West Fraser reports Q1 net earnings of C$72M, up from C$67M a year earlier, despite sales falling 6.3% to C$809M; lumber operations generated earnings of C$79M, boosted by higher SYP prices, weakened Canadian dollar, slightly offset by lower shipments

Audrey Dixon

Audrey Dixon

VANCOUVER, British Columbia , April 24, 2014 (press release) – West Fraser Timber Co. Ltd. (TSX:WFT) today reported earnings of $72 million or $0.84 per share on sales of $809 million in the first quarter of 2014. These results compare with previous periods as follows:

($ millions except earnings per share ("EPS")) Q1-14 Q4-13 Q1-13
Sales 809 833 863
EBITDA1 148 97 141
Operating earnings 106 30 101
Earnings 72 118 67
Basic EPS ($) 0.84 1.37 0.79
Adjusted earnings2 84 50 103
Adjusted basic EPS ($)2 0.97 0.58 1.21
1. In this News Release, reference is made to EBITDA (defined as operating earnings plus amortization and restructuring charges).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 has 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 first quarter 2014 results for details of adjustments.
Operational Results

In the quarter our lumber operations generated operating earnings of $79 million and EBITDA of $107 million. The improvement over the prior quarter reflects higher SYP lumber prices and the benefit of a weaker Canadian dollar partially offset by lower shipments. Operating earnings in the previous quarter included a $24 million restructuring charge.

The panel segment, which includes plywood, LVL and MDF, generated $7 million of operating earnings and EBITDA of $11 million in the quarter, reflecting higher plywood prices.

Pulp and paper operations generated operating earnings of $22 million in the quarter and EBITDA of $32 million. The improvement from the previous quarter reflected improved pulp prices, a weaker Canadian dollar and improved operating rates at our mills.

During the quarter, much of Canada and the U.S. experienced severe winter conditions and significantly restricted railcar availability, which impaired the transport of our products to market. Shipments were further adversely affected by a 28-day trucking strike at the port of Vancouver during March. As a result, our finished-goods inventories at the end of the quarter were at unusually high levels. We expect that as the weather improves and the building season progresses, inventories will decrease to more normal levels.

Outlook

We expect lumber prices to be volatile over the balance of 2014 as the supply chain adjusts to more normal shipping flows and the weather-delayed building season progresses. The recovery of the U.S. housing market continues to be the greatest uncertainty that will affect lumber prices. Pulp prices are under pressure as new global hardwood pulp supply entered the market in the quarter.

"We continue to be confident about the long-term recovery of the U.S. housing market although we do expect that it will be bumpy," West Fraser's President and CEO Ted Seraphim said. "Our purchases of three sawmills, two in Arkansas and one in northern Alberta reflects our positive view of the future. The current combined capacity of these mills is 380 million board feet and with some additional capital investment, we expect to increase capacity to 485 million board feet."

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 an integrated wood products company producing lumber, wood chips, LVL, MDF, plywood, pulp and newsprint. The Company has 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 "Operational Results" (regarding expected effects of improved weather) and "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 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 the Company undertakes no obligation to publicly revise them to reflect subsequent events or circumstances, except as required by applicable securities laws.

Conference Call

Investors are invited to listen to the quarterly conference call on Friday, April 25, 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 and a presentation to be used during the call may 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
    2014   2013
Assets        
Current assets        
Cash and short-term investments $ 49 $ 162
Receivables   293   279
Inventories (note 4)   697   519
Prepaid expenses   14   11
    1,053   971
Property, plant and equipment   1,225   1,144
Timber licences   485   489
Goodwill and other intangibles (note 3)   353   321
Other assets   70   83
Deferred income tax assets   91   96
  $ 3,277 $ 3,104
 
Liabilities        
Current liabilities        
Cheques issued in excess of funds on deposit $ 15 $ -
Operating loans (note 5)   57   -
Payables and accrued liabilities   397   385
Income taxes payable   18   30
Reforestation and decommissioning obligations   39   39
Current portion of long-term debt (note 5)   332   319
    858   773
Long-term debt (note 5)   9   9
Other liabilities (note 6)   213   197
Deferred income tax liabilities   171   178
    1,251   1,157
 
Shareholders' Equity        
Share capital   602   602
Accumulated other comprehensive earnings   27   10
Retained earnings   1,397   1,335
    2,026   1,947
  $ 3,277 $ 3,104

Number of Common shares and Class B Common shares outstanding at April 24, 2014 was 85,674,160.

