SOURCE: West Fraser Timber

West Fraser Timber

October 24, 2016 17:01 ET

West Fraser Announces Third Quarter Results

VANCOUVER, BC--(Marketwired - October 24, 2016) - West Fraser Timber Co. Ltd. (TSX: WFT) reported earnings of $107 million or $1.35 basic earnings per share on sales of $1,155 million in the third 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" of our 2016 third quarter Management's Discussion & Analysis.

       
($ millions except earnings per  2016  2015
share ("EPS"))  Q3  Q2  YTD  Q3  YTD
Sales  1,155  1,111  3,343  1,044  3,087
Adjusted EBITDA1  213  138  481  82  327
Operating earnings  156  120  355  88  231
Earnings  107  98  247  56  119
Basic EPS ($)  1.35  1.22  3.06  0.67  1.43
Adjusted Earnings1  115  64  229  35  145
Adjusted basic EPS ($)1  1.45  0.80  2.84  0.42  1.74
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 $114 million (Q2-16 - $78 million) and Adjusted EBITDA of $151 million (Q2-16 - $113 million). Higher U.S. dollar lumber prices contributed to the improvement in earnings.

The panel segment, which includes plywood, LVL and MDF, generated operating earnings in the quarter of $30 million (Q2-16 - $18 million) and Adjusted EBITDA of $33 million (Q2-16 - $21 million). Higher plywood prices were the main contributor to the improved earnings.

Our pulp & paper operations generated operating earnings of $22 million (Q2-16 - loss of $5 million) and Adjusted EBITDA of $31 million (Q2-16 - $4 million). Pulp and newsprint prices increased and pulp production was higher resulting in increased earnings.

Outlook

"We're pleased with the ongoing improvements from our capital spending program. I'm also very proud of our committed and focused employee group who continue to strive to improve operational performance each and every day," said Ted Seraphim, our President and CEO.

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 Tuesday, October 25, 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)
       
   September 30  December 31
   2016  2015
Assets      
Current assets      
Cash and short-term investments  $52  $13
Receivables   332   298
Income taxes receivable   -   11
Inventories (note 3)   536   631
Prepaid expenses   17   18
    937   971
Property, plant and equipment   1,632   1,609
Timber licences   555   570
Goodwill and other intangibles   365   369
Other assets   18   36
Deferred income tax assets   49   80
   $3,556  $3,635
         
Liabilities        
Current liabilities        
Cheques issued in excess of funds on deposit  $36  $29
Operating loans (note 4)   46   178
Payables and accrued liabilities   355   351
Income taxes payable   9   -
Reforestation and decommissioning obligations   48   48
    494   606
Long-term debt (note 4)   403   423
Other liabilities (note 5)   372   269
Deferred income tax liabilities   186   190
    1,455   1,488
         
Shareholders' Equity        
Share capital (note 7)   551   579
Accumulated other comprehensive earnings   137   164
Retained earnings   1,413   1,404
    2,101   2,147
   $3,556  $3,635
Number of Common shares and Class B Common shares outstanding at October 24, 2016 was 78,552,469.
 
   
West Fraser Timber Co. Ltd.  
Condensed Consolidated Statements of Changes in Shareholders' Equity  
(in millions of Canadian dollars, except where indicated - unaudited)  
                  
   July 1 to September 30   January 1 to September 30  
   2016   2015   2016   2015  
                  
Share capital                 
Balance - beginning of period  $560   $587   $579   $587  
Common share repurchases   (9 )  (8 )  (28 )  (8 )
Balance - end of period  $551   $579   $551   $579  
                      
Accumulated other comprehensive earnings                     
Balance - beginning of period  $129   $98   $164   $55  
Translation gain (loss) on foreign operations   8    41    (27 )  84  
Balance - end of period  $137   $139   $137   $139  
                      
Retained earnings                     
Balance - beginning of period  $1,332   $1,447   $1,404   $1,387  
Actuarial gain (loss) on post-retirement benefits   26    (40 )  (79 )  (31 )
Common share repurchases   (47 )  (52 )  (142 )  (52 )
Earnings for the period   107    56    247    119  
Dividends   (5 )  (5 )  (17 )  (17 )
Balance - end of period  $1,413   $1,406   $1,413   $1,406  
                      
