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West Fraser Timber Co. Ltd.

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West Fraser Announces 2019 First Quarter Results
West Fraser Announces 2019 First Quarter Results

Canada NewsWire

VANCOUVER, April 25, 2019 /CNW/ - First Quarter Highlights

  • Sales of $1.2 billion
  • Adjusted EBITDA1 of $110 million or 9% of sales
  • Curtailed 125 million board feet of B.C. production in the quarter
  • Permanently reduced B.C. production by 300 million board feet on an annual basis
  • Reinvested $108 million through capital expenditure and returned $64 million to shareholders through share buybacks and dividends
  • Net debt to capital ratio of 27% and available liquidity of $208 million
  • Additional $100 million operating credit facility made available on April 24, 2019

Results Compared to Previous Periods

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

Q1-19

Q4-18

Q1-18

Sales

1,241

1,274

1,364

Adjusted EBITDA1

110

120

379

Operating earnings

10

15

265

Earnings

(5)

29

197

Basic EPS ($)

(0.07)

0.42

2.53

Adjusted Earnings1

22

43

229

Adjusted basic EPS ($)1

0.32

0.63

2.96



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 2019 Management's Discussion & Analysis for details of these adjustments.

 

Highlights

Our lumber segment generated operating earnings of $2 million (Q4-18 - $22 million loss) and Adjusted EBITDA of $84 million (Q4-18 - $68 million). The current quarter's results were negatively impacted by lower SPF and SYP production and a decline in SPF market demand compared to the previous quarter. SPF production for the quarter was affected by the previously announced temporary curtailments at our Williams Lake, Chasm, 100 Mile and Chetwynd sawmills and the permanent curtailment of the third-shift at our Quesnel and Fraser Lake sawmills resulting in 125 MMfbm of lower production (Q4-18 - 25 MMfbm lower from temporary curtailments). Despite this, operating earnings were higher in the current quarter due in part to improved SPF pricing and higher SYP shipments. Lastly, the impact on earnings of log and lumber inventory write-downs to market value was nil in the current quarter compared to $17 million in the fourth quarter of 2018.  

Our panels segment generated operating earnings in the quarter of $11 million (Q4-18 - $4 million) and Adjusted EBITDA of $15 million (Q4-18 - $9 million). Improved plywood pricing was the major contributor to the improved results.

Our pulp & paper segment generated operating earnings of $1 million (Q4-18 - $36 million) and Adjusted EBITDA of $11 million (Q4-18 - $47 million). This quarter, our Hinton pulp mill experienced planned and unplanned shutdowns which resulted in 22,000 tonnes of lost production compared to the previous quarter. This gave rise to higher manufacturing costs which when accompanied with lower pulp pricing resulted in lower operating earnings compared to the previous quarter. This was partially offset by lower fibre costs, higher BCTMP shipment volumes and lower manufacturing costs at our Quesnel River pulp mill following their planned shutdowns in the fourth quarter of 2018.

We ended the quarter with $208 million of available liquidity and remain well within our leverage parameters. Subsequent to quarter end, we secured a new $100 million of demand operating credit facility as well as an additional $20 million on our letter of credit facility.

Outlook

Several of the fundamental factors for U.S. housing demand including mortgage rates and applications, housing permits, as well as employment and job gains have been showing positive signs early in 2019. As of yet, this has not translated into an increase in demand for lumber which we believe has been negatively impacted by persistently wet weather across major construction markets in the U.S. In the second quarter, normal spring logging curtailments will significantly reduce log inventories at our Canadian lumber and panel mills which will be an additional source of liquidity.

We have an upcoming maintenance shut down in May at our jointly owned NBSK mill in Quesnel.

Fibre costs in British Columbia ("B.C.") remain challenging due to a tight market for purchase wood which will impact quota wood in the second half of 2019. We are expecting a moderation of fibre costs in the U.S. South provided weather conditions normalize more in line with past trends.

