West Fraser Announces First Quarter Results

VANCOUVER, April 24, 2017 /CNW/ - West Fraser Timber Co. Ltd. reports first quarter 2017 results:

First Quarter Highlights

  • Sales improved by 7% compared to the previous quarter.
  • Earnings up 56% from previous quarter.
  • Improved product pricing across operating segments.
  • Strong operating metrics despite some weather-related challenges.
  • Quarter ending net debt to capital ratio of 16%.

Results Compared to Previous Periods





($millions except earnings per share ("EPS"))

Q1-17

Q4-16

Q1-16

Sales

1,189

1,107

1,077

Adjusted EBITDA1

245

193

130

Operating earnings

183

127

79

Earnings

123

79

42

Basic EPS ($)

1.58

1.01

0.51

Adjusted earnings1

134

101

49

Adjusted basic EPS ($)1

1.71

1.28

0.60

1.

In this News Release, reference is made to Adjusted EBITDA, Adjusted earnings and Adjusted basic 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 these measures should not 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.  Refer to the tables in the section titled "Non-IFRS Measures" in our first quarter 2017 Management's Discussion & Analysis for details of these adjustments.

 

Operational Results

Our lumber segment generated operating earnings of $152 million (Q4-16 - $107 million) and Adjusted EBITDA of $191 million (Q4-16 - $144 million).  Improved product pricing was the primary driver of improved results.  SPF shipments were lower than production due in part to weather-related transportation delays.

Our panels segment, which includes plywood, LVL and MDF, generated operating earnings in the quarter of $12 million (Q4-16 - $17 million) and Adjusted EBITDA of $15 million (Q4-16 - $20 million).  Improved product pricing was offset by increased costs associated with our WestPine MDF plant restart.

Our pulp & paper segment generated operating earnings of $31 million (Q4-16 - $20 million) and Adjusted EBITDA of $40 million (Q4-16 - $30 million).  Higher pulp prices, higher BCTMP shipments and lower NBSK production costs were the primary drivers of improved results. Both Hinton Pulp and Slave Lake Pulp set quarterly production records.

Outlook

We will continue to focus on operational improvements which, together with warmer weather in Canada, should contribute to improved lumber production and shipments.  Our two NBSK pulp mills will undergo major scheduled maintenance during the balance of 2017 which will reduce normal NBSK pulp production by approximately 25,000 tonnes.  Our WestPine MDF mill is expected to gradually work through start-up issues over the balance of the year but we do not expect to achieve targeted production levels until late in 2017.

The most challenging immediate issue facing the Company is the current softwood lumber dispute.  We are expecting the U.S. Department of Commerce to announce preliminary countervail duty rates very shortly, to be implemented in May 2017, and potentially to be applied retroactively over a 90-day period.  West Fraser will receive its own duty rate.  Anti-dumping duty rates are expected to be announced in late June and implemented in July 2017 and could potentially be applied retroactively over a 90-day period.  Ted Seraphim, our President and CEO, said: "It is regrettable that our American neighbours have chosen to renew this long-standing dispute which creates so much uncertainty for lumber market participants and threatens to undermine some of the tremendous work our two countries have undertaken to grow the markets for North American lumber.  However, we are fully cooperating with the U.S. investigation as we continue to believe that the allegations of subsidy and dumping are groundless."

Mr. Seraphim also added:  "I want to thank all of our employees for their tremendous effort and dedication to continuously improving our safety awareness and at the same time focusing on achieving operational excellence.  Our focus is not on any one quarter but on long-term results and we are certainly making progress towards achieving our goals."

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 2016 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, April 25, 2017 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.



Condensed Consolidated Balance Sheets



(in millions of Canadian dollars, except where indicated - unaudited)





March 31

December 31


2017

2016

Assets



Current assets



Cash and short-term investments

$

86

$

50

Receivables 

393

297

Inventories (note 3)

744

581

Prepaid expenses 

17

10


1,240

938

Property, plant and equipment 

1,692

1,685

Timber licences 

546

551

Goodwill and other intangibles

373

371

Other assets 

20

20

Deferred income tax assets

17

35


$

3,888

$

3,600




Liabilities



Current liabilities



Cheques issued in excess of funds on deposit

$

36

$

15

Operating loans (note 4)

108

-

Payables and accrued liabilities 

398

379

Income taxes payable

27

21

Reforestation and decommissioning obligations

43

44


612

459

Long-term debt (note 4)

409

413

Other liabilities (note 5)

290

272

Deferred income tax liabilities

212

215


1,523

1,359




Shareholders' Equity



Share capital 

549

549

Accumulated other comprehensive earnings 

145

150

Retained earnings

1,671

1,542


2,365

2,241


$

3,888

$

3,600

Number of Common shares and Class B Common shares outstanding at April 24, 2017 was 78,166,003.

