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Premium
West Fraser Timber Co. Ltd. (TSX:WFT) today reported earnings after discontinued
operations of $19 million or $0.44 per share for the first quarter of 2011.
Earnings from continuing operations were $20 million or $0.46 per share on sales
of $687 million.
"We are pleased with our operating performance which produced another quarter of
positive results despite a lack of recovery in U.S. housing and a strengthening
Canadian dollar." said Hank Ketcham, the Company's Chairman, CEO and President.
"We continue to focus on efficiency and cost control at every level of our
business."
The results compare with previous periods as follows:
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($ millions except earnings per 2011 2010
share ("EPS")) Q1 Q4 Q1
---------------------------------------------------------------------------
Sales 687 719 688
EBITDA (1) 80 81 106
Operating earnings from continuing
operations 35 43 57
Earnings from continuing operations 20 28 38
Diluted EPS from continuing operations ($) 0.46 0.65 0.89
Earnings after discontinued operations 19 43 29
Diluted EPS after discontinued operations ($) 0.44 1.00 0.67
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(1) Throughout this News Release, reference is made to EBITDA (defined as
operating earnings plus amortization). Management of the Company believes
that, in addition to earnings, EBITDA is a useful performance indicator and
is a useful complementary measure of cash available prior to debt service,
capital expenditures and income taxes. However, EBITDA is not a generally
accepted earnings measure under International Financial Reporting Standards
("IFRS") and does not have a standardized meaning prescribed by IFRS.
Investors are cautioned that EBITDA should not be considered as an
alternative to earnings or cash flow, as determined in accordance with
IFRS. As there is no standardized method of calculating EBITDA, the
Company's method of calculating EBITDA may differ from the methods used by
other entities and, accordingly, the Company's use of that term may not be
directly comparable to similarly titled measures used by other entities.
Operational Results
The Company's lumber and pulp operations were significant contributors to
earnings in the quarter. Current quarter earnings were adversely affected by the
stronger Canadian dollar and a $27 million ($0.60 per share) charge for
long-term equity-based compensation.
The lumber segment recorded operating earnings of $33 million and EBITDA of $55
million in the current quarter. SPF shipments were lower in the current quarter
compared to the prior quarter as poor weather conditions affected truck and
railcar availability.
The panel segment, which includes plywood, LVL and MDF, recorded break-even
operating earnings and EBITDA of $4 million in the quarter. The MDF and LVL
operations continue to operate on a curtailed basis while the three plywood
mills ran at capacity.
Pulp & paper operations recorded operating earnings of $29 million and EBITDA of
$47 million. Global inventory levels of NBSK are lower than normal which allowed
for a price increase during the quarter. BCTMP prices have weakened during the
quarter as new production in China adversely affected markets.
Outlook
SPF and SYP lumber prices have weakened dramatically since the end of the first
quarter of 2011, likely the result of the restarting of some
previously-curtailed production without a balancing increase in demand. Prices
for the Company's construction products are expected to remain volatile until
the U.S. housing industry experiences sustainable recovery. The strong NBSK pulp
markets should continue as economic growth in the consuming regions continues to
support a reasonable pulp price.
Mr. Ketcham noted: "We expected a slow and uneven recovery of the North American
lumber industry, and that seems to be playing out. Fortunately, we continue to
experience the benefits of strong NBSK pulp markets."
Normal Course Issuer Bid
The Company also announces that it intends to apply to the Toronto Stock
Exchange (the "TSX") for approval to conduct a normal course issuer bid ("NCIB")
for up to 5% of its issued and outstanding Common shares in accordance with the
TSX rules. The NCIB will be subject to TSX acceptance. Full details of the NCIB
will be announced upon receipt of TSX acceptance of the NCIB.
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 and anticipated
financial results. 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. Forward-looking statements are included under the heading
"Outlook". 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 2010 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 Wednesday,
May 4, 2011 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time) by dialing
1-877-440-9795 (toll free North America). The call may also be accessed through
West Fraser's website at www.westfraser.com. A presentation summarizing the
first quarter results will also be available on the Company's website.
Management's Discussion and Analysis
This discussion and analysis by West Fraser's management ("MD&A") of the
Company's financial performance during the first quarter of 2011 should be read
in conjunction with the unaudited interim condensed consolidated financial
statements and accompanying notes included in this quarterly report and the 2010
annual MD&A included in the Company's 2010 Annual Report. Dollar amounts are
expressed in Canadian currency, unless otherwise indicated.
This MD&A contains historical information, descriptions of current circumstances
and statements about potential future developments and anticipated financial
results. 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.
Forward-looking statements are included in the description of anticipated
maintenance shutdowns and expectations relating to the Pulp and Paper Green
Transformation Program under the heading "Discussion & Analysis by Product
Segment - Pulp & Paper Segment" and under the heading "Business Outlook". 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 under "Risks and Uncertainties" in the 2010 annual MD&A, 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.
Throughout this MD&A reference is made to EBITDA (defined as operating earnings
plus amortization). Management believes that, in addition to earnings, EBITDA is
a useful performance indicator and is a useful complementary measure of cash
available prior to debt service, capital expenditures and income taxes. EBITDA
is not a generally accepted earnings measure under International Financial
Reporting Standards ("IFRS") and does not have a standardized meaning prescribed
by IFRS. Investors are cautioned that EBITDA should not be considered as an
alternative to earnings or cash flow, as determined in accordance with IFRS. As
there is no standardized method of calculating EBITDA, the Company's method of
calculating EBITDA may differ from the methods used by other entities and,
accordingly, the Company's use of that term may not be directly comparable to
similarly titled measures used by other entities.