The B.C. government has launched a number of policy measures that will affect the B.C. forest sector. The government has: (1) commenced a consultation process on a draft agreement called the Caribou Protection Plan which the province estimates may remove at least 300,000 m3 from the timber supply in the northeast of B.C.; (2) introduced Bill 22, Forest Amendment Act, 2019, which if passed into law will make it harder to dispose of or transfer a tenure agreement to a third party; and (3) initiated the Interior Revitalization process which is meant to encourage collaborative forest planning activities and update land-use planning and usage. We are still assessing the impact these changes may have on our operations.

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, 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 2018 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 26, 2019 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 and an earnings presentation 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


2019

2018

Assets



Current assets



Cash and short-term investments

$

34

$

160

Receivables 

380

332

Income taxes receivable

85

48

Inventories (note 5)

968

791

Prepaid expenses 

18

14


1,485

1,345

Property, plant and equipment 

2,103

2,056

Timber licences 

508

513

Goodwill and other intangibles  

757

767

Export duty deposits (note 14)

79

75

Other assets 

33

32

Deferred income tax assets

3

3


$

4,968

$

4,791




Liabilities



Current liabilities



Cheques issued in excess of funds on deposit

$

30

$

13

Operating loans (note 6)

327

61

Payables and accrued liabilities 

447

448

Income taxes payable

-

34

Reforestation and decommissioning obligations

40

39


844

595

Long-term debt (note 6)

678

692

Other liabilities (note 7)

400

316

Deferred income tax liabilities

271

292


2,193

1,895




Shareholders' Equity



Share capital 

487

491

Accumulated other comprehensive earnings 

153

170

Retained earnings

2,135

2,235


2,775

2,896


$

4,968

$

4,791

Number of Common shares and Class B Common shares outstanding at April 24, 2019 was 68,858,133.

 

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


2019

2018




Share capital 



Balance - beginning of period

$

491

$

549

Issuance of Common shares

1

-

Repurchase of Common shares

(5)

(4)

Balance - end of period

$

487

$

545




Accumulated other comprehensive earnings 



Balance - beginning of period

$

170

$

108

Translation gain (loss) on foreign operations

(17)

19

Balance - end of period

$

153

$

127




Retained earnings



Balance - beginning of period

$

2,235

$

2,069

Actuarial loss on post-retirement benefits

(36)

(3)

Repurchase of Common shares

(45)

(42)

Earnings for the period

(5)

197

Dividends

(14)

(12)

Balance - end of period

$

2,135

$

2,209




Shareholders' Equity

$

2,775

$

2,881

 

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


2019

2018




Sales 

$

1,241

$

1,364




Costs and expenses



Cost of products sold 

903

778

Freight and other distribution costs 

170

152

Export duties (note 14)

32

43

Amortization 

65

66

Selling, general and administration 

58

55

Equity-based compensation 

3

5


1,231

1,099

Operating earnings

10

265

Finance expense

(11)

(9)

Other (note 10)

(5)

9

Earnings before tax

(6)

265

Tax recovery (provision) (note 11)

1

(68)

Earnings

$

(5)

$

197




Earnings per share (dollars) (note 12)



Basic

$

(0.07)

$

2.53

Diluted

$

(0.12)

$

2.53




Comprehensive earnings



Earnings

$

(5)

$

197

Other comprehensive earnings



Translation gain (loss) on foreign operations

(17)

19

Actuarial loss on post-retirement benefits (note 8)

(36)

(3)

Comprehensive earnings

$

(58)

$

213

 

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

Cash provided by (used in)

2019

2018

Operating activities



Earnings 

$

(5)

$

197

Adjustments 



Amortization 

65

66

Finance expense

11

9

Foreign exchange loss (gain) on long-term financing

1

(4)

Foreign exchange loss (gain) on export duty deposits

2

(1)

Export duty deposits 

(5)

(4)

Post-retirement expense

21

20

Contributions to post-retirement benefit plans

(17)

