SOURCE: West Fraser Timber

West Fraser Timber

July 21, 2016 17:01 ET

West Fraser Announces Second Quarter Results

VANCOUVER, BC--(Marketwired - July 21, 2016) - West Fraser Timber Co. Ltd. reported earnings of $98 million or $1.22 basic earnings per share on sales of $1,111 million in the second quarter of 2016. These results compare with previous periods as shown in the table below.

Adjusted EBITDA, Adjusted earnings and Adjusted basic EPS as described in this News Release reflect the adjustments described in the tables referred to in the section titled "Non-IFRS Measures" on page 12 of our 2016 second quarter Management's Discussion & Analysis.

                
($ millions except earnings per     2016     2015    
share ("EPS"))  Q2  Q1  YTD  Q2  YTD
Sales  1,111  1,077  2,188  1,029  2,043
Adjusted EBITDA1  138  130  268  72  245
Operating earnings  120  79  199  18  143
Earnings  98  42  140  14  63
Basic EPS ($)  1.22  0.51  1.72  0.17  0.76
Adjusted Earnings1  64  49  113  12  111
Adjusted basic EPS ($)1  0.80  0.60  1.40  0.15  1.32
 1.In this News Release, reference is made to Adjusted EBITDA, Adjusted earnings and Adjusted EPS (collectively "these measures"). We believe that, in addition to earnings, these measures are useful performance indicators. None of these measures is a generally accepted earnings measure under International Financial Reporting Standards ("IFRS") and none has a standardized meaning prescribed by IFRS. Investors are cautioned that none of these measures should be considered as an alternative to earnings, EPS or cash flow, as determined in accordance with IFRS. As there is no standardized method of calculating any of these measures, our method of calculating each of them may differ from the methods used by other entities and, accordingly, our use of any of these measures may not be directly comparable to similarly titled measures used by other entities.
  

Operational Results

In the quarter our lumber operations generated operating earnings of $78 million (Q1-16 - $63 million) and Adjusted EBITDA of $113 million (Q1-16 - $100 million). Increased U.S. lumber prices and strong sales partially offset by a stronger Canadian dollar contributed to the improvement in earnings. Greater sawmill efficiency after the completion of a number of capital improvements contributed to increased production at several of our operations.

The panel segment, which includes plywood, LVL and MDF, generated operating earnings in the quarter of $18 million (Q1-16 - $12 million) and Adjusted EBITDA of $21 million (Q1-16 - $15 million). Improving plywood prices and increased shipments were the primary contributors to the improved earnings.

Our pulp & paper operations generated an operating loss of $5 million (Q1-16 - earnings of $5 million) and Adjusted EBITDA of $4 million (Q1-16 - $14 million). A stronger Canadian dollar was the main contributor to the reduced earnings.

Outlook

Our second quarter operating results affirm our expectation that we should exceed our 2015 lumber production by over 400 MMfbm. We expect to see continued gradual improvement in lumber prices as U.S. new home construction returns to average historical levels.

In the event that a softwood lumber agreement is not reached by mid-October we are prepared for the potential that the U.S. industry will petition the U.S. government to initiate trade action against Canadian softwood lumber imports to the U.S. Ted Seraphim, our President and CEO, said "We expect that our geographic diversification and investment of capital to modernize and improve the efficiency of our mills should substantially mitigate any negative effect of any trade action."

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 and are included under the heading "Outlook", 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. 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 2015 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 22, 2016 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time) by dialing 1-866-225-0198 (toll- free North America). The call may also be accessed through West Fraser's website at www.westfraser.com.