This MD&A includes references to benchmark prices over selected periods for
products of the type produced by West Fraser. These benchmark prices do not
necessarily reflect the prices obtained by West Fraser for those products during
such period. The information in this interim MD&A is as at May 3, 2011 unless
otherwise indicated.
Production, Shipments and Financial Comparisons
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Q1-11 Q4-10 Q1-10
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Production
Lumber - MMfbm
SPF 879 804 827
SYP 382 355 274
--------------------------------------------------------------------------
1,261 1,159 1,101
Plywood - MMsf (3/8" basis) 196 190 191
MDF - MMsf (3/4" basis) 48 44 48
LVL - Mcf 405 382 580
BCTMP - Mtonnes 154 161 156
NBSK - Mtonnes 138 142 124
Newsprint - Mtonnes 31 33 33
Linerboard and Kraft Paper - Mtonnes - - 29
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Shipments
Lumber - MMfbm
SPF 765 832 830
SYP 347 355 270
--------------------------------------------------------------------------
1,112 1,187 1,100
Plywood - MMsf (3/8" basis) 178 208 181
MDF - MMsf (3/4" basis) 52 42 51
LVL - Mcf 383 387 564
BCTMP - Mtonnes 153 181 142
NBSK - Mtonnes 136 134 132
Newsprint - Mtonnes 30 34 34
Linerboard and Kraft Paper - Mtonnes - - 89
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Financial Comparisons - $ millions
Sales 687 719 688
--------------------------------------------------------------------------
EBITDA 80 81 106
Amortization (45) (38) (49)
--------------------------------------------------------------------------
Operating earnings 35 43 57
--------------------------------------------------------------------------
Interest expense - net (5) (6) (8)
Exchange gain on long-term debt 8 10 11
Other expense (4) (3) (8)
Provision for income taxes (14) (16) (14)
--------------------------------------------------------------------------
Earnings from continuing operations 20 28 38
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings from discontinued operations (1) 15 (9)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings 19 43 29
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cdn. $1.00 converted to U.S. - average 1.015 0.987 0.961
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Selected Quarterly Information
Selected Quarterly Information
($ millions, except earnings per share ("EPS") amounts which are in $)
--------------------------------------------------------------------------
Q4-09 Q3-09 Q2-09
Q1-11 Q4-10 Q3-10 Q2-10 Q1-10 (2) (2) (2)
--------------------------------------------------------------------------
Sales(1) 687 719 707 772 688 570 612 612
--------------------------------------------------------------------------
Earnings(1) 20 28 49 67 38 8 (100) (23)
--------------------------------------------------------------------------
Earnings after
discontinued
operations 19 43 48 67 29 (20) (199) (39)
--------------------------------------------------------------------------
Basic EPS(1) 0.46 0.65 1.15 1.56 0.89 0.18 (2.34) (0.53)
--------------------------------------------------------------------------
Diluted EPS(1) 0.46 0.65 1.15 1.28 0.89 0.18 (2.34) (0.53)
--------------------------------------------------------------------------
Basic EPS after
discontinued
operations 0.44 1.00 1.12 1.56 0.67 (0.47) (4.64) (0.91)
--------------------------------------------------------------------------
Diluted EPS after
discontinued
operations 0.44 1.00 1.12 1.27 0.67 (0.47) (4.64) (0.91)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
1. From continuing operations.
2. Prepared in accordance with Canadian generally accepted accounting
principles in place at December 31, 2009.
Discussion & Analysis
The Company's lower operating results in the quarter reflect a strong Canadian
dollar and a higher long-term equity-based compensation expense. These negative
factors were partially offset by higher lumber and NBSK prices.
U.S. housing starts remain at very low levels causing much of the North American
lumber industry to continue to operate below capacity. However, with increased
demand from Asia, specifically China, lumber prices have remained significantly
above the extreme lows reached in 2009.
NBSK demand remains strong and prices began rising in the current quarter after
falling in the second half of 2010. Conditions of oversupply in the BCTMP market
have continued to put downward pressure on prices, although markets stabilized
somewhat during the quarter.
Although the higher value of the Canadian dollar eroded earnings in the quarter,
the lumber and pulp & paper segments achieved positive operating earnings. The
panels segment was negatively affected by increased competition from U.S.
plywood producers which more readily enter the Canadian market when the Canadian
dollar is strong.
Selling, general and administrative expenses declined by approximately $2
million from the previous quarter but increased by $5 million from the first
quarter of 2010. The increase from the first quarter of 2010 is due in part to
an increase in employee compensation costs.
Long-term equity-based compensation expense of $27 million in the quarter
compares to $18 million in the previous quarter and $15 million in the first
quarter of 2010. An expense is recorded on the issuance of share options or
phantom share units and a further expense or recovery is recorded each quarter
based primarily on a Black-Scholes valuation model that considers various
factors relating to outstanding options. The most significant of these factors
is the change in the market value of the Company's shares from the beginning to
the end of the particular period. In the first quarter of 2011 the market value
of the Company's shares increased from $47.16 at the beginning of the quarter to
$60.46 at the end of the quarter, representing a 28% increase in the quarter. In
the previous quarter the market value increased by approximately 25% while in
the first quarter of 2010 the market value increased by approximately 17%. The
expense or recovery does not necessarily represent the actual amount which will
ultimately be paid by the Company.
