West Fraser Timber Co. Ltd.
TSX : WFT

West Fraser Timber Co. Ltd.

October 27, 2014 17:01 ET

West Fraser ("WFT") Announces Third Quarter Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Oct. 27, 2014) - West Fraser Timber Co. Ltd. (TSX:WFT) today reported earnings of $70 million or $0.83 per share on sales of $1,030 million in the third quarter of 2014. These results compare with previous periods as follows:

($ millions except earnings per share ("EPS")) Q3-14 Q2-14 YTD-14 Q3-13 YTD-13
Sales 1,030 1,053 2,892 878 2,641
EBITDA1 156 146 450 113 432
Operating earnings 111 106 323 73 315
Earnings 70 74 216 55 231
Basic EPS ($) 0.83 0.87 2.54 0.64 2.70
Adjusted earnings 2 94 66 244 68 278
Adjusted basic EPS ($)2 1.12 0.77 2.86 0.79 3.24

1 In this Report, reference is made to EBITDA (defined as earnings plus (i) amortization, (ii) restructuring charges, (iii) finance expense, (iv) exchange (gain) loss on long-term debt, (v) other (income) expense and (vi) tax (recovery) provision. Our management believes that, in addition to earnings, EBITDA is a useful performance indicator and is a useful measure of cash available prior to debt service, acquisitions, capital expenditures and income taxes. Reference is also made to Adjusted earnings (calculated as set out in the tables described in footnote 2) and Adjusted basic EPS (collectively, with EBITDA, "these measures"). None of these measures is a generally accepted earnings measure under International Financial Reporting Standards ("IFRS") and none have a standardized meaning prescribed by IFRS. Investors are cautioned that none of these measures should be considered as an alternative to earnings, earnings per share 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.

2 Refer to the table titled "Earnings Adjustments for Certain Non-Operational Items" in Management's Discussion and Analysis of our third quarter 2014 results for details of these adjustments.

Operational Results

In the quarter our lumber operations generated operating earnings of $101 million (Q2 - $81 million) and EBITDA of $131 million (Q2- $106 million). The increased earnings were largely the result of reduced costs and certain manufacturing productivity improvements related to capital investments.

Our panel segment generated operating earnings of $25 million (Q2 - $10 million) and EBITDA of $29 million (Q2 - $13 million), the result of substantially improved plywood prices.

Our pulp and paper operations generated an operating loss of $2 million compared to operating earnings of $19 million in the previous quarter and EBITDA of $9 million (Q2 - $30 million). The loss was largely the result of scheduled maintenance downtime at our Hinton pulp mill followed by a difficult startup.

Outlook

We have seen gradual recovery in U.S. home construction and expect the recovery to continue. Log costs are expected to trend higher in Canada as competition for purchased wood increases in certain areas of B.C. and contractor costs increase. However, as we complete our capital projects, we expect productivity improvements and cost reductions to continue.

"The largest capital program in our Company's history is currently underway and I expect combined capital expenditures for 2013 and 2014 to exceed $700 million," said Ted Seraphim, our President and CEO. "I'm excited about what these investments are doing to improve the competitiveness of the Company and how we are positioning our operations to succeed as U.S. housing continues its slow recovery."

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.

West Fraser

We are an integrated wood products company producing lumber, wood chips, LVL, MDF, plywood, pulp and newsprint. We have operations 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 our ability to execute our business plans, including those matters described in the 2013 annual MD&A and our 2014 third quarter MD&A 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 we undertake 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 28, 2014 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time) by dialing 1-800-769-8320 (toll-free North America). The call may also be accessed through our website at www.westfraser.com.