 
West Fraser Timber Co. Ltd.
Condensed Consolidated Balance Sheets
(in millions of Canadian dollars, except where indicated - unaudited)
 
   June 30  December 31
   2016  2015
Assets      
Current assets      
Cash and short-term investments  $27  $13
Receivables   333   298
Income taxes receivable   13   11
Inventories (note 3)   541   631
Prepaid expenses   30   18
    944   971
Property, plant and equipment   1,599   1,609
Timber licences   560   570
Goodwill and other intangibles   363   369
Other assets   13   36
Deferred income tax assets   58   80
   $3,537  $3,635
         
Liabilities        
Current liabilities        
Cheques issued in excess of funds on deposit  $36  $29
Operating loans (note 4)   144   178
Payables and accrued liabilities   316   351
Reforestation and decommissioning obligations   47   48
    543   606
Long-term debt (note 4)   395   423
Other liabilities (note 5)   416   269
Deferred income tax liabilities   162   190
    1,516   1,488
         
Shareholders' Equity        
Share capital (note 7)   560   579
Accumulated other comprehensive earnings   129   164
Retained earnings   1,332   1,404
    2,021   2,147
   $3,537  $3,635
Number of Common shares and Class B Common shares outstanding at July 21, 2016 was 79,832,726.
 
 
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Changes in Shareholders' Equity
(in millions of Canadian dollars, except where indicated - unaudited)
 
   April 1 to June 30  January 1 to June 30
   2016  2015  2016  2015
             
Share capital            
Balance - beginning of period  $571   $587   $579   $587  
                 
Common share repurchases   (11 )  -    (19 )  -  
Balance - end of period  $560   $587   $560   $587  
                 
Accumulated other comprehensive earnings                     
Balance - beginning of period  $132   $106   $164   $55  
                 
Translation gain (loss) on foreign operations   (3 )  (8 )  (35 )  43  
Balance - end of period  $129   $98   $129   $98  
                 
Retained earnings                     
Balance - beginning of period  $1,338   $1,385   $1,404   $1,387  
                 
Actuarial gain (loss) on post-retirement benefits   (45 )  54    (105 )  9  
                 
Common share repurchases   (53 )  -    (95 )  -  
                 
Earnings for the period   98    14    140    63  
                 
Dividends   (6 )  (6 )  (12 )  (12 )
Balance - end of period  $1,332   $1,447   $1,332   $1,447  
                 
Shareholders' Equity  $2,021   $2,132   $2,021   $2,132  
                 
 
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
(in millions of Canadian dollars, except where indicated - unaudited)
 
   April 1 to June 30  January 1 to June 30
   2016  2015  2016  2015
         
Sales  $1,111   $1,029   $2,188   $2,043  
                 
Costs and expenses                     
Cost of products sold   775    749    1,524    1,406  
Freight and other distribution costs   156    159    315    303  
Export taxes   -    12    -    12  
Amortization   48    45    97    92  
Selling, general and administration   42    37    81    77  
Equity-based compensation   (30 )  9    (28 )  10  
    991    1,011    1,989    1,900  
Operating earnings   120    18    199    143  
Finance expense   (7 )  (7 )  (15 )  (15 )
Other (note 9)   7    21    (9 )  (26 )
Earnings before tax   120    32    175    102  
Tax provision (note 10)   (22 )  (18 )  (35 )  (39 )
Earnings  $98   $14   $140   $63  
                 
Earnings per share (dollars) (note 11)                     
Basic  $1.22   $0.17   $1.72   $0.76  
Diluted  $0.86   $0.17   $1.36   $0.76  
                 
Comprehensive earnings                     
Earnings  $98   $14   $140   $63  
Other comprehensive earnings                     
Translation gain (loss) on foreign operations   (3 )  (8 )  (35 )  43  
Actuarial gain (loss) on post-retirement benefits 1   (45 )  54    (105 )  9  
Comprehensive earnings  $50   $60   $-   $115  
1.Net of tax recovery of $17 million for the three months ended June 30, 2016 (three months ended June 30, 2015 - $19 million tax provision) and $38 million for the six months ended June 30, 2016 (six months ended June 30, 2015 - $2 million tax provision).
  