Interest expense decreased in the current quarter compared to both the previous
quarter and the same period last year due to lower borrowings and lower interest
rates.
The change in value of the Canadian dollar relative to the U.S. dollar during
the periods presented resulted in the following foreign exchange gains and
losses:
--------------------------------------------------------------------------
Q1-11 Q4-10 Q1-10
--------------------------------------------------------------------------
Included in other income
Translation loss on current monetary items (4) (4) (4)
Gain on foreign currency contracts - - 1
--------------------------------------------------------------------------
Gain on U.S. dollar-denominated
long-term debt 8 10 11
--------------------------------------------------------------------------
Translation loss on foreign operations (5) (6) (7)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The results of the current quarter include a $14 million provision for income
taxes compared to provisions of $16 million for the preceding quarter and $14
million for the first quarter of 2010. Note 12 to the accompanying interim
condensed consolidated financial statements provides a reconciliation of the
statutory income tax rate to the effective income tax rate.
In the first quarter of 2011 the following significant items were included in
earnings from continuing operations:
-- a charge for long-term equity-based compensation of $27 million (after
tax $26 million or 0.60 per share); and
-- the translation of U.S. dollar-denominated debt which resulted in a
foreign exchange gain of $8 million (after tax $7 million or $0.15 per
share).
Discussion & Analysis by Product Segment
Lumber Segment
---------------------------------------------------------------------------
Q1-11 Q4-10 Q1-10
---------------------------------------------------------------------------
Sales - $ millions 411 418 409
EBITDA - $ millions 55 41 66
EBITDA margin - % 13 10 16
Operating earnings - $ millions 33 25 40
Benchmark prices (US$ per Mfbm)
SPF #2 & Better 2 x 4(1) 296 269 269
SYP #2 West 2 x 4(2) 308 270 322
---------------------------------------------------------------------------
---------------------------------------------------------------------------
1. Source: Random Lengths - 2 x 4, #2 & Better - Net FOB mill.
2. Source: Random Lengths - 2 x 4 - Net FOB mill Westside.
Operating earnings increased in the quarter compared to the previous quarter on
improved pricing for both SPF and SYP lumber and lower lumber production costs,
which were only partially offset by the stronger Canadian dollar and lower SPF
shipments in the current quarter.
Compared to the first quarter of the previous year, operating earnings were
lower due mainly to lower shipments of SPF lumber, the effect of the stronger
Canadian dollar on SPF sales realizations, lower SYP prices and higher lumber
production costs. These factors were partially offset by higher SYP shipments in
the current quarter.
Benchmark U.S.-dollar SPF prices were higher by 10% in the quarter compared to
both the previous quarter and the first quarter of 2010. However, the continued
strengthening of the Canadian dollar partially offset the benefit of the higher
prices with the resulting Canadian dollar realizations up 7% from the previous
quarter and up 4% from the first quarter of 2010. Benchmark prices for SYP
lumber were 14% higher in the current quarter compared to the previous quarter
and down 4% compared to the first quarter of 2010.
SPF lumber shipments were down in the current quarter compared to the previous
quarter due to continuing poor demand in the United States and winter weather
conditions which affected truck and railcar availability in Canada. SPF
shipments to offshore markets declined compared to the previous quarter,
reflecting a typical seasonal slow period in both China and Japan. SYP shipment
volumes in the quarter were similar to the previous quarter reflecting the
continued poor demand for building products in the U.S.
SPF shipment volumes were lower in the current quarter compared to the first
quarter of 2010, despite a 32% increase in shipments to offshore markets, as
North American truck and rail transportation was significantly affected by poor
weather in the current quarter. SYP shipments were up 29% in the current quarter
to more normal levels compared to the similar quarter in 2010 as shipments in
2010 were very restricted due to the severe wet weather that affected the
southern U.S. in early 2010.
SPF production was higher by 9% from the previous quarter and by 6% from the
first quarter of 2010. Although the Canadian sawmills ran at near capacity in
the quarter as in the previous quarter, production was higher in the current
quarter due to improved productivity and more available operating days. The
higher production in the current quarter compared to the first quarter of 2010
was also the result of higher operating rates in the current quarter.
SYP production was 8% higher in the current quarter compared to the previous
quarter and 39% higher compared to the first quarter of 2010. Additional
operating shifts in many of the U.S. sawmills contributed to the increase. In
addition, severe weather conditions in many of the operating areas in the first
quarter of 2010 adversely affected log supply, resulting in production
curtailments in many of the U.S. sawmills. In the current quarter the U.S
sawmills operated at approximately 75% of capacity compared to 70% in the
previous quarter and 55% of capacity in the first quarter of 2010.
Unit cash production costs in the current quarter were similar to the previous
quarter. Log costs in both Canada and the U.S. were consistent with levels
experienced in the previous quarter.
Compared to the first quarter of 2010 unit cash production costs were up
marginally as a result of higher log costs driven principally by higher
harvesting and hauling rates and higher fuel costs. These increases were offset
in part by lower conversion costs which benefited from higher production levels
in both the Canadian and U.S. operations.