 
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  
  2014   2013  
         
Share capital            
Balance - beginning and end of period $ 602   $ 602  
             
Accumulated other comprehensive earnings            
Balance - beginning of period $ 10   $ (9 )
Translation gain on foreign operations   17     5  
Balance - end of period $ 27   $ (4 )
             
Retained earnings            
Balance - beginning of period $ 1,335   $ 899  
Actuarial loss on post-retirement benefits (net of tax)   (4 )   (52 )
Earnings for the period   72     67  
Dividends   (6 )   (6 )
Balance - end of period $ 1,397   $ 908  
             
Shareholders' equity $ 2,026   $ 1,506  
   
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  
    2014     2013  
   
Sales $ 809   $ 863  
   
Costs and expenses            
Cost of products sold   516     541  
Freight and other distribution costs   109     117  
Amortization   42     40  
Selling, general and administration   35     32  
Equity-based compensation   1     32  
    703     762  
Operating earnings   106     101  
Finance expense   (6 )   (7 )
Exchange loss on long-term debt   (13 )   (6 )
Other income (expense) (note 9)   13     (3 )
Earnings before tax   100     85  
Tax provision (note 10)   (28 )   (18 )
Earnings $ 72   $ 67  
   
Earnings per share (dollars) (note 11)            
Basic $ 0.84   $ 0.79  
Diluted $ 0.79   $ 0.79  
   
Comprehensive earnings            
Earnings $ 72   $ 67  
Other comprehensive earnings            
Translation gain on foreign operations   17     5  
Actuarial loss on post-retirement benefits 1   (4 )   (52 )
Comprehensive earnings $ 85   $ 20  
1. Net of income tax charge of $2 million (three months ended March 31, 2013 - $17 million).
   
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  
    2014     2013  
Operating activities            
Earnings $ 72   $ 67  
Adjustments            
  Amortization   42     40  
  Finance expense   6     7  
  Exchange loss on long-term debt   13     6  
  Tax provision   28     18  
  Income taxes paid   (37 )   (12 )
  Post-retirement expense   14     13  
  Contributions to post-retirement benefit plans   (7 )   (8 )
  Other   11     18  
Changes in non-cash working capital            
  Receivables   (11 )   (77 )
  Inventories   (165 )   (112 )
  Prepaid expenses   (3 )   (5 )
  Payables and accrued liabilities   (2 )   46  
Cash flows from operating activities   (39 )   1  
   
Financing activities            
Proceeds from operating loans   61     -  
Finance expense paid   (1 )   (1 )
Dividends   (6 )   (6 )
Cash flows from financing activities   54     (7 )
   
Investing activities            
Acquisition (note 3)   (60 )   -  
Additions to capital assets   (93 )   (49 )
Government assistance   9     1  
Other   (1 )   1  
Cash flows from investing activities   (145 )   (47 )
   
Change in cash   (130 )   (53 )
Foreign exchange effect on cash   2     1  
Cash - beginning of period   162     102  
Cash - end of period $ 34   $ 50  
   
Cash consists of            
Cash and short-term investments $ 49   $ 61  
Cheques issued in excess of funds on deposit   (15 )   (11 )
  $ 34   $ 50  
 
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.

  1. 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.

  1. Acquisition

On March 7, 2014 we acquired a lumber manufacturing facility located in Mansfield, Arkansas for $60 million (US$55 million). We accounted for the transaction 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:

    Preliminary
2014
Non-cash working capital $ 9
Property, plant and equipment   16
Goodwill and other intangibles   35
Cash consideration $ 60
  1. Inventories

Inventories at March 31, 2014 were written down by $4 million (December 31, 2013 - $6 million; March 31, 2013 - $1 million) to reflect net realizable value being lower than cost.

  1. Long-term debt and operating loans

Long-term debt

    March 31, 2014   December 31, 2013
US$300 million senior notes due October 2014; interest at 5.2% $ 332 $ 319
US$8 million note payable due October 2020; interest at 2%   8   8
Note payable due in installments to 2020; interest at 5.5%   2   2
    342   329
Current portion   (332)   (319)
Deferred financing costs   (1)   (1)
  $ 9 $ 9

The fair value of the long-term debt is $352 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 $530 million in revolving lines of credit of which $57 million (net of deferred financing costs of $4 million) were drawn as at March 31, 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, a $25 million demand line of credit dedicated to letters of credit and a $5 million demand line of credit dedicated to a jointly owned newsprint operation. Interest on the three facilities is payable at floating rates based on Prime, U.S. base, Bankers' Acceptances or LIBOR at our option. As at March 31, 2014, letters of credit in the amount of $46 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.