 
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Cash Flows
(in millions of Canadian dollars, except where indicated - unaudited)
 
   April 1 to June 30  January 1 to June 30
   2016  2015  2016  2015
Operating activities            
Earnings  $98   $14   $140   $63  
Adjustments                     
 Amortization   48    45    97    92  
 Finance expense   7    7    15    15  
 Foreign exchange loss (gain) on long-term financing   (1 )  (4 )  (10 )  23  
 Loss (gain) on power agreements, net of settlement costs   -    (18 )  11    12  
 Post-retirement expense   18    15    35    28  
 Contributions to post-retirement benefit plans   (16 )  (18 )  (28 )  (21 )
 Tax provision   22    18    35    39  
 Income taxes received (paid)   4    (12 )  (5 )  (54 )
 Other   (28 )  (6 )  (29 )  4  
Changes in non-cash working capital                     
 Receivables   6    28    (30 )  (26 )
 Inventories   180    119    84    62  
 Prepaid expenses   (10 )  (15 )  (15 )  (16 )
 Payables and accrued liabilities   (47 )  21    (42 )  19  
Cash flows from operating activities   281    194    258    240  
                 
Financing activities                     
Repayment of operating loans   (150 )  (124 )  (34 )  (75 )
Finance expense paid   (10 )  (9 )  (11 )  (11 )
Dividends   (6 )  (6 )  (12 )  (12 )
Common share repurchases   (62 )  -    (112 )  -  
Cash flows from financing activities   (228 )  (139 )  (169 )  (98 )
                 
Investing activities                     
Additions to capital assets   (57 )  (49 )  (106 )  (118 )
Government assistance   3    -    7    -  
Other   -    6    -    6  
Cash flows from investing activities   (54 )  (43 )  (99 )  (112 )
                 
Change in cash   (1 )  12    (10 )  30  
Foreign exchange effect on cash   13    2    17    7  
Cash - beginning of period   (21 )  8    (16 )  (15 )
Cash - end of period  $(9 ) $22   $(9 ) $22  
                 
Cash consists of                     
Cash and short-term investments            $27   $30  
Cheques issued in excess of funds on deposit             (36 )  (8 )
          $(9) $22 
                 
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, 2015 annual financial statements. These condensed consolidated interim financial statements should be read in conjunction with our 2015 annual financial statements.

  
3. Inventories

Inventories at June 30, 2016 were written down by $11 million (March 31, 2016 - $14 million December 31, 2015 - $21 million; June 30, 2015 - $22 million) to reflect net realizable value being lower than cost.

  
4. Long-term debt and operating loans
Long-term debt    
     
  June 30, 2016 December 31, 2015
     
US$300 million senior notes due October 2024; interest at 4.35% $388  $415 
         
US$8 million note payable due October 2020; interest at 2.00%  10   10 
         
Note payable due in installments to 2025; interest ranging from 4.82% to 5.50%  1   2 
   399   427 
Deferred financing costs  (4)  (4)
  $395  $423 
         

The fair value of the long-term debt is $379 million (December 31, 2015 - $406 million) based on rates available to us at the balance sheet date for long-term debt with similar terms and remaining maturities.

Operating loans

We have $615 million in revolving lines of credit of which $144 million (net of deferred financing costs of $3 million) were drawn as at June 30, 2016 (December 31, 2015 - $178 million, net of deferred financing costs of $3 million).

Our revolving lines of credit consist of a $500 million revolving credit facility which matures September 30, 2020, a $32 million (US$25 million) demand line of credit dedicated to our US operations, two demand lines of credit totalling $75 million dedicated to letters of credit, and an $8 million demand line of credit dedicated to our jointly owned newsprint operation. Interest on the facilities is payable at floating rates based on Prime, U.S. base, Bankers' Acceptances or LIBOR at our option. As at June 30, 2016, letters of credit in the amount of $47 million have been issued under these facilities.

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

  
5. Other liabilities
 
   June 30, 2016  December 31, 2015
Post-retirement (note 6)  $288  $142
Reforestation   82   76
Decommissioning   29   29
Other   17   22
   $416  $269
       
  
6. 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.