Although SPF prices were higher in the quarter, average export tax charges under
the Softwood Lumber Agreement were similar to the previous quarter and were 12%
lower compared to the first quarter of 2010. This was due largely to higher
volumes of SPF lumber being shipped to offshore markets compared to the first
quarter of 2010. In addition, SPF lumber shipped from the Company's Alberta
mills were subject to the 22.5% surge export tax rate for the months of January
and March 2011 and the 15% export tax rate in the month of February 2011 whereas
shipments from Alberta in the previous quarter and in the first quarter of 2010
were all subject to the 22.5% surge export tax rate.
Panels Segment
---------------------------------------------------------------------------
Q1-11 Q4-10 Q1-10
---------------------------------------------------------------------------
Sales - $ millions 91 94 100
EBITDA - $ millions 4 6 11
EBITDA margin - % 4 7 11
Operating earnings - $ millions - 3 6
Benchmark price
Plywood (per Msf 3/8" basis)(1) Cdn$ 307 301 332
MDF (per Msf 3/4" basis)(2) US$ 539 547 485
---------------------------------------------------------------------------
---------------------------------------------------------------------------
1. Source: Crow's Market Report - Delivered Toronto.
2. Source: Resource Information Systems, Inc. - MDF Western U.S. - Net FOB
mill.
The Company's panels segment is comprised of its plywood, MDF and LVL operations.
Operating earnings were lower than in the previous quarter. Marginally higher
plywood prices were offset mainly by the stronger Canadian dollar and lower
shipment volumes of plywood. As the Canadian dollar continues to strengthen,
greater volumes of competing U.S.-produced plywood are being sold to customers
in Canada, West Fraser's primary market. The increased plywood supply has put
downward pressure on plywood prices for the past several quarters.
Benchmark plywood prices increased only slightly in the current quarter compared
to the previous quarter but were down 8% compared to the first quarter of 2010,
largely due to the increase in U.S.-produced plywood sold in Canada. In
addition, housing starts in Canada in the current quarter were down
significantly from those recorded in the first quarter of the previous year.
MDF prices were down slightly from the previous quarter largely due to seasonal
factors and up 11% compared to the corresponding quarter in 2010, or 5% on a
Canadian dollar basis. LVL prices were down somewhat from the previous quarter
but up slightly from the first quarter of 2010.
Wood costs for plywood were higher in the current quarter than in the previous
quarter mainly due to higher harvesting and fuel-related hauling costs. Wood
costs were also higher when compared to the first quarter of 2010, again due to
higher harvesting and fuel-related hauling costs. Amortization was lower than in
the first quarter of 2010 as certain assets became fully depreciated in 2010.
The two MDF plants and the LVL plant operated in the quarter on a curtailed
basis at approximately 65% and 50% respectively for MDF and LVL to more closely
match supply with demand.
Pulp & Paper Segment
---------------------------------------------------------------------------
Q1-11 Q4-10 Q1-10
---------------------------------------------------------------------------
Sales - $ millions 209 230 204
EBITDA - $ millions 47 49 42
EBITDA margin - % 22 21 21
Operating earnings - $ millions 29 30 26
Benchmark price
NBSK (US$ per tonne)(1) 970 967 880
Newsprint (US$ per tonne)(2) 640 640 553
---------------------------------------------------------------------------
---------------------------------------------------------------------------
1. Source: Resource Information Systems, Inc. - U.S. list price delivered
U.S.
2. Source: Resource Information Systems, Inc. - delivered 48.8 gram
newsprint.
The Company's pulp & paper segment is comprised of its NBSK, BCTMP and newsprint
businesses. Results from the Eurocan business are included in discontinued
operations.
Operating earnings were marginally lower from the previous quarter due to lower
shipment volumes. The U.S.-dollar NBSK benchmark price was slightly up from the
previous quarter but the stronger Canadian dollar and lower shipment volumes
resulted in reduced sales revenues. However, lower production costs partially
offset the negative effect of the higher Canadian dollar. Operating earnings
were up from the first quarter of 2010 primarily due to higher production
volumes in the NBSK operations, higher NBSK and newsprint prices and lower
production costs, all of which more than offset lower BCTMP pricing and the
stronger Canadian dollar.
Demand for pulp varies depending on the grade. Global inventories of softwood
kraft pulp continue to be lower than normal while inventories of pulp grades
such as hardwood kraft are above normal. This has resulted in an increasing
price differential between NBSK and hardwood kraft, as well as BCTMP which tends
to be priced relative to hardwood kraft pulp grades. In addition BCTMP prices
have been under pressure due to the startup of new BCTMP capacity in China. The
benchmark price for NBSK averaged US$970 in the quarter compared to US$967 in
the previous quarter and US$880 in the first quarter of 2010.
Total pulp production was approximately 4% lower than the previous quarter due
to fewer operating days and lower production at the Slave Lake BCTMP mill due to
production curtailments related to high electricity prices. Production in the
current quarter was 4% higher than in the first quarter of 2010 mainly due to
the NBSK mills running at much higher rates this quarter which more than offset
the reductions resulting from curtailments at the Slave Lake mill.
Although production was lower in the quarter compared to the previous quarter,
average unit cash production costs were similar to the previous quarter and to
the first quarter of 2010.
Benchmark U.S.-dollar newsprint prices were unchanged in the quarter from the
previous quarter. However, due to the stronger Canadian dollar, mill nets
realized in the current quarter were lower. Benchmark U.S.-dollar newsprint
prices were higher by approximately 16% compared to the first quarter of 2010,
or 10% on a Canadian dollar basis.