 

West Fraser Timber Co. Ltd.



Condensed Consolidated Statements of Changes in Shareholders' Equity

(in millions of Canadian dollars, except where indicated - unaudited)





January 1 to March 31


2017

2016




Share capital 



Balance - beginning of period

$

549

$

579

Common share repurchases

-

(8)

Balance - end of period

$

549

$

571




Accumulated other comprehensive earnings 



Balance - beginning of period

$

150

$

164

Translation loss on foreign operations

(5)

(32)

Balance - end of period

$

145

$

132




Retained earnings




Balance - beginning of period

$

1,542

$

1,404

Actuarial gain (loss) on post-retirement benefits

11

(60)

Common share repurchases

-

(42)

Earnings for the period

123

42

Dividends

(5)

(6)

Balance - end of period

$

1,671

$

1,338




Shareholders' Equity

$

2,365

$

2,041

 

West Fraser Timber Co. Ltd.



Condensed Consolidated Statements of Earnings and Comprehensive Earnings

(in millions of Canadian dollars, except where indicated - unaudited)





January 1 to March 31


2017

2016




Sales 

$

1,189

$

1,077




Costs and expenses



Cost of products sold 

740

749

Freight and other distribution costs

160

159

Amortization 

51

49

Selling, general and administration

44

39

Equity-based compensation 

11

2


1,006

998

Operating earnings

183

79

Finance expense

(7)

(8)

Other (note 7)

-

(16)

Earnings before tax

176

55

Tax provision (note 8)

(53)

(13)

Earnings

$

123

$

42




Earnings per share (dollars) (note 9)



Basic 

$

1.58

$

0.51

Diluted 

$

1.58

$

0.50




Comprehensive earnings



Earnings

$

123

$

42

Other comprehensive earnings



Translation loss on foreign operations

(5)

(32)

Actuarial gain (loss) on post-retirement benefits 

11

(60)

Comprehensive earnings

$

129

$

(50)

 

West Fraser Timber Co. Ltd.

Condensed Consolidated Statements of Cash Flows

(in millions of Canadian dollars, except where indicated - unaudited)





January 1 to March 31


2017

2016

Cash used for operations



Earnings 

$

123

$

42

Adjustments 




Amortization

51

49


Finance expense

7

8


Foreign exchange gain on long-term financing

(1)

(9)


Loss on power agreements, net of settlement costs

-

11


Post-retirement expense

19

17


Contributions to post-retirement benefit plans

(14)

(12)


Tax provision

53

13


Income taxes paid

(36)

(9)


Other

3

(1)

Changes in non-cash working capital




Receivables

(91)

(36)


Inventories

(161)

(96)


Prepaid expenses

(7)

(5)


Payables and accrued liabilities

7

5


(47)

(23)




Cash provided by financing



Proceeds from operating loans

110

116

Finance expense paid

(1)

(1)

Dividends

(5)

(6)

Common share repurchases

-

(50)


104

59




Cash used for investing



Additions to capital assets

(56)

(49)

Government assistance

-

4

Other

1

-


(55)

(45)




Change in cash 

2

(9)

Foreign exchange effect on cash

13

4

Cash - beginning of period

35

(16)

Cash - end of period

$

50

$

(21)




Cash consists of



Cash and short-term investments

$

86

$

19

Cheques issued in excess of funds on deposit

(36)

(40)


$

50

$

(21)

 

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, 2016 annual financial statements. These condensed consolidated interim financial statements should be read in conjunction with our 2016 annual consolidated financial statements.

3.  Inventories

Inventories at March 31, 2017 were written down by $5 million (December 31, 2016 - $5 million; March 31, 2016 - $14 million) to reflect net realizable value being lower than cost.

4.  Long-term debt and operating loans

Long-term debt








March 31, 2017


December 31, 2016

US$300 million senior notes due October






2024; interest at 4.35%

$

399

$

403

US$8 million note payable due October






2020; interest at 2%


10


10

Notes payable


4


4



413


417

Deferred financing costs


(4)


(4)


$

409

$

413

 

The fair value of the long-term debt is $397 million (December 31, 2016 - $391 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 September 30, 2020, 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 $59 million dedicated to letters of credit, of which US$7 million is dedicated to our U.S. operations.    

At March 31, 2017, our revolving credit facility was drawn by $108 million (net of deferred financing costs of $2 million).  Letters of credit in the amount of $46 million were also supported by our facilities, leaving $444 million of credit available for further use.  At December 31, 2016 there were no amounts outstanding under our revolving credit facility, as a result, the associated deferred financing costs of $2 million were reported in other assets and our outstanding letters of credit were $48 million.

Interest on these facilities is payable at floating rates based on Prime, U.S. base, Bankers' Acceptances or LIBOR 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.

