Classified in: Business
Subject: ERN

West Fraser Announces Second Quarter Results

VANCOUVER, July 19, 2018 /CNW/ - West Fraser Timber Co. Ltd. reports second quarter 2018 results:

Second Quarter Highlights

• Record sales and operating earnings for the quarter
• Earnings up 76% from previous quarter and 137% from the second quarter of 2017
• Strong product pricing across all operating segments
• Repurchased 2.878 million shares for $256 million at an average price of $88.94
• Quarter ending net debt to capital ratio of 11% and available liquidity of $864 million

Results Compared to Previous Periods

 

 

Recent Developments

We were able to partially overcome the transportation challenges from the previous quarter and begin the process of normalizing our inventory levels.  Specifically related to lumber, we shipped 82 million board feet more than our production during the quarter, partially reducing the accumulation of 226 million board feet from the first quarter of 2018.  There remains a backlog of lumber inventory to be reduced over the balance of the year.

Commissioning of our newly rebuilt sawmill in High Prairie, Alberta is proceeding according to schedule and is on track to realize the expected cost reductions from the upgrades.  We expect to start production at our new sawmill in Opelika, Alabama in the third quarter which when fully ramped up in early 2019 will increase site capacity by 110 million board feet.

In the quarter, we received approximately $7 million of insurance proceeds as final settlement of business interruption claims stemming from the fires last summer that resulted in curtailed production at a number of our mills in the BC interior.

Operational Results

Our lumber segment generated operating earnings of $358 million (Q1-18 - $189 million) and Adjusted EBITDA of $467 million (Q1-18 - $282 million).  Improved product pricing and increased shipments of 416 million board feet were largely responsible for the improved results.  Countervailing and antidumping duties charged in the quarter were $81 million, of which $68 million was recorded as export duties expense in the earnings statement and $13 was recorded as a long?term duty receivable on the balance sheet.

Our panels segment generated operating earnings in the quarter of $52 million (Q1-18 - $25 million) and Adjusted EBITDA of $56 million (Q1-18 - $28 million).  Improved plywood pricing and higher shipments boosted results.

Our pulp & paper segment generated operating earnings of $56 million (Q1-18 - $57 million) and Adjusted EBITDA of $68 million (Q1-18 - $70 million).  Higher pulp prices were offset by lost production from a planned maintenance shutdown at our Cariboo NBSK mill, transportation related production curtailments at our Quesnel BCTMP mill, and a series of operational challenges at our Hinton NBSK mill.

Management's Discussion & Analysis ("MD&A")

The Company's MD&A is available on the Company's website:  www.westfraser.com and on the System for Electronic Document Analysis and Retrieval at www.sedar.com under the Company's profile.

The Company

West Fraser is a diversified wood products company producing lumber, LVL, MDF, plywood, pulp, newsprint, wood chips and energy with facilities in western Canada and the southern United States.

Forward?Looking Statements

This Report contains historical information, descriptions of current circumstances and statements about potential future developments.  The latter, which are forward?looking statements, are presented to provide reasonable guidance to the reader but their accuracy depends on a number of assumptions and is subject to various risks and uncertainties.  Forward-looking statements are included under the heading "Recent Developments" (relating to inventory reductions and mill start-up activities).  Actual outcomes and results will depend on a number of factors that could affect the ability of the Company to execute its business plans, including those matters described in the 2017 annual Management's Discussion & Analysis under "Risks and Uncertainties", and may differ materially from those anticipated or projected.  Accordingly, readers should exercise caution in relying upon forward?looking statements and the Company undertakes no obligation to publicly revise them to reflect subsequent events or circumstances, except as required by applicable securities laws.

Conference Call

Investors are invited to listen to the quarterly conference call on Friday, July 20, 2018 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time) by dialing 1-888-390-0546 (toll? free North America).  The call may also be accessed through West Fraser's website at www.westfraser.com.

West Fraser shares trade on the Toronto Stock Exchange under the symbol: "WFT".