  1. Other liabilities
         
    March 31, 2014   December 31, 2013
Post-retirement (note 7) $ 87 $ 82
Reforestation   77   66
Decommissioning   22   22
Other   27   27
  $ 213 $ 197
  1. 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, 2014     December 31, 2013  
Projected benefit obligations $ (1,270 ) $ (1,212 )
Fair value of plan assets   1,250     1,207  
Impact of minimum funding requirement   (5 )   (5 )
    (25 )   (10 )
Represented by            
Post-retirement assets   62     72  
Post-retirement liabilities (note 6)   (87 )   (82 )
  $ (25 ) $ (10 )

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

  March 31, 2014 December 31, 2013 March 31, 2013
Discount rate 4.50% 4.75% 4.00%
Future compensation rate increase 3.50% 3.50% 3.50%

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

  January 1 to March 31  
    2014     2013  
Actuarial loss $ (6 ) $ (69 )
Tax recovery on actuarial loss   2     17  
  $ (4 ) $ (52 )
  1. Share capital

Stock dividend

On December 10, 2013 the Board of Directors declared a stock dividend (the "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.

  1. Other income (expense)
  January 1 to March 31  
    2014   2013  
Foreign exchange gain - net $ 8 $ 4  
Increase in decommissioning obligations   -   (6 )
Other   5   (1 )
  $ 13 $ (3 )
  1. Tax provision

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

  January 1 to March 31  
    2014     2013  
Income tax expense at statutory rate of 26% (2013 - 25%) $ (26 ) $ (21 )
Non-taxable amounts   (1 )   (7 )
Rate differentials between jurisdictions and on specified activities   (1 )   (4 )
Recognized tax assets   -     14  
Tax provision $ (28 ) $ (18 )
  1. 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  
    2014     2013  
Earnings            
  Basic $ 72   $ 67  
  Share option (recovery) expense   (1 )   27  
  Equity-settled share option adjustment   (2 )   (2 )
  Diluted $ 69   $ 92  
             
Weighted average number of shares (thousands)            
  Basic   85,672     85,728  
  Share options   1,541     1,430  
  Diluted   87,213     87,158  
Earnings per share (dollars)            
  Basic $ 0.84   $ 0.79  
  Diluted $ 0.79   $ 0.79  
  1. Segmented information
                Pulp &     Corporate        
    Lumber     Panels     paper     & other     Total  
January 1, 2014 to March 31, 2014                              
   
Sales at market prices                              
  To external customers $ 502   $ 112   $ 195   $ -   $ 809  
  To other segments   22     2     -     -        
  $ 524   $ 114   $ 195   $ -        
   
EBITDA 1 $ 107   $ 11   $ 32   $ (2 ) $ 148  
Amortization   (28 )   (4 )   (10 )   -     (42 )
Operating earnings   79     7     22     (2 )   106  
Finance expense   (4 )   -     (2 )   -     (6 )
Exchange loss on long-term debt   -     -     -     (13 )   (13 )
Other income   8     -     5     -     13  
   
Earnings before tax $ 83   $ 7   $ 25   $ (15 ) $ 100  
   
January 1, 2013 to March 31, 2013                              
   
Sales at market prices                              
  To external customers $ 561   $ 115   $ 187   $ -   $ 863  
  To other segments   18     2     -     -        
  $ 579   $ 117   $ 187   $ -        
   
EBITDA 1 $ 146   $ 18   $ 8   $ (31 ) $ 141  
Amortization   (24 )   (4 )   (12 )   -     (40 )
Operating earnings   122     14     (4 )   (31 )   101  
Finance expense   (4 )   (1 )   (2 )   -     (7 )
Exchange loss on long-term debt   -     -     -     (6 )   (6 )
Other income (expense)   -     -     2     (5 )   (3 )
   
Earnings before tax $ 118   $ 13   $ (4 ) $ (42 ) $ 85  
1. Non-IFRS measure:
  EBITDA is defined as operating earnings plus amortization and restructuring charges.

The geographic distribution of external sales is as follows:

  January 1 to March 311
    2014   2013
Canada $ 193 $ 209
United States   434   435
China   104   139
Other Asia   51   56
Other   27   24
  $ 809 $ 863
1. Sales distribution is based on the location of product delivery.
  1. Subsequent event

On April 3, 2014, we announced the completion of the acquisition of a lumber manufacturing facility and certain timber harvesting rights located in High Prairie, Alberta and an agreement to acquire a lumber manufacturing facility in Russellville, Arkansas. The preliminary High Prairie purchase price was $55 million plus working capital. The Russellville purchase price1 is estimated to be $67 million (US$61 million) plus working capital and is expected to close before the end of April, 2014.

1. Canadian dollar amount will be updated to reflect the exchange rate in effect on the date of close.
 

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
(604) 681-6061 (FAX)
www.westfraser.com

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