VANCOUVER, Oct. 23, 2017 /CNW/ - West Fraser Timber Co. Ltd. reports third quarter 2017 results:

Highlights

• Completed acquisition of six sawmills and a finger-joint mill in Florida and Georgia.
• Adjusted EBITDA of $269 million for the quarter.
• Quarter ending net debt to capital ratio of 16%.

Results Compared to Previous Periods

 

Gilman acquisition

On August 31, 2017 we completed the acquisition of the Gilman Companies for net cash consideration of $525 million (US$418 million).  The Gilman Companies are comprised of six sawmills and a finger-joint mill in Florida and Georgia as well as an administrative office in St. Marys, Georgia.  Ted Seraphim, our President and CEO said, "We are delighted to welcome the Gilman leadership and employees to the West Fraser family. This acquisition is a major step in our growth strategy as we expand our lumber business in the United States."

Forest fires in British Columbia and hurricanes in the U.S. South

A number of wildfires throughout the interior region of British Columbia resulted in a provincial state of emergency being declared from July 7 to September 15, 2017.  Our operations in 100 Mile House, Williams Lake and Chasm were briefly suspended due to the wildfires, reducing our production by 55 MMfbm of lumber and 15 Msf of plywood.  

The 2017 hurricane season was more severe than normal causing significant damage to areas in South East Texas and Florida.  We were fortunate that our facilities were undamaged and that disruptions to our operations were minimal.

Operational results

Our lumber segment generated operating earnings of $126 million (Q2-17 - $171 million) and Adjusted EBITDA of $195 million (Q2-17 - $240 million).  This quarter's results were negatively impacted by lower product pricing and lower SPF production as a result of the British Columbia forest fires. Countervailing and antidumping duties, which commenced in the previous quarter, resulted in an expense of $31 million for the current quarter.

Our panels segment generated operating earnings in the quarter of $45 million (Q2-17 - $23 million) and Adjusted EBITDA of $48 million (Q2-17 - $26 million).  Improved plywood pricing was the primary driver of improved results.

Our pulp & paper segment generated operating earnings of $21 million (Q2-17 - $32 million) and Adjusted EBITDA of $30 million (Q2-17 - $42 million). The major factors contributing to the decrease in operating earnings were lower Canadian dollar pulp prices and increased maintenance costs from our Hinton pulp mill major maintenance shutdown.  

Softwood lumber dispute

The U.S. Department of Commerce's preliminary review resulted in a West Fraser specific countervailing duty rate of 24.12% effective April 28, 2017 and an antidumping duty rate of 6.76% effective June 30, 2017, resulting in an expense of $31 million for the current quarter and $65 million for the first nine months of 2017.  The requirement that we pay countervailing duties was suspended on August 24, 2017 until final determination is determined by the U.S. International Trade Commission.

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, 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, October 24, 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.
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, 2016 annual financial statements. These condensed consolidated interim financial statements should be read in conjunction with our 2016 annual consolidated financial statements.

3. Gilman acquisition

On August 31, 2017 we completed the acquisition of six SYP sawmills and a finger-joint mill in Florida and Georgia as well as an administrative office in Georgia (the "Gilman Acquisition").  The consideration paid, net of cash acquired was $525 million (US$418 million) and the transaction was an acquisition of shares. The acquisition was financed with cash on hand, borrowings on our revolving credit facility and a $250 million (US$200 million) term loan. The purchase agreement contains indemnification provisions that are typical for a share purchase transaction.

The acquisition has been accounted for as an acquisition of a business and we have allocated the purchase price based on our preliminary estimated fair value of the assets acquired and the liabilities assumed as follows:

 

The deferred income tax asset estimate of $27 million includes an asset of $51 million related to estimated net operating losses acquired, partially offset by a liability of $24 million related to temporary differences on other assets and liabilities.

Factors contributing to goodwill include the Gilman workforce, assets that are geographically complementary to our existing facilities and offer close access to large markets, the good timber basket and multiple outlets for residuals. This transaction strengthens our core lumber business and gives us increased scale and geographic diversification. This was a rare opportunity to acquire a U.S. lumber producer of a meaningful scale with high quality facilities and a culture similar to our own. The goodwill of $337 million is not deductible for tax purposes. 