Shareholders' Equity  $2,101   $2,124   $2,101   $2,124  
                 
   
West Fraser Timber Co. Ltd.  
Condensed Consolidated Statements of Earnings and Comprehensive Earnings  
(in millions of Canadian dollars, except where indicated - unaudited)  
                  
   July 1 to September 30   January 1 to September 30  
   2016   2015   2016   2015  
                  
Sales  $1,155   $1,044   $3,343   $3,087  
                      
Costs and expenses                     
Cost of products sold   739    756    2,263    2,162  
Freight and other distribution costs   158    164    473    467  
Export taxes   -    14    -    26  
Amortization   50    49    147    141  
Selling, general and administration   45    28    126    105  
Equity-based compensation   7    (55 )  (21 )  (45 )
    999    956    2,988    2,856  
Operating earnings   156    88    355    231  
Finance expense   (7 )  (8 )  (22 )  (23 )
Other (note 9)   1    (22 )  (8 )  (48 )
Earnings before tax   150    58    325    160  
Tax provision (note 10)   (43 )  (2 )  (78 )  (41 )
Earnings  $107   $56   $247   $119  
                      
Earnings per share (dollars) (note 11)                     
Basic  $1.35   $0.67   $3.06   $1.43  
Diluted  $1.35   $0.05   $2.73   $0.83  
                      
Comprehensive earnings                     
Earnings  $107   $56   $247   $119  
Other comprehensive earnings                     
Translation gain (loss) on foreign operations   8    41    (27 )  84  
Actuarial gain (loss) on post-retirement benefits (note 6)   26    (40 )  (79 )  (31 )
Comprehensive earnings  $141   $57   $141   $172  
                 
   
West Fraser Timber Co. Ltd.  
Condensed Consolidated Statements of Cash Flows  
(in millions of Canadian dollars, except where indicated - unaudited)  
                  
   July 1 to September 30   January 1 to September 30  
   2016   2015   2016   2015  
Cash provided by operations                 
Earnings  $107   $56   $247   $119  
Adjustments                     
 Amortization   50    49    147    141  
 Finance expense   7    8    22    23  
 Foreign exchange loss (gain) on long-term financing   2    20    (8 )  43  
 Loss on power agreements, net of settlement costs   -    17    11    29  
 Post-retirement expense   18    23    53    51  
 Contributions to post-retirement benefit plans   (18 )  (23 )  (46 )  (44 )
 Tax provision   43    2    78    41  
 Income taxes received (paid)   6    (8 )  1    (62 )
 Other   (22 )  (9 )  (51 )  (5 )
Changes in non-cash working capital                     
 Receivables   (6 )  7    (36 )  (19 )
 Inventories   5    (10 )  89    52  
 Prepaid expenses   16    10    1    (6 )
 Payables and accrued liabilities   41    (53 )  (1 )  (34 )
    249    89    507    329  
                      
Cash used for financing                     
Proceeds from (repayment of) operating loans   (99 )  6    (133 )  (69 )
Finance expense paid   (3 )  (1 )  (14 )  (12 )
Dividends   (5 )  (5 )  (17 )  (17 )
Common share repurchases   (58 )  (60 )  (170 )  (60 )
Other   3    (1 )  3    (1 )
    (162 )  (61 )  (331 )  (159 )
                      
Cash used for investing                     
Additions to capital assets   (76 )  (51 )  (182 )  (169 )
Government assistance   1    -    8    -  
Other   1    (1 )  1    5  
    (74 )  (52 )  (173 )  (164 )
                      
Change in cash   13    (24 )  3    6  
Foreign exchange effect on cash   12    5    29    12  
Cash - beginning of period   (9 )  22    (16 )  (15 )
Cash - end of period  $16   $3   $16   $3  
                      
Cash consists of                     
Cash and short-term investments            $52   $21  
Cheques issued in excess of funds on deposit             (36 )  (18 )
             $16   $3  
                 

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 September 30, 2016 were written down by $10 million (June 30, 2016 - $11 million; December 31, 2015 - $21 million; September 30, 2015 - $37 million) to reflect net realizable value being lower than cost.