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

West Fraser Timber Co. Ltd.
Condensed Consolidated Balance Sheets
(in millions of Canadian dollars, except where indicated - unaudited)
September 30 December 31
2014 2013
Assets
Current assets
Cash and short-term investments $ 18 $ 162
Receivables 310 279
Inventories (note 4) 522 519
Prepaid expenses 18 11
868 971
Property, plant and equipment 1,424 1,144
Timber licences 522 489
Goodwill and other intangibles 394 321
Other assets 53 83
Deferred income tax assets 68 96
$ 3,329 $ 3,104
Liabilities
Current liabilities
Cheques issued in excess of funds on deposit $ 11 $ -
Operating loans (note 5) 41 -
Payables and accrued liabilities 452 385
Income taxes payable 25 30
Reforestation and decommissioning obligations 41 39
Current portion of long-term debt (note 5) 336 319
906 773
Long-term debt (note 5) 9 9
Other liabilities (note 6) 222 197
Deferred income tax liabilities 163 178
1,300 1,157
Shareholders' Equity
Share capital 589 602
Accumulated other comprehensive earnings 36 10
Retained earnings 1,404 1,335
2,029 1,947
$ 3,329 $ 3,104
Number of Common shares and Class B Common shares outstanding at October 27, 2014 was 83,836,728.
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
2014 2013 2014 2013
Share capital
Balance - beginning of period $ 596 $ 602 $ 602 $ 602
Issuance of Common shares - 1 - 1
Common share repurchases (7 ) (1 ) (13 ) (1 )
Balance - end of period $ 589 $ 602 $ 589 $ 602
Accumulated other comprehensive earnings
Balance - beginning of period $ 11 $ 7 $ 10 $ (9 )
Translation gain (loss) on foreign operations 25 (7 ) 26 9
Balance - end of period $ 36 $ - $ 36 $ -
Retained earnings
Balance - beginning of period $ 1,383 $ 1,069 $ 1,335 $ 899
Actuarial gain (loss) on post-retirement benefits (net of tax) - 50 (49 ) 56
Common share repurchases (43 ) (2 ) (80 ) (2 )
Earnings for the period 70 55 216 231
Dividends (6 ) (6 ) (18 ) (18 )
Balance - end of period $ 1,404 $ 1,166 $ 1,404 $ 1,166
Shareholders' Equity $ 2,029 $ 1,768 $ 2,029 $ 1,768
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
2014 2013 2014 2013
Sales $ 1,030 $ 878 $ 2,892 $ 2,641
Costs and expenses
Cost of products sold 682 583 1,907 1,700
Freight and other distribution costs 144 126 411 369
Export taxes - 6 - 6
Amortization 45 40 127 117
Selling, general and administration 37 31 110 95
Equity-based compensation 11 19 14 39
919 805 2,569 2,326
Operating earnings 111 73 323 315
Finance expense (6 ) (7 ) (20 ) (21 )
Exchange gain (loss) on long-term debt (16 ) 6 (17 ) (11 )
Other income (expense) (note 9) 13 (3 ) 19 4
Earnings before tax 102 69 305 287
Tax provision (note 10) (32 ) (14 ) (89 ) (56 )
Earnings $ 70 $ 55 $ 216 $ 231
Earnings per share (dollars) (note 11)
Basic and diluted $ 0.83 $ 0.64 $ 2.54 $ 2.70
Comprehensive earnings
Earnings $ 70 $ 55 $ 216 $ 231
Other comprehensive earnings
Translation gain (loss) on foreign operations 25 (7 ) 26 9
Actuarial gain (loss) on post-retirement benefits 1 - 50 (49 ) 56
Comprehensive earnings $ 95 $ 98 $ 193 $ 296
1. Net of income tax recovery of $nil for the three months ended September 30, 2014 (three months ended September 30, 2013 - $16 million provision) and $17 million for the nine months ended September 30, 2014 (six months ended September 30, 2013 - $18 million provision).
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
2014 2013 2014 2013
Operating activities
Earnings $ 70 $ 55 $ 216 $ 231
Adjustments
Amortization 45 40 127 117
Finance expense 6 7 20 21
Exchange (gain) loss on long-term debt 16 (6 ) 17 11
Tax provision 32 14 89 56
Income taxes paid (7 ) (4 ) (54 ) (26 )
Post-retirement expense 16 14 41 42
Contributions to post-retirement benefit plans (13 ) (27 ) (42 ) (67 )
Other (27 ) (14 ) (25 ) (14 )
Changes in non-cash working capital
Receivables 15 (1 ) (22 ) (29 )
Inventories 5 (18 ) 32 (6 )
Prepaid expenses 10 8 (7 ) (5 )
Payables and accrued liabilities 69 60 42 55
Cash flows from operating activities 237 128 434 386
Financing activities
Proceeds from long-term debt - 8 - 8
Proceeds from (repayment of) operating loans (84 ) - 45 -
Finance expense paid (1 ) (1 ) (12 ) (10 )
Dividends (6 ) (6 ) (18 ) (18 )
Common share repurchases (50 ) (3 ) (93 ) (3 )
Other (1 ) (1 ) (1 ) (1 )
Cash flows from financing activities (142 ) (3 ) (79 ) (24 )
Investing activities
Acquisitions (note 3) (1 ) - (203 ) -
Additions to capital assets (107 ) (96 ) (321 ) (219 )
Government assistance - 2 13 3
Other 2 2 (9 ) 1
Cash flows from investing activities (106 ) (92 ) (520 ) (215 )
Change in cash (11 ) 33 (165 ) 147
Foreign exchange effect on cash 7 (1 ) 10 3
Cash - beginning of period 11 220 162 102
Cash - end of period $ 7 $ 252 $ 7 $ 252
Cash consists of
Cash and short-term investments $ 18 $ 252
Cheques issued in excess of funds on deposit (11 ) -
$ 7 $ 252

