West Fraser reports Q2 earnings of C$74M, down 32% year-over-year, despite sales climbing 17% to C$1.05B; shipments of lumber increased sharply in Q2 after Vancouver port strike was settled, but gains largely offset by lower prices
Audrey Dixon
VANCOUVER, British Columbia
,
July 16, 2014
(press release)
–
West Fraser Timber Co. Ltd. (TSX:WTF) today reported earnings of $74 million or $0.87 per share on sales of $1,053 million in the second quarter of 2014. These results compare with previous periods as follows:
In the quarter our lumber operations generated operating earnings of $81 million (Q1 - $79 million) and EBITDA of $106 million (Q1- $107 million). The results were substantially similar to the previous quarter as significantly higher shipments were offset by lower prices. In the quarter our panel segment generated operating earnings of $10 million (Q1 - $7 million) and EBITDA of $13 million (Q1 - $11 million) as plywood prices and shipments improved. In the quarter our pulp and paper operations generated operating earnings of $19 million (Q1 - $22 million) and EBITDA of $30 million (Q1 - $32 million). Although shipments were higher and prices were relatively similar to the previous quarter, increased costs contributed to the decline in earnings. Outlook Shipments of lumber increased sharply in the second quarter after the settlement of the 28-day strike at the port of Vancouver that occurred during March and both SPF and SYP prices declined. As the strike-related lumber inventory backlog continues to clear and U.S. housing continues to gradually recover, lumber prices have stabilized and shown some improvement in early July. However, we expect them to remain fairly volatile. Log costs are expected to trend higher in B.C. as competition for purchased wood increases but lumber productivity and cost reductions throughout our sawmills are expected to continue to improve over the next few quarters as we complete various major capital projects. "We've expanded our lumber capacity with our acquisition of two sawmills in the second quarter and one in the first," said Ted Seraphim, our President and CEO. "We are pleased with the integration of those operations and the contributions they will continue to make to our earnings." 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 news release 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 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 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 Thursday, July 17, 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 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: 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: Goodwill of $76 million, recorded in the lumber segment, is fully deductible for tax purposes. Revenue of $41 million and earnings of $2 million have been generated and included in earnings related to these acquisitions. 4. Inventories Inventories at June 30, 2014 were written down by $7 million (March 31, 2014 - $4 million; June 30, 2013 - $7 million; December 31, 2013 - $6 million) to reflect net realizable value being lower than cost. 5. Long-term debt and operating loans Long-term debt The fair value of the long-term debt is $334 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. Operating loans We have $580 million in revolving lines of credit of which $126 million (net of deferred financing costs of $3 million) were drawn as at June 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 June 30, 2014, letters of credit in the amount of $45 million have been 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 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: The significant actuarial assumptions used to determine our balance sheet date post-retirement assets and liabilities are as follows: 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: 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 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"). On September 12, 2013 our Board of Directors authorized the initiation of a normal course issuer bid to repurchase for cancellation up to 2,000,000 Common shares or approximately 2.5% of our issued and outstanding Common shares. The normal course issuer bid may continue until September 16, 2014. In 2014 we repurchased 848,400 Common shares for $43 million. 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) 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: 11. Earnings per share Basic earnings per share is calculated based on earnings available to Common shareholders, as set out below, using the weighted average number of Common shares and Class B Common shares outstanding. Diluted earnings per share is calculated based on earnings available to Common shareholders adjusted to remove the actual share option expense (recovery) charged to earnings and after deducting a notional charge for share option expense assuming the use of the equity-settled method, as set out below. The diluted weighted average number of shares is calculated using the treasury stock method. When earnings available to Common shareholders for diluted earnings per share are greater than earnings available to Common shareholders for basic earnings per share, the calculation is anti-dilutive and diluted earnings per share are deemed to be the same as basic earnings per share. 12. Segmented information The geographic distribution of external sales is as follows1: 1. Sales distribution is based on the location of product delivery.
($ millions except earnings per share ("EPS"))
Q2-14
Q1-14
YTD-14
Q2-13
YTD-13
Sales
1,053
809
1,862
900
1,763
EBITDA1
146
148
294
178
319
Operating earnings
106
106
212
141
242
Earnings
74
72
146
109
176
Basic EPS ($)
0.87
0.84
1.71
1.27
2.06
Adjusted earnings 2
66
84
150
107
210
Adjusted basic EPS ($)2
0.77
0.97
1.74
1.25
2.46
Operational Results
West Fraser Timber Co. Ltd.