The following table shows the results of the Gilman Acquisition since the acquisition date and the estimated pro-forma West Fraser consolidated results as if we owned the Gilman Acquisition since January 1, 2017:

 

Balances that required significant fair value adjustments for purchase price accounting included inventory, property, plant and equipment, goodwill and deferred income taxes.  After accounting for the increased value assigned to the acquired inventory and costs associated with the rapid integration of systems, the acquired operations did not make a material contribution to operating earnings in the one month post acquisition.

Acquisition costs of $1 million have been expensed in selling, general and administration.

4. Inventories

Inventories at September 30, 2017 were written down by $4 million (June 30, 2017 - $6 million; December 31, 2016 - $5 million; September 30, 2016 - $10 million) to reflect net realizable value being lower than cost.

5. Long-term debt and operating loans

Long-term debt

 

On August 28, 2017 we were advanced a $250 million (US$200 million) 5 year non-revolving term loan due on August 25, 2022.  This loan was used to fund the Gilman Acquisition.  Interest is payable at floating rates based on Base Rate Advances or LIBOR Advances at our option.  The loan is repayable at any time, in whole or in part, at our option and without penalty but cannot be redrawn after payment. 

The fair value of the long-term debt is $624 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

In August 2017, we extended our $500 million committed revolving credit facility to August 25, 2022. Our operating loans consist of a $500 million committed revolving credit facility, a $31 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 committed to our U.S. operations.    

At September 30, 2017 there were no amounts outstanding under our revolving credit facility.  As a result, the associated deferred financing costs of $3 million were reported in other assets.  Letters of credit in the amount of $47 million were also supported by our facilities, leaving $551 million of credit available for further use. At December 31, 2016, our revolving credit facility was undrawn, deferred financing costs were $2 million and our outstanding letters of credit were $48 million.

Interest on these 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.

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

 

8. Share Capital

On September 12, 2017 our Board of Directors authorized the renewal of our normal course issuer bid ("NCIB") program to repurchase for cancellation up to 3,794,375 Common shares or approximately 5% of our issued and outstanding Common shares. The NCIB will expire on September 18, 2018. Our previous NCIB expired on September 18, 2017.

During the three months ended September 30, 2017 we purchased a total of 245,645 of Common shares under both of our NCIB programs.  The purchase price averaged $68.45 per share and totalled $17 million for the period ended September 30, 2017.

9. Other 

 

10. 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:

 

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:

 

13. Softwood lumber dispute

On November 25, 2016 a coalition of U.S. lumber producers petitioned the U.S. Department of Commerce ("USDOC") and the U.S. International Trade Commission ("USITC") to investigate alleged subsidies to Canadian softwood lumber producers and levy countervailing and antidumping duties against Canadian imports.  We were chosen by the USDOC as a "mandatory respondent" to both the countervailing and antidumping investigations and as a result have received unique company specific rates.

On April 24, 2017, the USDOC issued its preliminary determination in the countervailing duty investigation and imposed a company specific preliminary rate of 24.12% to be posted by cash deposits on the exports from Canada of softwood lumber to the U.S. on or after April 28, 2017.  On June 26, 2017, the USDOC issued its preliminary determination in the antidumping duty investigation and imposed a company specific preliminary rate of 6.76% to be posted by cash deposits on the exports from Canada of softwood lumber to the U.S. on or after June 30, 2017.  We have expensed $65 million for the period April 28, 2017 to September 30, 2017 representing duties at the preliminary rates determined by the USDOC.

The USDOC is expected to announce final rates by November 13, 2017.  The USITC is expected to make a ruling on "injury" not later than January 4, 2018.  The requirement that we pay countervailing duties was suspended on August 24, 2017 until final determination is published by the USITC.  Any adjustments resulting from a change in the final countervailing and antidumping duty rates will be made prospectively.

Together with other Canadian forest product companies, the federal government and Canadian provincial governments ("Canadian Interests") we categorically deny the U.S. allegations and disagree with the preliminary countervailing and antidumping determinations.  Canadian Interests continue to defend the Canadian industry in this U.S. trade dispute.  Depending on the outcome of the final phase of the investigation, Canadian Interests may appeal the decision of the USDOC and USITC to the appropriate courts, North America Free Trade Agreement panels and/or the World Trade Organization.  Notwithstanding the preliminary rates established in the investigations, the final liability for the assessment of countervailing and antidumping duties will not be determined until each annual administrative review process is complete.

SOURCE West Fraser Timber Co. Ltd.