4. Long-term debt and operating loans

Long-term debt

          
   September 30, 2016   December 31, 2015  
US$300 million senior notes due October 2024; interest at 4.35%  $394   $415  
US$8 million note payable due October 2020; interest at 2.00%   10    10  
Notes payable   3    2  
    407    427  
Deferred financing costs   (4 )  (4 )
   $403   $423  
         

The fair value of the long-term debt is $390 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 $616 million in revolving lines of credit of which $46 million (net of deferred financing costs of $3 million) were drawn as at September 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 $33 million (US$25 million) demand line of credit dedicated to our U.S. 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 September 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

       
   September 30, 2016  December 31, 2015
Post-retirement (note 6)  $259  $142
Reforestation   68   76
Decommissioning   28   29
Other   17   22
   $372  $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. 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:

          
   September 30, 2016   December 31, 2015  
Projected benefit obligations  $(1,759 ) $(1,532 )
Fair value of plan assets   1,511    1,409  
Impact of minimum funding requirement   (5 )  (11 )
   $(253 ) $(134 )
Represented by           
Post-retirement assets  $6   $8  
Post-retirement liabilities (note 5)   (259 )  (142 )
   $(253 ) $(134 )
         

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

          
   September 30, 2016  June 30, 2016  December 31, 2015
Discount rate  3.25%  3.25%  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:

          
   July 1 to September 30   January 1 to September 30  
   2016   2015   2016   2015  
Actuarial gain (loss)  $35   $(54 ) $(108 ) $(43 )
Tax recovery (provision)   (9 )  14    29    12  
   $26   $(40 ) $(79 ) $(31 )
                 

7. Share Capital

During the three months ended September 30, 2016 we purchased 1,284,558 of our Common shares (nine months ended September 30, 2016 - 3,914,306 Common shares) under our normal course issuer bid ("NCIB") program, which expired on September 16, 2016. The purchase price averaged $43.23 per share and totalled $56 million for the three months ended September 30, 2016 (nine months ended September 30, 2016 - $43.39 per share and $170 million).

On September 8, 2016 our Board of Directors authorized the renewal of our NCIB to repurchase for cancellation up to 3,834,226 Common shares or approximately 5% of our issued and outstanding Common shares. The NCIB will expire September 18, 2017.

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. The impact on pre-tax earnings is as follows:

       
   July 1 to
September 30
 January 1 to
September 30
   2016
Estimated business interruption, less policy deductible  $7  $13
Estimated gain on disposal of equipment (note 9)   -   5
   $7  $18
       

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

          
   July 1 to September 30   January 1 to September 30  
   2016   2015   2016   2015  
Foreign exchange gain (loss) on working capital  $2   $10   $(8 ) $19  
Foreign exchange gain (loss) on intercompany financing1   4    5    (14 )  9  
Foreign exchange gain (loss) on long-term debt   (6 )  (25 )  22    (52 )
Gain on disposal of WestPine equipment (note 8)   -    -    5    -  
Loss on power agreements   -    (17 )  (19 )  (29 )
Other   1    5    6    5  
   $1   $(22 ) $(8 ) $(48 )
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 ("the Acquired PPA") effective March 24, 2016. As a result of this termination, our role as a party to the Power Syndicate Agreement 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 Government of Alberta has challenged the right of Capital Power Corporation to terminate the Acquired PPA. If the termination is successfully challenged additional losses would be incurred, although the amount of such losses is not reasonably determinable at this time. The amount of such loss 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 rates to earnings before tax as follows:

          
   July 1 to September 30   January 1 to September 30  
   2016   2015   2016   2015  
Income tax expense at statutory rate of 26%  $(40 ) $(15 ) $(85 ) $(42 )
Non-taxable amounts   (1 )  12    9    10  
Rate differentials between jurisdictions and on specified activities   (3 )  3    (7 )  4  
Increase in Alberta provincial tax rate   -    -    -    (7 )
Unrecognized capital losses   -    (3 )  1    (6 )
Other   1    1    4    -  
Tax provision  $(43 ) $(2 ) $(78 ) $(41 )
                 

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.