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 an integrated wood products company producing lumber, wood chips, LVL, MDF, plywood, pulp and newsprint 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 ("IASB") and using the same accounting policies and methods of their application as the December 31, 2013 annual financial statements. These condensed consolidated interim financial statements should be read in conjunction with our 2013 annual financial statements.

3. Acquisitions

During the year, we made the following acquisitions:

Location Business Acquired Date Cash
Paid
Due to
Seller
Total
Mansfield, Arkansas Lumber manufacturing facility March 7 $ 61 $ - $ 61
High Prairie, Alberta Lumber manufacturing facility and related timber tenures April 3 63 5 68
Russellville, Arkansas Lumber manufacturing facility April 25 79 - 79
Total $ 203 $ 5 $ 208

We accounted for each of these transactions as an acquisition of a business and have allocated the preliminary purchase price based on the estimated fair value of the assets acquired and the liabilities assumed. The preliminary purchase price allocation is as follows:

2014
Current assets $ 41
Current liabilities (6 )
Property, plant and equipment 55
Timber licenses 43
Goodwill and other intangibles 77
Long-term liabilities (2 )
Consideration $ 208

Goodwill of $76 million, recorded in the lumber segment, is deductible for tax purposes.

The acquired mills have generated revenues of $83 million and earnings of $4 million since the dates of the acquisitions. Acquisition costs of $1 million have been expensed in selling, general and administration.

4. Inventories

Inventories at September 30, 2014 were written down by $6 million (June 30, 2014 - $7 million; December 31, 2013 - $6 million; September 30, 2013 - $7 million) to reflect net realizable value being lower than cost.

5. Long-term debt and operating loans

Long-term debt

September 30,
2014
December 31,
2013
US$300 million senior notes due October 2014; interest at 5.2% $ 336 $ 319
US$8 million note due October 2020; interest at 2% 8 8
Note due in installments to 2020; interest at 5.5% 2 2
346 329
Current portion (336 ) (319 )
Deferred financing costs (1 ) (1 )
$ 9 $ 9

The fair value of the long-term debt is $346 million (December 31, 2013 - $341 million) based on rates available to us at the balance sheet date for long-term debt with similar terms and remaining maturities.

On October 15, 2014 we repaid the US$300 million senior notes and issued new US$300 million of unsecured senior notes due October 15, 2024, see note 12.

Operating loans

We have $580 million in revolving lines of credit of which $41 million (net of deferred financing costs of $3 million) were drawn as at September 30, 2014 (December 31, 2013 - undrawn). Deferred financing costs of $4 million were included in other assets at December 31, 2013.

Our revolving lines of credit include a $500 million revolving credit facility which matures September 30, 2018, two demand lines of credit totalling $75 million dedicated to letters of credit and a $5 million demand line of credit dedicated to a 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, 2014, letters of credit in the amount of $51 million were issued under these facilities.

All debt is unsecured except the $5 million joint operation demand line of credit, which is secured by that joint operation's current assets.

6. Other liabilities

September 30,
2014
December 31,
2013
Post-retirement (note 7) $ 110 $ 82
Reforestation 62 66
Decommissioning 22 22
Other 28 27
$ 222 $ 197

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.

