that is working, who are committed to building a bioenergy business in our company. We're at the early stages there, but we consider that to be an area that we're going to really focus on in the future.

Operator

Our next question is from Liliana Tzvetkova of Dundee Securities.

Richard A. Kelertas - Dundee Securities Corporation, Research Division

It's Richard Kelertas. Hank, could you give us a little bit more detail or maybe, if you can, year-over-year and quarter-over-quarter, you were indicating that you've seen -- and I guess this is stating the obvious, recovery and yield impact from the pine beetle. That's been going on for a while. Did it accelerate in the quarter for you, or did you see it -- or have you made changes to the way you're doing some of your hedging and some of your processing that you've been able to stem the tide, or has it accelerated for you?

Henry H. Ketcham

I don't think it's getting any better. We do -- we're constantly working in our mills to find new and better ways to improve the process, to mitigate the issues. But the wood is getting drier. Fortunately, we're able to start getting into some more green wood in some of our areas now, so that's what's really mitigating any further decline in the deterioration of the pine. But our lumber recoveries and our grade recoveries and our productivity continue to suffer. I wouldn't say it's necessarily materially worse than the third quarter versus the second quarter, but it certainly is not improving.

Richard A. Kelertas - Dundee Securities Corporation, Research Division

Okay. Just switching gears, Hank, maybe you could talk about the wood cost increases. You mentioned that some of it was attributable to your purchased wood program. Can you talk about that? How much of your wood usage in the sawmills, for instance, was purchased wood versus your own?

Henry H. Ketcham

The purchased wood is part of the issue, and that's -- the purchased wood is part of the issue, but let me ask Wayne to cover that part.

Wayne Clogg

Richard, we can't give you an exact number of what the percentage of our purchased wood is. But in B.C., particularly, it makes up a fairly substantial part of our diet. It probably varies from 30% to even 50% in some of our mills. I know some of you probably track the Interior Log Market report that's on the Ministry of Forests website. But it's an interesting report to look at trends and purchased log prices. And if I look at January -- or July 2010 versus July 2011, the SPF price is showing above an 18% increase. So it's kind of instructive to what's happened to purchased log prices over the last year in B.C. And I think that's attributable to just increased competition. There's been more mills come on -- come off-line and probably some more optimism in 2010 about lumber prices.

Richard A. Kelertas - Dundee Securities Corporation, Research Division

And it could be as well that maybe in some areas, green wood availability versus beetle kill, and this purchased wood then is trying to make up for the difference?

Wayne Clogg

Yes, that's certainly part of it.

Richard A. Kelertas - Dundee Securities Corporation, Research Division

Okay. Can you talk about your fuel costs in quarter-over-quarter, how much did they go up for you? Just on a percentage basis?

Wayne Clogg

Yes, again, it's a hard one. We have many different logging operations. Most of our contracts have fuel clauses in them, and they vary from division to division. But fuel has certainly been one of the factors that's pressured log costs. The other has been availability of operators for our contractors. And it's not just us, it's across the sector in general. There's been a strong demand for operators from other resource industries, like oil and gas, mining and so on.

Richard A. Kelertas - Dundee Securities Corporation, Research Division

Have you seen this trend continuing into the fourth quarter or is there some easing going on?

Wayne Clogg

I would say there's easing. The third quarter is generally when we started our logging operations up in Canada. So negotiations with contractors in that take place in the third quarter. And most of our rates have been settled now as we move into the logging season.

Richard A. Kelertas - Dundee Securities Corporation, Research Division

Just a final question. On your crown limits and on the woods that you get from the province, have you -- did you indicate or did you see a substantial rise in the inventory -- sorry, in the stumpage charges? Or have there been quarter-over-quarter, but I suspect because of the setting, you're going to only see it year-over-year. Was it a substantial move for you on stumpage, or was it pretty flat?

Wayne Clogg

Alberta's stumpage has been flat for some time and continues to be flat. B.C., on a year-over-year basis, if you look at July 2010 to '11, the effective stumpage rate in B.C. is up $1.82. So that would reflect some of that increase purchased cost. Q -- July 1 to October 1 is down $0.62, so it may have peaked and begun to come back down again.

Operator

Our next question is from David Elstone of Equity Research Associates.

David Elstone

Just wanted to ask, I guess, following up on the stumpage question. Is that shift that you've seen over the last year have anything to do with, as you mentioned, a shift to a harvest of the green timber, or is that just the, as you said, the higher purchase cost and such?

Wayne Clogg

David, it's probably to do with both.

David Elstone

Sure, okay. And with the yellow -- excuse me, the Southern Pine design value change, I guess you have 60 days until January 5 before we'll know exactly what the changes will be. But do you see anything happening in the market right now in terms of, say, inventory management or any other types of, I guess, coping strategies with people -- as people prepare for this eventual design change?