          
   July 1 to September 30   January 1 to September 30  
   2016  2015   2016   2015  
Earnings                
Basic  $107  $56   $247   $119  
Share option expense (recovery)   4   (52 )  (21 )  (46 )
Equity-settled share option adjustment   -   (1 )  (3 )  (3 )
Diluted  $111  $3   $223   $70  
                     
Weighted average number of shares (thousands)                    
Basic   79,310   82,906    80,819    83,320  
Share options   799   1,207    863    1,352  
Diluted   80,109   84,113    81,682    84,672  
                     
Earnings per share (dollars)                    
Basic  $1.35  $0.67   $3.06   $1.43  
Diluted  $1.35  $0.05   $2.73   $0.83  
                

12. Segmented information

                      
           Pulp &   Corporate      
   Lumber   Panels   paper   & other   Total  
July 1, 2016 to September 30, 2016                     
                      
Sales                     
 To external customers  $788   $137   $230   $-   $1,155  
 To other segments   26    2    -    -       
   $814   $139   $230   $-       
                           
Operating earnings before amortization  $151   $33   $31   $(9 ) $206  
                           
Amortization   (37 )  (3 )  (9 )  (1 )  (50 )
Operating earnings   114    30    22    (10 )  156  
                           
Finance expense   (4 )  (1 )  (2 )  -    (7 )
Other   1    -    1    (1 )  1  
                           
Earnings before tax  $111   $29   $21   $(11 ) $150  
                           
July 1, 2015 to September 30, 2015                          
                           
Sales                          
 To external customers  $668   $146   $230   $-   $1,044  
 To other segments   29    2    -    -       
   $697   $148   $230   $-       
                           
Operating earnings before amortization  $26   $29   $25   $57   $137  
                           
Amortization   (35 )  (3 )  (11 )  -    (49 )
Operating earnings   (9 )  26    14    57    88  
                           
Finance expense   (5 )  (1 )  (2 )  -    (8 )
                           
Other   3    -    (4 )  (21 )  (22 )
                           
Earnings before tax  $(11 ) $25   $8   $36   $58  
                       
                      
           Pulp &   Corporate      
   Lumber   Panels   paper   & other   Total  
January 1, 2016 to September 30, 2016                  
                      
Sales                     
 To external customers  $2,288   $399   $656   $-   $3,343  
 To other segments   79    6    -    -       
   $2,367   $405   $656   $-       
                           
Operating earnings before amortization  $364   $69   $49   $20   $502  
                           
Amortization   (109 )  (9 )  (27 )  (2 )  (147 )
Operating earnings   255    60    22    18    355  
                           
Finance expense   (13 )  (3 )  (6 )  -    (22 )
                           
Other   (2 )  3    (21 )  12    (8 )
                           
Earnings before tax  $240   $60   $(5 ) $30   $325  
                           
January 1, 2015 to September 30, 2015                      
                           
Sales                          
 To external customers  $1,998   $409   $680   $-   $3,087  
 To other segments   82    6    -    -       
   $2,080   $415   $680   $-       
                           
Operating earnings before amortization  $188   $76   $63   $45   $372  
                           
Amortization   (100 )  (10 )  (30 )  (1 )  (141 )
Operating earnings   88    66    33    44    231  
                           
Finance expense   (14 )  (3 )  (6 )  -    (23 )
                           
Other   5    (2 )  (7 )  (44 )  (48 )
                           
Earnings before tax  $79   $61   $20   $-   $160  
                     
 
The geographic distribution of external sales is as follows1:
   July 1 to September 30  January 1 to September 30
   2016  2015  2016  2015
Canada  $261  $223  $759  $669
United States   666   588   1,942   1,672
China   118   140   351   470
Other Asia   94   76   242   224
Other   16   17   49   52
   $1,155  $1,044  $3,343  $3,087
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