5.  Other liabilities








March 31, 2017


December 31, 2016

Post-retirement (note 6)

$

156

$

162

Reforestation


87


69

Decommissioning


27


25

Other


20


16


$

290

$

272

 

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:








March 31, 2017


December 31, 2016

Projected benefit obligations

$

(1,653)

$

(1,648)

Fair value of plan assets


1,522


1,507

Impact of minimum funding requirement


(15)


(13)


$

(146)

$

(154)

Represented by





Post-retirement assets

$

10

$

8

Post-retirement liabilities (note 5)


(156)


(162)


$

(146)

$

(154)

 

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








March 31, 2017


December 31, 2016

Discount rate


3.75%


3.75%

Future compensation rate increase


3.50%


3.50%

 

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




January 1 to March 31



2017


2016

Actuarial gain (loss)

$

15

$

(81)

Tax recovery (provision) on actuarial gain (loss)


(4)


21


$

11

$

(60)

 

7.  Other


January 1 to March 31



2017


2016

Foreign exchange loss on working capital

$

(1)

$

(10)

Foreign exchange loss on intercompany financing1


(3)


(17)

Foreign exchange gain on long-term debt


4


26

Loss on power agreements


-


(19)

Other


-


4


$

-

$

(16)

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. 

 

8.  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:




January 1 to March 31



2017


2016

Income tax at statutory rate of 26%

$

(46)

$

(14)

Non-taxable amounts


(3)


2

Rate differentials between jurisdictions and on specified activities


(5)


(2)

Unrecognized capital losses


-


1

Other


1


-

Tax provision

$

(53)

$

(13)

 

9.  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.




January 1 to March 31



2017


2016

Earnings






Basic

$

123

$

42


Share option expense


10


2


Equity-settled share option adjustment


(2)


(2)


Diluted

$

131

$

42






Weighted average number of shares (thousands)






Basic


78,164


82,281


Share options


841


955


Diluted


79,005


83,236

Earnings per share (dollars)






Basic

$

1.58

$

0.51


Diluted

$

1.58

$

0.50

 

10.  Segmented information




Pulp &

Corporate



Lumber

Panels

paper

& other

Total

January 1, 2017 to March 31, 2017












Sales 







To external customers

$

810

$

126

$

253

$

-

$

1,189


To other segments

26

2

-

-



$

836

$

128

$

253

$

-








Operating earnings before amortization

$

191

$

15

$

40

$

(12)

$

234

Amortization 

(39)

(3)

(9)

-

(51)

Operating earnings

152

12

31

(12)

183

Finance expense 

(4)

(1)

(2)

-

(7)

Other 

-

-

1

(1)

-

Earnings before tax

$

148

$

11

$

30

$

(13)

$

176







January 1, 2016 to March 31, 2016












Sales 







To external customers

$

729

$

136

$

212

$

-

$

1,077


To other segments

29

2

-

-



$

758

$

138

$

212

$

-








Operating earnings before amortization

$

100

$

15

$

14

$

(1)

$

128

Amortization

(37)

(3)

(9)

-

(49)

Operating earnings

63

12

5

(1)

79

Finance expense 

(5)

(1)

(2)

-

(8)

Other 

(5)

(2)

(23)

14

(16)

Earnings before tax

$

53

$

9

$

(20)

$

13

$

55

 

The geographic distribution of external sales is as follows:





January 1 to March 311



2017


2016

Canada

$

254

$

247

United States


675


620

China


148


116

Other Asia


101


77

Other


11


17


$

1,189

$

1,077

1.

Sales distribution is based on the location of product delivery.

 

11.  Softwood lumber dispute

The Canada – U.S. Softwood Lumber Agreement ("SLA") expired in October 2015 and on the expiry of that agreement a one year moratorium on trade sanctions by the U.S. came into place.  The Government of Canada and the U.S. Trade Representative have been unable to reach agreement on a new managed trade agreement.

On November 25, 2016 a coalition of U.S. lumber producers petitioned the U.S. Department of Commerce and the U.S. International Trade Commission to investigate alleged subsidies to Canadian producers and levy countervailing and anti-dumping duties against Canadian imports.  The U.S. Department of Commerce has initiated its investigation and is expected to make a preliminary determination regarding countervailing duties in April 2017, and in June 2017 for anti-dumping duties. If the U.S. Department of Commerce determines that "critical circumstances" apply, duties could be applied retroactively up to 90 days prior to the preliminary determinations.  We have been chosen by the U.S. Department of Commerce as a "mandatory respondent" to both the countervailing and antidumping investigations and as a result will receive unique company specific rates.

SOURCE West Fraser Timber Co. Ltd.

For further information: Chris Virostek, Vice President, Finance and Chief Financial Officer; Rodger Hutchinson, Vice President, Corporate Controller and Investor Relations, (604) 895-2700, www.westfraser.com

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