Pulp production is anticipated to be reduced in the second quarter by
approximately 5,000 tonnes as a result of scheduled maintenance downtime at the
Cariboo NBSK mill.
In 2009 the Government of Canada confirmed an allocation of credits totalling
$88 million to West Fraser under the Pulp and Paper Green Transformation
Program. The Company has received approval under this program for six projects
that are expected to significantly reduce future energy costs with approval for
a seventh project expected in the second quarter. The Company expects to utilize
its full allocation under the Program.
Discontinued Operations
The Eurocan mill was closed in the first quarter of 2010. Total restructuring
charges of approximately $50 million related to the closure of this facility
have been recorded to date. We do not anticipate any further closure costs.
As at March 31, 2011 the assets and liabilities associated with the Eurocan
business are as follows:
--------------------------------------------------------------------------
Q1-11
--------------------------------------------------------------------------
Current assets 2
Non-current assets 1
--------------------------------------------------------------------------
Total assets 3
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Current liabilities (7)
Non-current liabilities (10)
--------------------------------------------------------------------------
Total liabilities (17)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Business Outlook
For a detailed description of West Fraser's business outlook for 2011 see its
2010 annual MD&A under "Business Outlook", which is included in the Company's
2010 Annual Report.
Benchmark prices for both SPF and SYP lumber have weakened dramatically since
the end of the first quarter of 2011, likely the result of the restarting of
some previously-curtailed production without a balancing increase in demand.
Unless demand levels increase or production curtailments occur, prices are
likely to remain at depressed levels. Although the second quarter of the year
typically reflects improved lumber pricing as a result of the start of the
housing construction season, with the continuing very weak state of the U.S. new
home construction industry and the current oversupply situation, this outcome
becomes highly unpredictable. Prices for the Company's construction products are
expected to remain volatile until the U.S. housing industry experiences
sustainable recovery.
Pulp demand remains strong resulting in higher prices for NBSK. However, new
supply of BCTMP entered the marketplace in the second half of 2010 and the
resulting oversupply of that commodity has put downward pressure on prices.
Pricing of BCTMP is likely to remain at current levels until the new supply
volumes are absorbed into the market. Continued economic growth in China and
other consuming regions should support a reasonable pulp price.
Capital Requirements and Liquidity
Summary of Financial Position ($ millions, except as otherwise indicated)
--------------------------------------------------------------------------
Q1-11 Q4-10 Q1-10
--------------------------------------------------------------------------
Cash(1) 81 161 (15)
Current assets 850 789 712
Current liabilities 403 389 481
Ratio of current assets to current
liabilities 2.1 2.0 1.5
Net debt 216 148 452
Shareholders' equity 1,573 1,534 1,458
Net debt to capitalization(2) - % 12 9 24
--------------------------------------------------------------------------
--------------------------------------------------------------------------
1. Cash consists of cash and short-term investments less cheques issued in
excess of funds on deposit.
2. Net debt (total debt less net cash) divided by net debt plus
shareholders' equity.
West Fraser's cash requirements, other than for operating purposes, are
primarily for interest payments, repayment of debt, additions to property,
plant, equipment and timber, acquisitions and payment of dividends. In normal
business cycles and in years without a major acquisition or debt repayment, cash
on hand and cash provided by operations have normally been sufficient to meet
these requirements.
Selected Cash Flow Items ($ millions)
--------------------------------------------------------------------------
Q1-11 Q4-10 Q1-10
--------------------------------------------------------------------------
Operating Activities
Cash provided before working capital
changes 33 31 186
Non-cash working capital change (89) (53) (112)
--------------------------------------------------------------------------
Cash provided (used) in operating
activities (56) (22) 74
--------------------------------------------------------------------------
Financing Activities
Debt and operating loans (4) (4) (44)
Interest Paid (2) (10) (2)
Dividends and other (6) (5) (5)
--------------------------------------------------------------------------
Cash used in financing activities (12) (19) (51)
--------------------------------------------------------------------------
Investing Activities
Additions to capital assets (20) (12) (28)
Other - net 9 1 1
--------------------------------------------------------------------------
Cash used in investing activities (11) (11) (27)
--------------------------------------------------------------------------
Change in cash from continuing operations (79) (52) (4)
--------------------------------------------------------------------------
Change in cash from discontinued
operations (1) - (1)
--------------------------------------------------------------------------
Change in cash (80) (52) (5)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Capital Structure and Debt Ratings
The capital structure of the Company consists of Common share equity and
long-term debt. In addition, the Company maintains a committed revolving credit
facility that is available to meet additional funding requirements. Additional
information on the Company's capital structure can be found in the Company's
2010 Annual Report.
At April 28, 2011, the Common share equity of the Company consisted of
40,056,618 Common shares and 2,781,478 Class B Common shares for a total of
42,838,096 shares issued and outstanding.
In addition, as of April 28, 2011 there were 2,014,067 share purchase options
outstanding with exercise prices ranging from $24.71 to $51.56 per Common share.
All of West Fraser's debt is secured and, with the exception of current
borrowings incurred by its joint venture newsprint mill, ranks equally in right
of payment.