(29)

Tax provision (recovery)

(1)

68

Income taxes paid

(77)

(132)

Other 

19

14

Changes in non-cash working capital



Receivables

(49)

(58)

Inventories

(180)

(228)

Prepaid expenses

(4)

(13)

Payables and accrued liabilities

(9)

38


(228)

(57)




Financing activities



Proceeds from operating loans

266

83

Finance expense paid

(5)

(3)

Repurchase of Common shares

(50)

(46)

Dividends 

(14)

(12)


197

22




Investing activities



Additions to capital assets

(108)

(104)

Other

-

2


(108)

(102)




Change in cash 

(139)

(137)

Foreign exchange effect on cash

(4)

4

Cash - beginning of period

147

258

Cash - end of period

$

4

$

125




Cash consists of



Cash and short-term investments

$

34

$

125

Cheques issued in excess of funds on deposit

(30)

-


$

4

$

125

 

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 use the same accounting policies and methods of their application as the December 31, 2018 annual audited consolidated financial statements. These condensed consolidated interim financial statements should be read in conjunction with our 2018 annual audited consolidated financial statements.

3. Changes in accounting standards

IFRS 16 – Leases

We have adopted IFRS 16 effective January 1, 2019 using the modified retrospective approach, accordingly the information presented for 2018 has not been restated. The new standard replaces IAS 17 - Leases and the related interpretations. IFRS 16 provides a single lessee accounting model and requires lessees to recognize assets and liabilities for all major leases.

On initial application, we elected to record right-of-use assets equal to the corresponding present value of the remaining lease liability. Right-of-use assets and lease obligations of $14 million were recorded as of January 1, 2019 for leases related to some of our office spaces and mobile equipment.      








January 1, 2019

Right-of-use assets

Increase in Property, plant and equipment

$

14

Lease obligation - current portion

Increase in Payables and accrued liabilities


2

Lease obligation - long-term portion

Increase in Other liabilities


12

 

When measuring lease liabilities, we discounted lease payments using our incremental borrowing rate at January 1, 2019. The weighted-average rate applied is 4.19%.

We elected to apply practical expedients, including recognition exemptions for short-term and low value leases.  

During the three months ended March 31, 2019, we recorded a $1 million amortization expense on the right-of-use assets and we made a $1 million payment on the lease obligations.

4. Seasonality of operations

Our operating results are subject to seasonal fluctuations that impact quarter-to-quarter operating results. Log availability has a direct impact on our operations. We build up log inventory in Canada during the winter to sustain our lumber and plywood production during the second quarter when logging is curtailed due to wet land conditions. Extreme weather conditions, wildfires in Western Canada and hurricanes in the U.S. South may periodically affect operations including logging, manufacturing and transportation. Consequently, interim operating results do not proportionately reflect operating results for a full year.

5.  Inventories

Inventories at March 31, 2019 were written down by $30 million (December 31, 2018 - $30 million; March 31, 2018 - $7 million) to reflect net realizable value being lower than cost.








March 31, 2019


December 31, 2018

Manufactured products

$

422

$

421

Logs and other raw materials


392


218

Processing materials and supplies


154


152


$

968

$

791

 

6. Operating loans and long-term debt

Operating loans

Our revolving lines of credit consist of a $500 million committed revolving credit facility which matures August 25, 2022, 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 $70 million dedicated to letters of credit, of which US$15 million is dedicated to our U.S. operations.

At March 31, 2019, $327 million (net of deferred financing costs of $2 million) was drawn under our revolving credit facility. Letters of credit in the amount of $61 million were also supported by our facilities.

Subsequent to the quarter end, we established a new $100 million uncommitted operating credit facility dedicated to our Canadian operations. We also expanded our letters of credit facility by an additional $20 million.

Interest on the facilities is payable at floating rates based on Prime, Base Rate Advances, Bankers' Acceptances or LIBOR Advances 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.