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

       
   June 30, 2016  December 31, 2015
Projected benefit obligations  $(1,743 ) $(1,532 )
Fair value of plan assets   1,457    1,409  
Impact of minimum funding requirement   -    (11 )
   $(286 ) $(134 )
Represented by           
Post-retirement assets  $2   $8  
Post-retirement liabilities (note 5)   (288 )  (142 )
   $(286 ) $(134 )
         

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

          
   June 30, 2016  March 31, 2016  December 31, 2015
Discount rate  3.25 % 3.75 % 4.00 %
Future compensation rate increase  3.50 % 3.50 % 3.50 %
          

The change in the discount rate on obligations and the difference between the actual rate of return and the discount rate on plan assets generated an actuarial gain (loss) on post-retirement benefits, included in other comprehensive earnings, as follows:

       
   April 1 to June 30  January 1 to June 30
   2016  2015  2016  2015
Actuarial gain (loss)  $(62 ) $73   $(143 ) $11  
Tax recovery (provision)   17    (19 )  38    (2 )
   $(45 ) $54   $(105 ) $9  
                 
  
7. Share Capital

During the three months ended June 30, 2016 we purchased 1,566,996 of our Common shares (six months ended June 30, 2016 - 2,629,748 Common shares) under our normal course issuer bid program, which expires on September 16, 2016. The purchase price averaged $41.11 per share and totalled $64 million for the three months ended June 30, 2016 (six months ended June 30, 2016 - $43.47 per share and $114 million).

  
8. Insurance proceeds

Our WestPine MDF mill, located in Quesnel British Columbia, was closed due to a fire on March 9, 2016 and will remain closed until repairs are complete. The mill is insured for property damage and business interruption. For the three and six months ended June 30, 2016 the impact on pre-tax earnings is as follows:

     
Estimated business interruption, less policy deductible  $6
Estimated gain on disposal of equipment (note 9)   5
   $11
    

Estimated business interruption insurance is recorded as a reduction of cost of products sold in each period the mill remains closed. Estimated insurance proceeds to be spent to replace equipment are accounted for as proceeds of disposition, and the resulting gain has been included in other income.

The final amount of the insurance claim will be determined after the mill reconstruction is complete and the mill returns to expected production rates.

  
9.Other
         
  April 1 to June 30 January 1 to June 30
  2016 2015 2016 2015
         
Foreign exchange gain (loss) on working capital $-  $(2 )$(10 )$9  
                  
Foreign exchange gain (loss) on intercompany financing1  (1 ) (1 ) (18 ) 4  
                  
Foreign exchange gain (loss) on long-term debt  2   5   28   (27 )
                  
Gain on disposal of WestPine equipment (note 8)  5   -   5   -  
Gain (loss) on power agreements  -   18   (19 ) (12 )
Other  1   1   5   -  
  $7  $21  $(9 )$(26 )
1.Relates to US$200 million of financing provided to our U.S. operations. IAS 21 requires that the exchange gain or loss be recognized through earnings as the financing is not considered part of our permanent investment in our U.S. subsidiaries. The balance sheet amounts and related financing expense are eliminated in these consolidated financial statements.
  

In March 2016 the termination of our three-year power strip agreement was negotiated. In addition, Capital Power Corporation gave notice of its intent to terminate its role as buyer of the Sundance C Power Arrangement effective March 24, 2016. As a result of this termination, our role as a party to the Power Syndicate Agreement (Sundance C) also terminated. These agreements had provided us with a portion of the electricity generated from two power plants in Alberta at substantially predetermined rates.

Prior to the termination we recorded the agreements at fair value with the resulting gains or losses being recorded through other income. As at the release date of these condensed consolidated financial statements, we have been advised that the Balancing Pool is investigating the circumstances associated with the termination and the Balancing Pool may challenge the validity of the termination or the effective date of the termination. A change in the effective termination date could result in an additional loss. The amount of such loss is not reasonably determinable and will be recorded through earnings at such time as it can be determined.

  
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:

       
   April 1 to June 30  January 1 to June 30
   2016  2015  2016  2015
Income tax expense at statutory rate of 26%  $(31 ) $(9 ) $(45 ) $(27 )
Non-taxable amounts   8    (2 )  10    (2 )
Rate differentials between jurisdictions and on specified activities   (2 )  1    (4 )  1  
Increase in Alberta provincial tax rate   -    (7 )  -    (7 )
Unrecognized capital losses   -    -    1    (3 )
Other   3    (1 )  3    (1 )
Tax provision  $(22 ) $(18 ) $(35 ) $(39 )
                 
  
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.