The Company is rated by three rating agencies. Based on the approaches employed
by these agencies, rating upgrades could occur after a sustained improvement in
the Company's various markets occurs resulting in improved profitability for the
Company. In April 2011 the Company's Outlook was changed from Stable to Positive
by Standard & Poor's and from Negative to Positive by Moody's. The current
rating by each of these agencies is as follows:
Debt Ratings
---------------------------------------------------------------------------
Agency Rating Outlook
---------------------------------------------------------------------------
Dominion Bond Rating Service BB(high) Stable
Moody's Ba1 Positive
Standard & Poor's BB+ Positive
---------------------------------------------------------------------------
---------------------------------------------------------------------------
These ratings are not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the rating agencies.
Risks and Uncertainties
For a review of the risks and uncertainties to which the Company is subject, see
the 2010 annual MD&A which is included in the Company's 2010 Annual Report.
New Accounting Pronouncements
International Financial Reporting Standards
The Company has adopted IFRS effective January 1, 2011. Prior to the adoption of
IFRS the Company prepared its financial statements in accordance with Canada's
previous Generally Accepted Accounting Principles for publicly accountable
profit-oriented enterprises. For additional information on the conversion to
IFRS, see the 2010 annual MD&A which is included in the Company's 2010 Annual
Report and the unaudited interim condensed consolidated financial statements
accompanying this MD&A.
Disclosure Controls and Procedures and Internal Control Over Financial Reporting
West Fraser's management, including the Chairman, President and Chief Executive
Officer and the Executive Vice-President, Finance and Chief Financial Officer
acknowledge responsibility for the design of disclosure controls and procedures
(DC&P) and internal controls over financial reporting (ICFR) as those terms are
defined in National Instrument 52-109.
There were no changes in internal controls over financial reporting that
occurred during the quarter ended March 31, 2011 that have materially affected,
or are reasonably likely to materially affect, West Fraser's internal control
over financial reporting.
Additional Information
Additional information relating to the Company, including the Company's Annual
Information Form, is available on SEDAR at www.sedar.com.
West Fraser Timber Co. Ltd.
Condensed Consolidated Balance Sheets
(in millions of Canadian dollars - unaudited)
As at As at As at
March 31, December 31, January 1,
2011 2010 2010
--------------------------------------------------------------------------
Assets
Current assets
Cash and short-term
investments $ 81.8 $ 163.1 $ 12.0
Accounts receivable 278.3 246.0 200.6
Income taxes receivable - - 67.6
Inventories (note 4) 477.6 372.4 407.7
Prepaid expenses 12.3 7.6 11.2
--------------------------------------------------------------------------
850.0 789.1 699.1
Property, plant, and
equipment (note 5) 895.3 924.7 1,031.9
Timber licences 505.6 509.6 499.7
Goodwill and other
intangibles (note 6) 342.6 345.4 354.0
Other assets 57.1 41.5 29.1
--------------------------------------------------------------------------
$ 2,650.6 $ 2,610.3 $ 2,613.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liabilities
Current liabilities
Cheques issued in excess of
funds on deposit $ 0.8 $ 2.4 $ 21.8
Operating loans (note 8) 5.4 8.8 78.7
Accounts payable and
accrued liabilities 330.9 271.0 275.2
Income taxes payable 17.8 58.3 -
Current portion of
reforestation &
decomissioning obligations 47.7 48.2 38.3
Current portion of long-
term debt (note 8) 0.3 0.3 100.3
--------------------------------------------------------------------------
402.9 389.0 514.3
Long-term debt (note 8) 291.7 299.5 315.9
Other liabilities (note 9) 217.8 225.7 185.8
Deferred income taxes 165.4 162.3 174.8
--------------------------------------------------------------------------
1,077.8 1,076.5 1,190.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Shareholders' equity
Share capital 600.6 600.5 599.7
Accumulated other
comprehensive earnings (14.9) (9.6) -
Retained earnings 987.1 942.9 823.3
--------------------------------------------------------------------------
1,572.8 1,533.8 1,423.0
--------------------------------------------------------------------------
$ 2,650.6 $ 2,610.3 $ 2,613.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Contingency (note 17)
Number of Common shares and Class B Common shares outstanding at April 28,
2011 was 42,838,096
West Fraser Timber Co. Ltd.