Henry H. Ketcham

Well, I mean, the market isn't general in the south -- is very slow right now. We're not sure that, that has anything to do with the design values. It's just a very tough market down there. So I can't comment specifically on what it -- to what extent it relates to the design thing.

David Elstone

Sure, okay. And with just -- moving over to China. It's been quite a decrease in imported SPF prices to China lately. Can you just tell us what's happening with what you're seeing for the Chinese market at the moment and out for the next, say, the next quarter? What, for instance, your loading for the next -- for November and such?

Henry H. Ketcham

We think there's still a -- we think it's a very sort solid market over there. It's a growing market. I think that price pressures in the U.S. have affected price pressures in China. And there may be some inventory adjustments going on over there. But fundamentally, looking forward, we continue to be quite optimistic about that market.

Operator

Our next question is from Paul Quinn of RBC Capital Markets.

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

Just a couple of questions. One on just hearing lots of reports of slowdown of lumber exports to China. I hear inventories are building on the docks over there, but now I hear they're building over the docks on this side. Can you comment on that? And how long do you expect this slowdown to last?

Henry H. Ketcham

Well, again as I mentioned a second ago, Paul, I mean we're -- we do think there is a bit of a buildup in inventory in China, and it's probably working itself off right now, we hope. Hard to say. But again I don't know specifically. All I can say is we think that the -- it's still a strong economy. We think that if there is -- to the extent there's an oversupply of lumber on the docks over there, it's starting to work itself off now, we hope. And we think it's just going to continue to grow for us.

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

I'm hearing it's particularly bad for low grade. Is that what you're experiencing as well?

Henry H. Ketcham

It could be a little bit. But I can't give you any specific. I can't tell you specifically. I think in general, it's -- we might be selling a little bit more -- doing better over there. But again I think it's -- we think, at the current time, we think it's simply a question of rebalancing inventories.

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

Okay. Just moving on to plywood. You guys have complained about the high Canadian dollar and increased U.S. imports. We saw a lot of change in the Canadian dollar over the quarter. Did you notice any drop in import pressure?

Henry H. Ketcham

Not quarter-over-quarter. Not significantly, no.

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

Okay, and in terms of Eurocan, terminal proceeds were $40 million. What can we expect on the industrial side? Is that in the same magnitude, or is it a fraction of that?

Henry H. Ketcham

It will be less.

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

Okay. And then on just the Terrace sawmill. That $8 million gain, is that -- does that suggest proceeds were $8 million? And can you describe the crown tenures that were associated with that?

Wayne Clogg

Paul, it's Wayne. All of our crown tenures in the northwest were part of the sale, which included the Tree Farm License 41.

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

Okay, great. And just lastly, just on the BC Hydro, the 2 projects you've got on the biomass that come in the first half of 2014. I guess, we've got gigawatt hours there. What can we see in incremental revenue or EBITDA generated from that? Is that in the $20 million ballpark a year?

Henry H. Ketcham

I guess a little too early to be specific on that. But I guess, all I can say is we're going to get good financial returns out of those projects, good return on the capital.

Operator

Our next question is from Joe Licursi of BMO Capital Markets.

Stephen Atkinson - BMO Capital Markets Canada

It's Stephen Atkinson. To begin with, just trying to get a handle on where you're at on the Green Transformation program. I know it's $88 million, and you spent about just under $50 million. And can you tell me which projects have been completed? And are there any major projects and where they are?

Henry H. Ketcham

I might actually pass that over to Ted Seraphim.

Edward R. Seraphim

Stephen, I think, first of all, all our major projects, they have been announced. So fundamentally, we have 5 major projects, 2 of them are at Hinton mill. One is a pressure diffuser, the other one is a pulp machine upgrade. Those are just we'll be starting up this quarter. We're just coming out of Hinton maintenance shutdown. We have a cogen project at our joint venture, Cariboo pulp mill, that'll be starting up likely second quarter of next year. We have an energy efficiency project at our Slave Lake mill, that'll be starting up late next year. And then we're also putting in a chlorine dioxide generator at the Cariboo pulp mill and that'll be coming in next year as well. So those are the major projects.

Stephen Atkinson - BMO Capital Markets Canada

Okay. And okay, and I think, as Hank mentioned then, you expect good returns?

Edward R. Seraphim

That's correct.

Stephen Atkinson - BMO Capital Markets Canada

Okay. And in terms of your offshore sales where we've spoken about China -- just talking about lumber, of course. What's the situation in Japan?

Henry H. Ketcham

I think the situation in Japan is basically steady. It continues to be a good, solid market for us.

Stephen Atkinson - BMO Capital Markets Canada

And typically, I had been using about 10% of sales. Is that fair?

Henry H. Ketcham

Into Japan?

Stephen Atkinson - BMO Capital Markets Canada

Yes.

Henry H. Ketcham

Well, we don't really break it down. But I think roughly 30% is going into Asia.

Stephen Atkinson - BMO Capital Markets Canada

Okay, okay. So I'll stay with that number. So excluding the Green Transformation funding, then what's your CapEx for next year, or can you give me a ballpark?