 

 

 

 

West Fraser Timber Co. Ltd.
Notes to Condensed Consolidated Interim Financial Statements
(figures are in millions of dollars, except where indicated - unaudited)

1. Nature of operations

West Fraser Timber Co. Ltd. ("West Fraser", "we", "us" or "our") is a diversified wood products company producing lumber, LVL, MDF, plywood, pulp, newsprint, wood chips and energy with facilities in western Canada and the southern United States.  Our executive office is located at 858 Beatty Street, Suite 501, Vancouver, British Columbia.  West Fraser was formed by articles of amalgamation under the Business Corporations Act (British Columbia) and is registered in British Columbia, Canada.  Our Common shares are listed for trading on the Toronto Stock Exchange under the symbol WFT.

2. Basis of presentation and statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting as issued by the International Accounting Standards Board and using the same accounting policies and methods of their application as the December 31, 2017 annual financial statements.  These condensed consolidated interim financial statements should be read in conjunction with our 2017 annual consolidated financial statements.

We have reclassified certain prior-year amounts to conform to current-year's presentation.

3. Changes in accounting standards

IFRS 9 - Financial Instruments

We have adopted IFRS 9 effective January 1, 2018 using the full retrospective method.  The new standard for financial instruments, IFRS 9, replaces IAS 39 'Financial Instruments: Recognition and Measurement'.  It makes changes to the previous guidance on the classification and measurement of financial assets and introduces an 'expected credit loss' model for the impairment of financial assets.  IFRS 9 also contains new requirements on the application of hedge accounting.

The adoption of this standard had no significant impact on our consolidated financial statements and no retrospective adjustments were necessary.

IFRS 15 - Revenue from Contracts with Customers

We have adopted IFRS 15 effective January 1, 2018 using the full retrospective method.  The new revenue standard, IFRS 15, replaces IAS 18 - Revenue, IAS 11 - Construction Contracts and the related interpretations.  This standard addresses revenue recognition and establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers.  IFRS 15 requires that revenue is recognized at the 'transaction price' when certain contractual obligations are met but with any 'variable consideration' elements of the price recognized when it is 'highly probable' that there will be no reversal of that revenue.

The adoption of this standard had no significant impact on our consolidated financial statements and no retrospective adjustments were necessary.

4. Inventories

Inventories at June 30, 2018 were written down by $1 million (March 31, 2018 - $7 million; December 31, 2017 - $9 million; June 30, 2017 - $6 million) to reflect net realizable value being lower than cost.

 

5. Long-term debt and operating loans

Long-term debt

 

The fair value of the long?term debt at June 30, 2018 was $668 million (December 31, 2017 - $634 million) based on rates available to us at the balance sheet date for long?term debt with similar terms and remaining maturities.

Operating loans

Our revolving lines of credit consist of a $500 million committed revolving credit facility which matures August 25, 2022, a $33 million (US$25 million) demand line of credit dedicated to our U.S. operations and an $8 million demand line of credit dedicated to our jointly?owned newsprint operation.  In addition, we have demand lines of credit totalling $70 million dedicated to letters of credit, of which US$15 million is dedicated to our U.S. operations.  During the quarter, we have increased our available letters of credit dedicated to our U.S. operations from US$7 million to US$15 million.

At June 30, 2018, there were no amounts outstanding under our revolving credit facility.  As a result, the associated deferred financing costs of $2 million are recorded in other assets.  Letters of credit in the amount of $49 million were also supported by our facilities, leaving $562 million of credit available for further use.  At December 31, 2017, our revolving credit facility was undrawn, deferred financing costs were $2 million and our outstanding letters of credit were $47 million.

Interest on the facilities is payable at floating rates based on Prime, Base Rate Advances, Bankers' Acceptances or LIBOR Advances at our option.

All debt is unsecured except the $8 million joint operation demand line of credit, which is secured by that joint operation's current assets.

6. Other liabilities

 

7. Post-retirement benefits

We maintain defined benefit and defined contribution pension plans covering a majority of our employees.  The defined benefit plans generally do not require employee contributions and provide a guaranteed level of pension payable for life based either on length of service or on earnings and length of service, and in most cases do not increase after commencement of retirement.  We also provide group life insurance, medical and extended health benefits to certain employee groups.