Condensed Consolidated Statement of Changes in Equity
(in millions of Canadian dollars - unaudited)
Issued capital
------------------------
Number Translation
of of foreign Retained Total
shares Amount operations earnings equity
--------------------------------------------------------------------------
Balance -
January 1, 2010 42,815,809 $ 599.7 $ - $ 823.3 $ 1,423.0
Changes in
equity for 2010
Translation
loss on foreign
operations - - (9.6) - (9.6)
Actuarial loss
on employee
future benefits - - - (59.1) (59.1)
Issuance of
Common shares 19,103 0.8 - - 0.8
Earnings for
the year - - - 186.4 186.4
Dividends - - - (7.7) (7.7)
--------------------------------------------------------------------------
Balance -
December 31,
2010 42,834,912 600.5 (9.6) 942.9 1,533.8
Changes in
equity for 2011
Translation
loss on foreign
operations - - (5.3) - (5.3)
Actuarial gain
on employee
future benefits - - - 31.3 31.3
Issuance of
Common shares 2,484 0.1 - - 0.1
Earnings for
the period - - - 18.9 18.9
Dividends - - - (6.0) (6.0)
--------------------------------------------------------------------------
Balance -
March 31, 2011 42,837,396 $ 600.6 $ (14.9) $ 987.1 $ 1,572.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
(in millions of Canadian dollars - unaudited)
January 1 to March 31
2011 2010
--------------------------------------------------------------------------
Sales $ 687.0 $ 687.8
--------------------------------------------------------------------------
Costs and expenses
Cost of products sold 432.3 415.3
Freight and other distribution costs 105.6 109.6
Export taxes 15.6 19.2
Amortization 44.7 49.4
Selling, general and administration 27.4 22.3
Long-term equity-based compensation 26.5 14.8
--------------------------------------------------------------------------
652.1 630.6
--------------------------------------------------------------------------
Operating earnings 34.9 57.2
Other
Interest expense - net (4.8) (7.6)
Exchange gain on long-term debt 7.5 10.6
Other expense (note 11) (3.6) (7.9)
--------------------------------------------------------------------------
Earnings from continuing operations before
income taxes 34.0 52.3
Provision for income taxes (note 12) (14.1) (14.3)
--------------------------------------------------------------------------
Earnings from continuing operations 19.9 38.0
Earnings from discontinued operations (note 13) (1.0) (9.1)
--------------------------------------------------------------------------
Earnings $ 18.9 $ 28.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Actuarial gain on employee future benefits $ 41.5 $ 20.0
Income tax on actuarial gain on employee
future benefits (10.2) (5.7)
Translation loss on foreign operations (5.3) (6.8)
--------------------------------------------------------------------------
Comprehensive earnings $ 44.9 $ 36.4
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings per share (dollars) (note 14)
Basic from continuing operations $ 0.46 $ 0.89
Diluted from continuing operations $ 0.46 $ 0.89
Basic after discontinued operations $ 0.44 $ 0.67
Diluted after discontinued operations $ 0.44 $ 0.67
--------------------------------------------------------------------------
--------------------------------------------------------------------------
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Cash Flows
(in millions of Canadian dollars - unaudited)
January 1 to March 31
2011 2010
--------------------------------------------------------------------------
Cash flows from operating activities
Earnings from continuing operations $ 19.9 $ 38.0
Adjustments for:
Amortization 44.7 49.4
Interest expense - net 4.8 7.6
Exchange gain on long-term debt (7.5) (10.6)
Tax expense 14.1 14.3
Income taxes received (paid) - net (61.3) 62.7
Change in reforestation obligations 11.5 13.2
Other 6.4 11.3
--------------------------------------------------------------------------
32.6 185.9
Net change in non-cash working capital items (89.2) (111.8)
--------------------------------------------------------------------------
(56.6) 74.1
--------------------------------------------------------------------------
Cash flows from financing activities
Repayment of long-term debt (0.3) (100.3)
Proceeds from (repayment of) operating loans (3.7) 56.5
Interest paid (1.6) (2.2)
Dividends (6.0) (1.2)
Other - (3.5)
--------------------------------------------------------------------------
(11.6) (50.7)
--------------------------------------------------------------------------
Cash flows from investing activities
Additions to capital assets (19.8) (28.1)
Proceeds from disposal of capital assets 0.8 0.5
Proceeds from Green Transformation Program 7.5 -
Other 0.4 -
--------------------------------------------------------------------------
(11.1) (27.6)
--------------------------------------------------------------------------
Change in cash from continuing operations (79.3) (4.2)
Change in cash from discontinued operations
(note 13) (0.4) (0.9)
Cash - beginning of period 160.7 (9.8)
--------------------------------------------------------------------------
Cash - end of period $ 81.0 $ (14.9)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash consists of
Cash and short-term investments $ 81.8 $ 13.4
Cheques issued in excess of funds on
deposit (0.8) (28.3)
--------------------------------------------------------------------------
$ 81.0 $ (14.9)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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
The Company is an integrated wood products company producing lumber, wood chips,
LVL, MDF, plywood, pulp and newsprint. The Company's executive office is located
at 858 Beatty Street, Suite 501, Vancouver, British Columbia. The Company was
formed by articles of amalgamation under the Business Corporations Act (British
Columbia) and is registered in British Columbia, Canada. The Company is listed
on the Toronto Stock Exchange under the symbol WFT.
2. Transition to International Financial Reporting Standards ("IFRS")
The Company adopted IFRS effective January 1, 2011. Prior to the adoption of
IFRS the Company prepared its financial statements in accordance with Canadian
generally accepted accounting principles ("CGAAP"). The Company's financial
statements for the year ending December 31, 2011 will be the first annual
financial statements that are prepared in accordance with IFRS. The Company's
transition date is January 1, 2010 (the "Transition Date") and the Company has
prepared its opening IFRS balance sheet at that date. The Company will
ultimately prepare its opening balance sheet and financial statements for 2010
and 2011 by applying IFRS with an effective date of December 31, 2011 or
earlier. Accordingly, the opening balance sheet and annual financial statements
for 2010 and 2011 may differ from these statements.
3. 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
accounting policies the Company expects to adopt in its consolidated financial
statements for the year ended December 31, 2011. These policies can be found in
Appendix A.
These condensed consolidated interim financial statements should be read in
conjunction with the Company's 2010 annual financial statements with
consideration of the IFRS transition disclosures included in Appendix B of these
condensed consolidated interim financial statements.
4. Inventories
Inventories at March 31, 2011 were written down by $3.9 million (December 31,
2010 - $3.8 million; March 31, 2010 - $3.5 million, January 1, 2010 - $16.0
million) to reflect net realizable value being lower than cost.