Henry H. Ketcham

No, because we're just -- I mean, we're still in the process of developing our capital plans. But we have significant capital that we will be spending that's already been -- we're kind of halfway through the major capital plan that we announced earlier in the year.

Stephen Atkinson - BMO Capital Markets Canada

Okay. So the $250 million in the U.S. south one, is that the one where you're halfway through?

Henry H. Ketcham

Well, it's not in the U.S. south, as the total program, was, I think, $230 million. I can't just remember -- yes, $230 million. And that's split between throughout our organization.

Stephen Atkinson - BMO Capital Markets Canada

Okay. And you're about halfway through like maybe...

Henry H. Ketcham

By the end of the fourth quarter, we'll be about halfway through, I think.

Stephen Atkinson - BMO Capital Markets Canada

Okay. And in terms of the discussion about the increase in log costs, are you able to give me an idea of your mix between, let's say, for B.C., your mix between the beetle and conventional?

Henry H. Ketcham

Well, actually, to be honest, conventional is the beetle. So no, I can't give you that mix. But it hasn't changed significantly over the last year or so.

Operator

Our next question is from Sean Steuart of TD Securities.

Sean Steuart - TD Newcrest Capital Inc., Research Division

Just a few questions. Hank or Wayne, just on the log costs. You mentioned one of the factors was a shortage of equipment and operators. And I take it that's a function of the number of sawmills restarting in the region. Would you qualify that, I guess, as more of a recent cost pressure for you, or is this something that's been building over the last several quarters?

Wayne Clogg

It's Wayne. Part of it is the start-up of mills. But probably the bigger pressure is coming from other industries, like mining and oil and gas, in areas like trucking where those operators can move easily between industries. So oil and gas, coal, other mining has been very active, very strong demand for operators. And that's putting pressure on contractors in the forest sector.

Sean Steuart - TD Newcrest Capital Inc., Research Division

Okay, understood. A question for Ted. Wondering if you can just give us an update on what you're seeing in China for softwood and mechanical pulp markets right now. Obviously, it seems like the sell-off in pricing is accelerating a little bit near term. Can you just give us a little bit of context on what you're seeing right now?

Edward R. Seraphim

Well, I think just a little background here. I mean, the mechanical pulp markets really took a hit over the last year. And frankly, they've been quite stable over the last 6 months. In fact, we've had some price improvements, as Hank mentioned, in the third quarter. Order books are very strong for mechanical pulp and global inventories for that grade are quite low, actually. But again we do have to think about in context of the global pulp market. For NBSK, we know you know the buyers in China bought a significant amount of pulp in the summertime. That was all -- a lot of that was shipped in September. I think that's why you saw the inventories come down. They've got a lot of product coming over there. There is a slowdown there. And as usual, some suppliers are in -- have bigger inventories than others, and we've seen some aggressive price movement by suppliers. But I don't see this as being a long-term thing. I think we see this as, as Hank mentioned earlier, whether it's lumber or pulp in China, it's an inventory adjustment. We see it right now as a bit of an inventory adjustment. And from a West Fraser standpoint, our order books are in good shape.

Sean Steuart - TD Newcrest Capital Inc., Research Division

Okay. And just one last question. Can you confirm that Hinton is the only pulp mill outage for Q4? And then can you remind us again the capacity expansion you're going to get there? Can you just quantify that?

Edward R. Seraphim

You're correct on the first one. It's our only maintenance shutdown, and we will not have any major maintenance shutdowns next year. And then in terms of the Green Transformation Program, which is giving us energy improvements, we are also getting the capacity increase, and that increase is somewhere in the order of about 100 tonnes a day. So that mill will end up being a one-line mill with production next year we expect to be in excess of 400,000 tonnes.

Operator

[Operator Instructions] And our next question is from Pierre Lacroix of Desjardins Capital Markets.

Pierre Lacroix - Desjardins Securities Inc., Research Division

My questions have been answered. But maybe one last precision. In the press release, you talked about that traditional margin has been eroded and that is part of the SPF lumber shipments to China or sales to China. Can you clarify that dynamic a little bit more, please?

Henry H. Ketcham

Can you just explain that question one more time, Pierre?

Pierre Lacroix - Desjardins Securities Inc., Research Division

In the press release, you mentioned that your margins in the lumber division has been eroded by the fact that you're shipping some more wood, some more lumber to China. So I wanted -- we're just curious what was the dynamic beyond that erosion?

Henry H. Ketcham

The erosion, the major margin erosion is Southern Yellow Pine, the spread between -- the traditional spread between Southern Yellow Pine and SPF has narrowed very, very significantly. I don't -- I'm not sure that the China issue has a significant impact.

Operator

We have no further questions registered at this time, Mr. Ketcham.

Henry H. Ketcham

Okay. Thank you, all, for joining us. And we'll talk to you in 3 months. Bye.

Operator

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

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