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

September 30,
2014
December 31,
2013
Projected benefit obligations $ (1,384 ) $ (1,212 )
Fair value of plan assets 1,307 1,207
Impact of minimum funding requirement - (5 )
$ (77 ) $ (10 )
Represented by
Post-retirement assets $ 33 $ 72
Post-retirement liabilities (note 6) (110 ) (82 )
$ (77 ) $ (10 )

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

September 30,
2014
June 30,
2014
December 31,
2013
Discount rate 4.00% 4.00% 4.75%
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
2014 2013 2014 2013
Actuarial gain (loss) $ - $ 66 $ (66 ) $ 74
Tax recovery (provision) - (16 ) 17 (18 )
$ - $ 50 $ (49 ) $ 56

8. Share capital

Authorized
400,000,000 Common shares, without par value
20,000,000 Class B Common shares, without par value
10,000,000 Preferred shares, issuable in series, without par value

Issued

2014 2013
Number Amount Number Amount
Common 81,554,586 $ 589 83,390,026 $ 602
Class B Common 2,281,478 - 2,281,478 -
Total Common 83,836,064 $ 589 85,671,504 $ 602

On April 29, 2014 the shareholders of the Company voted to increase the number of authorized Common shares from 200,000,000 to 400,000,000. This increase returns the proportion of Common shares available for issuance to the same level as before the December 10, 2013 stock dividend (the "Stock Dividend").

During 2014 we repurchased 1,842,000 (2013 - 64,554) Common shares under our normal course issuer bid (NCIB) program at an average price of $50.78 per share (2013 - $44.60), for a total cost of $93 million (2013 - $3 million).

On September 5, 2014 we announced the renewal of our NCIB program providing for the repurchase and cancellation of up to 4,000,000 Common shares, representing approximately 5% of our issued and outstanding Common shares. Repurchases will be effected through the facilities of the Toronto Stock Exchange and may take place over a 12-month period ending no later than September 16, 2015.

Stock dividend

On December 10, 2013 the Board of Directors declared a Stock Dividend of one Common share for each issued and outstanding Common share and Class B Common share in the capital of the Company, which has the same effect as a two-for-one stock split. The Stock Dividend was paid on January 13, 2014 to shareholders of record on December 31, 2013. For comparative purposes the Stock Dividend has been applied retroactively to earlier periods so that the number of shares used to calculate earnings per share is doubled resulting in earnings per share for prior years being half of the amount that would otherwise have been reported.

On January 13, 2014 we issued 42,835,752 Common shares pursuant to the Stock Dividend. Also on January 13, 2014 the number of options and units outstanding under our share option, phantom share, and directors' deferred share unit plans were doubled and the exercise price of outstanding share options was halved to reflect the Stock Dividend.

9. Other income (expense)

July 1 to
September 30
January 1 to
September 30
2014 2013 2014 2013
Foreign exchange gain (loss) - net $ 10 $ (4 ) $ 10 $ 5
Increase in decommissioning obligations - - - (6 )
Other 3 1 9 5
$ 13 $ (3 ) $ 19 $ 4

10. Tax provision

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

July 1 to
September 30
January 1 to
September 30
2014 2013 2014 2013
Income tax expense at statutory rate of 26% (2013 - 25.75%) $ (26 ) $ (18 ) $ (79 ) $ (74 )
Non-taxable amounts (4 ) (3 ) (4 ) (8 )
Rate differentials between jurisdictions and on specified activities (3 ) (2 ) (6 ) (10 )
Recognized tax assets - 9 - 39
Increase in statutory tax rate - - - (2 )
Other 1 - - (1 )
Tax provision $ (32 ) $ (14 ) $ (89 ) $ (56 )

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
2014 2013 2014 2013
Earnings
Basic $ 70 $ 55 $ 216 $ 231
Share option expense 8 16 9 31
Equity settled share option adjustment - - (2 ) (2 )
Diluted $ 78 $ 71 $ 223 $ 260
Weighted average number of shares (thousands)
Basic 84,202 85,722 85,094 85,726
Share options 1,429 1,380 1,456 1,411
Diluted 85,631 87,102 86,550 87,137
Earnings per share (dollars)
Basic and diluted $ 0.83 $ 0.64 $ 2.54 $ 2.70

12. Subsequent event

On October 15, 2014 we issued US$300 million of senior unsecured notes. The notes bear interest of 4.35% per year and are due October 15, 2024. The net proceeds were used to repay our outstanding US$300 million senior notes that matured that day.