Long-term debt








March 31, 2019


December 31, 2018

US$300 million senior notes due October 2024;
interest at 4.35%

$

401

$

409

US$200 million term loan due August 2022;
floating interest rate


267


273

US$8 million note payable due October 2020;
interest at 2%


10


10

Notes payable


4


4



682


696

Deferred financing costs


(4)


(4)


$

678

$

692

 

On March 15, 2019, we entered into an interest rate swap agreement, maturing in August 2022, with a US$100 million notional amount to limit our exposure to fluctuations in interest rates and fix interest rates on a portion of our long-term debt. Under this agreement, we pay a fixed interest rate of 2.47% and receive a floating interest rate equal to 3-month LIBOR. The agreement is accounted for as a derivative. The gain or losses related to changes in the fair value are included in other income on our consolidated statements of earnings. In the quarter, a $1 million loss associated with the agreement was recorded in other income.

The fair value of the long-term debt at March 31, 2019 was $686 million (December 31, 2018 - $689 million) based on rates available to us at the balance sheet date for long-term debt with similar terms and remaining maturities.

7. Other liabilities









March 31, 2019



December 31, 2018

Post-retirement (note 8)

$

242


$

189

Reforestation


93



76

Decommissioning


30



29

Lease (note 3)


11



-

Other


24



22


$

400


$

316

 

8. 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, 2019


December 31, 2018

Projected benefit obligations

$

(1,516)

$

(1,381)

Fair value of plan assets


1,286


1,204


$

(230)

$

(177)

Represented by





Post-retirement assets

$

12

$

12

Post-retirement liabilities (note 7)


(242)


(189)


$

(230)

$

(177)

 

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








March 31, 2019


December 31, 2018

Discount rate


3.25%


3.75%

Future compensation rate increase


3.50%


3.50%

 

For the three months ended March 31, 2019, we recognized in other comprehensive earnings a $49 million loss (before tax) to reflect the changes in the valuation of the post-retirement benefit plans. The loss reflects the decrease in the discount rate used to calculate plan liabilities from the beginning of the year, partially offset by the return on plan assets. The actuarial loss on post-retirement benefits, included in other comprehensive earnings, is as follows:




January 1 to March 31



2019


2018

Actuarial loss

$

(49)

$

(4)

Tax recovery on actuarial loss


13


1


$

(36)

$

(3)

 

9. Share Capital

During the quarter, we repurchased 718,500 Common shares under our normal course issuer bid at an average price of $70.75 per share for a cost of approximately $50 million.

10. Other




January 1 to March 31



2019


2018

Foreign exchange gain (loss) on working capital

$

(3)

$

5

Foreign exchange gain (loss) on intercompany financing1


(15)


21

Foreign exchange gain (loss) on long-term debt


14


(17)

Foreign exchange gain (loss) on export duty deposits receivable


(2)


1

Other


1


(1)


$

(5)

$

9



1.

Relates to US$550 million (2018 - US$600 million from January to mid - December and US$550 million thereafter) 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.

 

11. 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



2019


2018

Income tax expense at statutory rate of 27%

$

2

$

(71)

Non-taxable amounts


(1)


(2)

Rate differentials between jurisdictions and on specified activities


-


4

Other


-


1

Tax recovery (provision)

$

1

$

(68)

 

12. 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


2019


2018

Earnings




Basic

$

(5)


$

197

Share option expense (recovery)

(1)


11

Equity-settled share option adjustment

(3)


(3)

Diluted

$

(8)


$

205





Weighted average number of shares (thousands)




Basic

69,432


77,825

Share options

398


764

Diluted

69,830


78,589





Earnings per share (dollars)




Basic

$

(0.07)


$

2.53

Diluted

$

(0.12)


$

2.53

 

13. Segmented information




Pulp &

Corporate



Lumber

Panels

paper

& other

Total

January 1, 2019 to March 31, 2019






Sales






To external customers

$

821

$

152

$

268

-

$

1,241

To other segments

36

3

-

-



$

857

$

155

$

268

$

-








Operating earnings before amortization

$

52

$

15

$

11

$

(3)