Condensed Consolidated Balance Sheets
(in millions of Canadian dollars, except where indicated - unaudited)
June 30
December 31
2014
2013
Assets
Current assets
Cash and short-term investments
$ 26
$ 162
Receivables
324
279
Inventories (note 4)
520
519
Prepaid expenses
27
11
897
971
Property, plant and equipment
1,339
1,144
Timber licences
524
489
Goodwill and other intangibles
392
321
Other assets
53
83
Deferred income tax assets
77
96
$ 3,282
$ 3,104
Liabilities
Current liabilities
Cheques issued in excess of funds on deposit
$ 15
$ -
Operating loans (note 5)
126
-
Payables and accrued liabilities
372
385
Income taxes payable
17
30
Reforestation and decommissioning obligations
41
39
Current portion of long-term debt (note 5)
320
319
891
773
Long-term debt (note 5)
9
9
Other liabilities (note 6)
229
197
Deferred income tax liabilities
163
178
1,292
1,157
Shareholders' Equity
Share capital
596
602
Accumulated other comprehensive earnings
11
10
Retained earnings
1,383
1,335
1,990
1,947
$ 3,282
$ 3,104
Number of Common shares and Class B Common shares outstanding at July 16, 2014 was 84,827,348.
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
2014
2013
2014
2013
Share capital
Balance - beginning of period
$ 602
$ 602
$ 602
$ 602
Common share repurchases
(6
)
-
(6
)
-
Balance - end of period
$ 596
$ 602
$ 596
$ 602
Accumulated other comprehensive earnings
Balance - beginning of period
$ 27
$ (4
)
$ 10
$ (9
)
Translation gain (loss) on foreign operations
(16
)
11
1
16
Balance - end of period
$ 11
$ 7
$ 11
$ 7
Retained earnings
Balance - beginning of period
$ 1,397
$ 908
$ 1,335
$ 899
Actuarial gain (loss) on post-retirement benefits (net of tax)
(45
)
58
(49
)
6
Common share repurchases
(37
)
-
(37
)
-
Earnings for the period
74
109
146
176
Dividends
(6
)
(6
)
(12
)
(12
)
Balance - end of period
$ 1,383
$ 1,069
$ 1,383
$ 1,069
Shareholders' equity
$ 1,990
$ 1,678
$ 1,990
$ 1,678
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
2014
2013
2014
2013
Sales
$ 1,053
$ 900
$ 1,862
$ 1,763
Costs and expenses
Cost of products sold
709
576
1,225
1,117
Freight and other distribution costs
158
126
267
243
Amortization
40
37
82
77
Selling, general and administration
38
32
73
64
Equity-based compensation
2
(12
)
3
20
947
759
1,650
1,521
Operating earnings
106
141
212
242
Finance expense
(8
)
(7
)
(14
)
(14
)
Exchange gain (loss) on long-term debt
12
(11
)
(1
)
(17
)
Other income (expense) (note 9)
(7
)
10
6
7
Earnings before tax
103
133
203
218
Tax provision (note 10)
(29
)
(24
)
(57
)
(42
)
Earnings
$ 74
$ 109
$ 146
$ 176
Earnings per share (dollars) (note 11)
Basic
$ 0.87
$ 1.27
$ 1.71
$ 2.06
Diluted
$ 0.87
$ 1.12
$ 1.66
$ 2.06
Comprehensive earnings
Earnings
$ 74
$ 109
$ 146
$ 176
Other comprehensive earnings
Translation gain (loss) on foreign operations
(16
)
11
1
16
Actuarial gain (loss) on post-retirement benefits 1
(45
)
58
(49
)
6
Comprehensive earnings
$ 13
$ 178
$ 98
$ 198
1. Net of income tax recovery of $15 million for the three months ended June 30, 2014 (three months ended June 30, 2013 - $19 million provision) and $17 million for the six months ended June 30, 2014 (six months ended June 30, 2013 - $2 million 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