13. Segmented information

Pulp & Corporate
Lumber Panels paper & other Total
July 1, 2014 to September 30, 2014
Sales at market prices
To external customers$ 688 $ 143 $ 199 $ - $ 1,030
To other segments25 2 - -
$ 713 $ 145 $ 199 $ -
EBITDA 1$ 131 $ 29 $ 9 $ (13)$ 156
Amortization(30)(4)(11)- (45)
Operating earnings101 25 (2)(13)111
Finance expense(4)- (2)- (6)
Exchange loss on long-term debt- - - (16)(16)
Other income6 1 6 - 13
Earnings before tax$ 103 $ 26 $ 2 $ (29)$ 102
July 1, 2013 to September 30, 2013
Sales at market prices
To external customers$ 559 $ 118 $ 201 $ - $ 878
To other segments22 2 - -
$ 581 $ 120 $ 201 $ -
EBITDA 1$ 83 $ 9 $ 40 $ (19)$ 113
Amortization(26)(3)(11)- (40)
Operating earnings57 6 29 (19)73
Finance expense(4)(1)(2)- (7)
Exchange gain on long-term debt- - - 6 6
Other income (expense)(2)- (2)1 (3)
Earnings before tax$ 51 $ 5 $ 25 $ (12)$ 69
1.Non-IFRS measure:
EBITDA is defined as earnings plus (i) amortization, (ii) restructuring charges, (iii) finance expense, (iv) exchange (gain) loss on long-term debt, (v) other (income) expense and (vi) tax (recovery) provision.
Pulp & Corporate
Lumber Panels paper & other Total
January 1, 2014 to September 30, 2014
Sales at market prices
To external customers $ 1,886 $ 386 $ 620 $ - $ 2,892
To other segments 73 6 - -
$ 1,959 $ 392 $ 620 $ -
EBITDA 1 $ 344 $ 53 $ 71 $ (18 ) $ 450
Amortization (83 ) (11 ) (32 ) (1 ) (127 )
Operating earnings 261 42 39 (19 ) 323
Finance expense (12 ) (2 ) (6 ) - (20 )
Exchange loss on long-term debt - - - (17 ) (17 )
Other income 11 1 7 - 19
Earnings before tax $ 260 $ 41 $ 40 $ (36 ) $ 305
January 1, 2013 to September 30, 2013
Sales at market prices
To external customers $ 1,712 $ 352 $ 577 $ - $ 2,641
To other segments 62 5 - -
$ 1,774 $ 357 $ 577 $ -
EBITDA 1 $ 354 $ 37 $ 79 $ (38 ) $ 432
Amortization (72 ) (11 ) (34 ) - (117 )
Operating earnings 282 26 45 (38 ) 315
Finance expense (11 ) (3 ) (7 ) - (21 )
Exchange loss on long-term debt - - - (11 ) (11 )
Other income (expense) 4 - 4 (4 ) 4
Earnings before tax $ 275 $ 23 $ 42 $ (53 ) $ 287
1. Non-IFRS measure:
EBITDA is defined as earnings plus (i) amortization, (ii) restructuring charges, (iii) finance expense, (iv) exchange (gain) loss on long-term debt, (v) other (income) expense and (vi) tax (recovery) provision.

The geographic distribution of external sales is as follows1:

July 1 to
September 30
January 1 to
September 30
2014 2013 2014 2013
United States $ 512 $ 434 $ 1,260 $ 1,325
Canada 257 213 900 637
China 175 137 451 406
Other Asia 62 70 208 204
Other 24 24 73 69
$ 1,030 $ 878 $ 2,892 $ 2,641
1. Sales distribution is based on the location of product delivery.

Contact Information

  • West Fraser Timber Co. Ltd.
    Larry Hughes
    Vice-President, Finance and Chief Financial Officer
    (604) 895-2700

    West Fraser Timber Co. Ltd.
    Rodger Hutchinson
    Vice-President, Corporate Controller and Investor Relations
    (604) 895-2700
    www.westfraser.com