$

75

Amortization

(50)

(4)

(10)

(1)

(65)

Operating earnings

2

11

1

(4)

10

Finance expense

(7)

(1)

(3)

-

(11)

Other

(3)

-

-

(2)

(5)

Earnings before tax

$

(8)

$

10

$

(2)

$

(6)

$

(6)







January 1, 2018 to March 31, 2018






Sales






To external customers

$

929

$

151

$

284

$

-

$

1,364

To other segments

37

3

-

-



$

966

$

154

$

284

$

-








Operating earnings before amortization

$

241

$

28

$

68

$

(6)

$

331

Amortization

(52)

(3)

(11)

-

(66)

Operating earnings

189

25

57

(6)

265

Finance expense

(6)

(1)

(2)

-

(9)

Other

3

-

3

3

9







Earnings before tax

$

186

$

24

$

58

$

(3)

$

265

 

The geographic distribution of external sales is as follows1:




January 1 to March 311



2019


2018

Canada

$

261

$

286

United States


701


802

China


169


155

Other Asia


98


109

Other


12


12


$

1,241

$

1,364



1.

Sales distribution is based on the location of product delivery.

 

14. Countervailing ("CVD") and antidumping ("ADD") duty dispute

In November 2016, a coalition of U.S. lumber producers filed a CVD/ADD petition against Canadian softwood lumber producers who import lumber into the United States. The petition alleged that Canadian lumber producers are subsidized. CVD and ADD duties have been imposed against Canadian softwood lumber imports beginning in 2017. See Note 27 "Countervailing ("CVD") and antidumping ("ADD") duty dispute" of our 2018 audited annual consolidated financial statements.

During the three months ended March 31, 2019, our lumber segment posted cash deposits for CVD at a 17.99% rate and for ADD at a 5.57% rate. Starting January 1, 2019, we moved into a new period of review that ends December 31, 2019. Our estimate of the ADD rate for the 2019 review period, using our actual sales and cost data and the same calculation methodology as the U.S. Department of Commerce ("USDOC"), is 2.03% which is lower than the ADD deposit rate of 5.57%.  

For the lumber segment, during the three months ended March 31, 2019 we incurred duty deposits of $28 million related to CVD (March 31, 2018 - $34 million) and $9 million related to ADD (March 31, 2018 - $11 million) which were recorded as follows:






January 1 to March 31



2019


2018

Export duties recognized as expense in consolidated statements of earnings

$

32

$

41

Export duties recognized as export duty deposits receivable in consolidated
balance sheets


5


4

Total

$

37

$

45

 

Export duty deposits receivable included on our consolidated balance sheets is as follows:








March 31, 2019


December 31, 2018

Beginning balance

$

75

$

37

Export duties recognized as export duty deposits receivable in consolidated
balance sheets


5


31

Interest recognized on the export duty deposits receivable


1


2

Foreign exchange gain (loss) on the export duty deposits


(2)


5

Ending balance

$

79

$

75

 

As at March 31, 2019, export duties paid and payable on deposit with the USDOC are US$201 million for CVD and US$75 million for ADD for a total of US$276 million.

The duty rates are subject to change based on administrative reviews and appeals available to us.  In addition, we will update our ADD rate at each reporting date considering our actual results for each period of review. Changes to estimated rates may be material and any changes will be reflected through earnings in the period of the change. Notwithstanding the deposit rates assigned under the investigations, our final liability for the assessment of CVD and ADD will not be determined until each annual administrative review process is complete and related appeal processes are concluded.

SOURCE West Fraser Timber Co. Ltd.

View original content: http://www.newswire.ca/en/releases/archive/April2019/25/c2684.html

Chris Virostek, Vice‑President, Finance and Chief Financial Officer, (604) 895-2700, www.westfraser.comCopyright CNW Group 2019

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