2014
2013
2014
2013
Operating activities
Earnings
$ 74
$ 109
$ 146
$ 176
Adjustments
Amortization
40
37
82
77
Finance expense
8
7
14
14
Exchange (gain) loss on long-term debt
(12
)
11
1
17
Tax provision
29
24
57
42
Income taxes paid
(10
)
(10
)
(47
)
(22
)
Post-retirement expense
11
15
25
28
Contributions to post-retirement benefit plans
(22
)
(32
)
(29
)
(40
)
Other
(9
)
(18
)
2
-
Changes in non-cash working capital
Receivables
(26
)
49
(37
)
(28
)
Inventories
192
124
27
12
Prepaid expenses
(14
)
(8
)
(17
)
(13
)
Payables and accrued liabilities
(25
)
(51
)
(27
)
(5
)
Cash flows from operating activities
236
257
197
258
Financing activities
Proceeds from operating loans
68
-
129
-
Finance expense paid
(10
)
(8
)
(11
)
(9
)
Dividends
(6
)
(6
)
(12
)
(12
)
Common share repurchases
(43
)
-
(43
)
-
Cash flows from financing activities
9
(14
)
63
(21
)
Investing activities
Acquisitions (note 3)
(142
)
-
(202
)
-
Additions to capital assets
(121
)
(74
)
(214
)
(123
)
Government assistance
4
-
13
1
Other
(10
)
(2
)
(11
)
(1
)
Cash flows from investing activities
(269
)
(76
)
(414
)
(123
)
Change in cash
(24
)
167
(154
)
114
Foreign exchange effect on cash
1
3
3
4
Cash - beginning of period
34
50
162
102
Cash - end of period
$ 11
$ 220
$ 11
$ 220
Cash consists of
Cash and short-term investments
$ 26
$ 220
Cheques issued in excess of funds on deposit
(15
)
-
$ 11
$ 220
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
4
67
Russellville, Arkansas
Lumber manufacturing facility
April 25
78
1
79
Total
$
202
$
5
$
207
2014
Current assets
$
40
Current liabilities
(6
)
Property, plant and equipment
54
Timber licenses
44
Goodwill and other intangibles
77
Long-term liabilities
(2
)
Consideration
$
207
June 30, 2014
December 31, 2013
US$300 million senior notes due October 2014; interest at 5.2%
$
320
$
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
330
329
Current portion
(320
)
(319
)
Deferred financing costs
(1
)
(1
)
$
9
$
9
June 30, 2014
December 31, 2013
Post-retirement (note 7)
$
108
$
82
Reforestation
72
66
Decommissioning
22
22
Other
27
27
$
229
$
197
June 30, 2014
December 31, 2013
Projected benefit obligations
$
(1,370
)
$
(1,212
)
Fair value of plan assets
1,296
1,207
Impact of minimum funding requirement
-
(5
)
$
(74
)
$
(10
)
Represented by
Post-retirement assets
$
34
$
72
Post-retirement liabilities (note 6)
(108
)
(82
)
$
(74
)
$
(10
)
June 30, 2014
March 31, 2014
December 31, 2013
Discount rate
4.00%
4.50%
4.75%
Future compensation rate increase
3.50%
3.50%
3.50%
April 1 to June 30
January 1 to
June 30
2014
2013
2014
2013
Actuarial gain (loss)
$
(60
)
$
77
$
(66
)
$
8
Tax recovery (provision)
15
(19
)
17
(2
)
$
(45
)
$
58
$
(49
)
$
6
2014
2013
Number
Amount
Number
Amount
Common
82,545,870
$
596
83,390,026
$
602
Class B Common
2,281,478
-
2,281,478
-
Total Common
84,827,348
$
596
85,671,504
$
602
April 1 to June 30
January 1 to
June 30
2014
2013
2014
2013
Foreign exchange gain (loss) - net
$
(8
)
$
5
$
-
$
9
Increase in decommissioning obligations
-
-
-
(6
)
Other
1
5
6
4
$
(7
)
$
10
$
6
$
7
April 1 to June 30
January 1 to
June 30
2014
2013
2014
2013
Income tax expense at statutory rate of 26% (2013 - 25.75%)