       
   April 1 to June 30  January 1 to June 30
   2016  2015  2016  2015
Earnings            
Basic  $98   $14  $140   $63  
Share option expense (recovery)   (28 )  8   (25 )  6  
Equity-settled share option adjustment   -    -   (3 )  (2 )
Diluted  $70   $22  $112   $67  
                
Weighted average number of shares(thousands)                    
Basic   80,867    83,530   81,574    83,529  
Share options   812    1,350   888    1,391  
Diluted   81,679    84,880   82,462    84,920  
                
Earnings per share (dollars)                    
Basic  $1.22   $0.17  $1.72   $0.76  
Diluted  $0.86   $0.17  $1.36   $0.76  
                
12. Segmented information
 
   Lumber  Panels  Pulp & paper  Corporate & other  Total
April 1, 2016 to June 30, 2016               
           
Sales               
 To external customers  $771   $126   $214   $-   $1,111  
 To other segments   24    2    -    -       
   $795   $128   $214   $-       
                     
Operating earnings before amortization  $113   $21   $4   $30   $168  
                     
Amortization   (35 )  (3 )  (9 )  (1 )  (48 )
Operating earnings   78    18    (5 )  29    120  
                     
Finance expense   (4 )  (1 )  (2 )  -    (7 )
Other   2    5    1    (1 )  7  
Earnings before tax  $76   $22   $(6 ) $28   $120  
                     
April 1, 2015 to June 30, 2015                          
                     
Sales                          
 To external customers  $675   $134   $220   $-   $1,029  
 To other segments   27    2    -    -       
   $702   $136   $220   $-       
                     
Operating earnings before amortization  $45   $21   $8   $(11 ) $63  
                     
Amortization   (32 )  (4 )  (9 )  -    (45 )
Operating earnings   13    17    (1 )  (11 )  18  
                     
Finance expense   (4 )  (1 )  (2 )  -    (7 )
Other   (1 )  1    17    4    21  
Earnings before tax  $8   $17   $14   $(7 ) $32  
                     
   Lumber  Panels  Pulp & paper  Corporate & other  Total
January 1, 2016 to June 30, 2016               
           
Sales               
 To external customers  $1,500   $262   $426   $-   $2,188  
 To other segments   53    4    -    -       
   $1,553   $266   $426   $-       
                     
Operating earnings before amortization  $213   $36   $18   $29   $296  
                     
Amortization   (72 )  (6 )  (18 )  (1 )  (97 )
Operating earnings   141    30    -    28    199  
                     
Finance expense   (9 )  (2 )  (4 )  -    (15 )
Other   (3 )  3    (22 )  13    (9 )
Earnings before tax $129  $31  $(26) $41  $175 
                     
January 1, 2015 to June 30, 2015               
           
Sales               
 To external customers  $1,330   $263   $450   $-   $2,043  
 To other segments   53    4    -    -       
   $1,383   $267   $450   $-       
                     
Operating earnings before amortization  $162   $47   $38   $(12 ) $235  
                     
Amortization   (65 )  (7 )  (19 )  (1 )  (92 )
Operating earnings   97    40    19    (13 )  143  
                     
Finance expense   (9 )  (2 )  (4 )  -    (15 )
                     
Other   2    (2 )  (3 )  (23 )  (26 )
Earnings before tax  $90   $36   $12   $(36 ) $102  
                     

The geographic distribution of external sales is as follows1:

       
   April 1 to June 30  January 1 to June 30
   2016  2015  2016  2015
Canada  $251  $228  $498  $446
United States   656   551   1,276   1,084
China   117   166   233   330
Other Asia   71   68   148   148
Other   16   16   33   35
   $1,111  $1,029  $2,188  $2,043
1.Sales distribution is based on the location of product delivery.
  

Contact Information

  • For more information
    Larry Hughes
    Vice-President, Finance and Chief Financial Officer
    Rodger Hutchinson
    Vice-President, Corporate Controller and Investor Relations
    (604) 895-2700
    www.westfraser.com

About this company West Fraser Timber
From this industry Manufacturing and Production
From this sub-industry Forest and Paper Products

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