During the first quarter of 2018, we settled approximately $145 million of our defined benefit obligation by purchasing annuities using plan assets.

The status of the defined benefit pension plans and other retirement benefit plans, in aggregate, is as follows:

 

The significant actuarial assumptions used to determine our balance sheet date post?retirement assets and liabilities are as follows:

 

For the three and six months ended June 30, 2018, the return on plan assets was higher than the discount rate that was established at the beginning of the year resulting in an actuarial gain being recorded in other comprehensive earnings.

The actuarial gain (loss) on post?retirement benefits included in other comprehensive earnings is as follows:

 

8. Share Capital

During 2018 we repurchased 2,878,450 Common shares under our normal course issuer bid ("NCIB") at an average price of $88.94 per share for a cost of $256 million.  Effective June 11, 2018 we amended our existing NCIB to increase the number of Common shares that we may repurchase for cancellation from 3,794,375 Common shares to 5,990,454 Common shares.

9. Other

 

 

10. Tax provision

The tax provision differs from the amount that would have resulted from applying the British Columbia statutory income tax rate to earnings before tax as follows:

 

11. Earnings per share

Basic earnings per share is calculated based on earnings available to Common shareholders, as set out below, using the weighted average number of Common shares and Class B Common shares outstanding.  Diluted earnings per share is calculated based on earnings available to Common shareholders adjusted to remove the actual share option expense (recovery) charged to earnings and after deducting a notional charge for share option expense assuming the use of the equity?settled method, as set out below.  The diluted weighted average number of shares is calculated using the treasury stock method.  When earnings available to Common shareholders for diluted earnings per share are greater than earnings available to Common shareholders for basic earnings per share, the calculation is anti?dilutive and diluted earnings per share are deemed to be the same as basic earnings per share.

 

12. Segmented information 

 

The geographic distribution of external sales is as follows¹:

 

 

13. Countervailing ("CVD") and antidumping ("ADD") duty dispute

In November 2016, a coalition of U.S. lumber producers filed a CVD/ADD petition against Canadian softwood lumber producers who import lumber into the United States.  The petition alleged that Canadian lumber producers are subsidized.  CVD and ADD duties have been imposed against Canadian softwood lumber imports beginning in 2017.  See Note 26 "Softwood lumber dispute" of our 2017 annual consolidated financial statements included in the Company's 2017 Annual Report for additional information.

We were chosen by the U.S. Department of Commerce ("USDOC") as a "mandatory respondent" to both the countervailing and antidumping investigations and as a result have received unique company specific rates.

For the lumber segment, during the six months ended June 30, 2018 we posted cash deposits for CVD at a 17.99% rate and ADD at a 5.57% rate.  We continue to recalculate the ADD rate for the current period of review using our reported results and the same calculation methodology as the USDOC. Based on our current data, we determined that the expected ADD rate will be lower than the current ADD deposit rate and as such, we have recorded a long-term duty deposit receivable related to ADD for the difference.  Our estimated ADD rate for the six months ended June 30, 2018 was 1.38%.

During the first quarter of 2018, our jointly?owned newsprint mill was assigned a CVD rate of 6.53% and an ADD rate of 22.16%.  This is reflected by a $4 million expense recorded in our pulp & paper segment.

 

For the six months ended June 30, 2018 we incurred duty deposits of $94 million related to CVD and $35 million related to ADD.  As at June 30, 2018 the total amount of duties paid and payable that are on deposit with the USDOC is US$171 million.

The duty rates are subject to change based on administrative reviews and appeals available to us.  In addition, we will update our ADD rate at each reporting date considering our actual results for each period of review.  Changes to estimated rates may be material and any changes will be reflected through current results in the period of the change.  Notwithstanding the deposit rates assigned under the investigations, our final liability for the assessment of CVD and ADD will not be determined until each annual administrative review process is complete and related appeal processes are concluded.

SOURCE West Fraser Timber Co. Ltd.

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