$
(27
)
$
(35
)
$
(53
)
$
(56
)
Non-taxable amounts
1
2
-
(5
)
Rate differentials between jurisdictions and on specified activities
(2
)
(4
)
(3
)
(8
)
Recognized tax assets
-
16
-
30
Increase in statutory tax rate
-
(2
)
-
(2
)
Other
(1
)
(1
)
(1
)
(1
)
Tax provision
$
(29
)
$
(24
)
$
(57
)
$
(42
)
April 1 to June 30
January 1 to
June 30
2014
2013
2014
2013
Earnings
Basic
$
74
$
109
$
146
$
176
Share option expense (recovery)
2
(12
)
1
15
Equity settled share option adjustment
-
-
(2
)
(2
)
Diluted
$
76
$
97
$
145
$
189
Weighted average number of shares (thousands)
Basic
85,408
85,730
85,540
85,728
Share options
1,389
1,377
1,464
1,423
Diluted
86,797
87,107
87,004
87,151
Earnings per share (dollars)
Basic
$
0.87
$
1.27
$
1.71
$
2.06
Diluted
$
0.87
$
1.12
$
1.66
$
2.06
Pulp &
Corporate
Lumber
Panels
paper
& other
Total
April 1, 2014 to June 30, 2014
Sales at market prices
To external customers
$ 696
$ 131
$ 226
$ -
$ 1,053
To other segments
26
2
-
-
$ 722
$ 133
$ 226
$ -
EBITDA 1
$ 106
$ 13
$ 30
$ (3
)
$ 146
Amortization
(25
)
(3
)
(11
)
(1
)
(40
)
Operating earnings
81
10
19
(4
)
106
Finance expense
(4
)
(2
)
(2
)
-
(8
)
Exchange gain on long-term debt
-
-
-
12
12
Other expense
(3
)
-
(4
)
-
(7
)
Earnings before tax
$ 74
$ 8
$ 13
$ 8
$ 103
April 1, 2013 to June 30, 2013
Sales at market prices
To external customers
$ 592
$ 119
$ 189
$ -
$ 900
To other segments
22
1
-
-
$ 614
$ 120
$ 189
$ -
EBITDA 1
$ 125
$ 10
$ 31
$ 12
$ 178
Amortization
(22
)
(4
)
(11
)
-
(37
)
Operating earnings
103
6
20
12
141
Finance expense
(3
)
(1
)
(3
)
-
(7
)
Exchange loss on long-term debt
-
-
-
(11
)
(11
)
Other income
6
-
4
-
10
Earnings before tax
$ 106
$ 5
$ 21
$ 1
$ 133
1.
Non-IFRS measure:
EBITDA is defined as operating earnings plus amortization and restructuring charges.
Pulp &
Corporate
Lumber
Panels
paper
& other
Total
January 1, 2014 to June 30, 2014
Sales at market prices
To external customers
$ 1,198
$ 243
$ 421
$ -
$ 1,862
To other segments
48
4
-
-
$ 1,246
$ 247
$ 421
$ -
EBITDA 1
$ 213
$ 24
$ 62
$ (5
)
$ 294
Amortization
(53
)
(7
)
(21
)
(1
)
(82
)
Operating earnings
160
17
41
(6
)
212
Finance expense
(8
)
(2
)
(4
)
-
(14
)
Exchange loss on long-term debt
-
-
-
(1
)
(1
)
Other income
5
-
1
-
6
Earnings before tax
$ 157
$ 15
$ 38
$ (7
)
$ 203
January 1, 2013 to June 30, 2013
Sales at market prices
To external customers
$ 1,153
$ 234
$ 376
$ -
$ 1,763
To other segments
40
3
-
-
$ 1,193
$ 237
$ 376
$ -
EBITDA 1
$ 271
$ 28
$ 39
$ (19
)
$ 319
Amortization
(46
)
(8
)
(23
)
-
(77
)
Operating earnings
225
20
16
(19
)
242
Finance expense
(7
)
(2
)
(5
)
-
(14
)
Exchange loss on long-term debt
-
-
-
(17
)
(17
)
Other income (expense)
6
-
6
(5
)
7
Earnings before tax
$ 224
$ 18
$ 17
$ (41
)
$ 218
1.
Non-IFRS measure:
EBITDA is defined as operating earnings plus amortization and restructuring charges.
April 1 to June 30
January 1 to
June 30
2014
2013
2014
2013
United States
$
555
$
456
$
748
$
891
Canada
209
215
643
424
China
172
130
276
269
Other Asia
95
78
146
134
Other
22
21
49
45
$
1,053
$
900
$
1,862
$
1,763
Contact Information
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
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