5. Property, plant and equipment
--------------------------------------------------------------------------
March 31, December 31, January 1,
2011 2010 2010
--------------------------------------------------------------------------
Manufacturing plant,
equipment & machinery $ 813.2 $ 848.0 $ 954.6
Construction-in-progress 20.8 12.8 13.3
Roads and bridges 31.6 34.4 35.8
Other 29.7 29.5 28.2
--------------------------------------------------------------------------
$ 895.3 $ 924.7 $ 1,031.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------
6. Goodwill and other intangible assets
--------------------------------------------------------------------------
March 31, December 31, January 1,
2011 2010 2010
--------------------------------------------------------------------------
Goodwill $ 263.7 $ 263.7 $ 263.7
Power purchase agreement 71.3 73.2 80.5
Timber deposits 3.3 3.4 5.3
Other 4.3 5.1 4.5
--------------------------------------------------------------------------
$ 342.6 $ 345.4 $ 354.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
7. Restructuring charges
Restructuring charges relate to the closure of the Kitimat mill and certain
indefinitely idled sawmills. A reconciliation of restructuring charges included
in accounts payable and accrued liabilities is as follows:
--------------------------------------------------------------------------
January 1 to
January 1 to December 31,
March 31, 2011 2010
--------------------------------------------------------------------------
Accrued liability - beginning of period $ 4.5 $ 40.2
Paid during period (0.9) (35.1)
Change in accrual 0.3 (0.6)
--------------------------------------------------------------------------
Accrued liability - end of period $ 3.9 $ 4.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
8. Long-term debt and operating loans
Long-term debt
------------------------------------------------------------------------
March 31, December 31, January 1,
2011 2010 2010
------------------------------------------------------------------------
US$300 million senior
notes due October 2014;
interest at 5.2% $ 290.9 $ 298.4 $ 315.3
Term note due March 2010;
interest at floating
rates - - 100.0
Note payable due in
installments to 2020;
interest at 5.5% 2.4 2.7 2.7
------------------------------------------------------------------------
293.3 301.1 418.0
Less:
Current portion (0.3) (0.3) (100.3)
Deferred financing costs (1.3) (1.3) (1.8)
------------------------------------------------------------------------
$ 291.7 $ 299.5 $ 315.9
------------------------------------------------------------------------
------------------------------------------------------------------------
Operating loans
The Company has $505 million in revolving lines of credit, of which $5.4 million
(net of deferred financing costs of $5.8 million) was drawn as at March 31, 2011
(December 31, 2010 - $8.8 million, net of deferred financing costs of $6.2
million). Interest is payable at floating rates based on Prime, US base,
Bankers' Acceptances or LIBOR at the Company's option. The Company has also
issued letters of credit in the amount of $35.8 million that are supported by
this facility. The revolving lines of credit include a $500 million committed
facility maturing in December 2014.
The $500 million committed facility and the US$300 million senior notes are
secured by the Company's assets.
9. Other long-term liabilities
--------------------------------------------------------------------------
March 31, December 31, January 1,
2011 2010 2010
--------------------------------------------------------------------------
Post-retirement obligations $ 100.1 $ 118.2 $ 66.1
Reforestation obligations 76.4 64.4 64.2
Timber damage deposits 13.1 13.9 15.6
Other decommissioning
obligations 18.6 19.6 32.1
Other long-term obligations 9.6 9.6 7.8
--------------------------------------------------------------------------
$ 217.8 $ 225.7 $ 185.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
10. Employee future benefits
The Company maintains defined benefit and defined contribution pension plans
covering a majority of its employees. The defined benefit plans provide pension
benefits based either on length of service or on earnings and length of service.
Total pension expense for the defined benefit plans is $8.4 million for the
three months ended March 31, 2011 ($24.3 million for the year ended December 31,
2010). The Company also provides group life insurance, medical and extended
health benefits to certain employee groups.
The status of the defined benefit pension plans and other benefit plans, in
aggregate, is as follows:
--------------------------------------------------------------------------
March 31, December 31, January 1,
2011 2010 2010
--------------------------------------------------------------------------
Projected benefit obligations $ (965.0) $ (983.6) $ (845.4)
Fair value of plan assets 919.3 904.1 805.7
--------------------------------------------------------------------------
Deficit $ (45.7) $ (79.5) $ (39.7)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Represented by
Pension surplus (1) $ 54.4 $ 38.7 $ 26.4
Post-retirement obligations
(2) (100.1) (118.2) (66.1)
--------------------------------------------------------------------------
$ (45.7) $ (79.5) $ (39.7)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
1. Included in other assets.
2. Included in other long-term liabilities.
The significant assumptions used to determine the period end benefit obligations
are as follows:
--------------------------------------------------------------------------
March 31, December 31, January 1,
2011 2010 2010
--------------------------------------------------------------------------
Discount rate on obligation 5.75% 5.50% 6.50%
Expected rate of return on
plan assets 6.50% 6.50% 7.00%
Rate of increase in future
compensation 3.50% 3.50% 3.50%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
11. Other income (expense)
--------------------------------------------------------------------------
March 31, March 31,
2011 2010
--------------------------------------------------------------------------
Foreign exchange loss - net $ (4.4) $ (3.9)
Loss on derivative financial instruments - (4.0)
Other - net 0.8 -
--------------------------------------------------------------------------
$ (3.6) $ (7.9)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
12. Income taxes
The Company's effective tax rate on earnings from continuing operations is as
follows:
--------------------------------------------------------------------------
January 1 to March 31
2011 2010
Amount % Amount %
--------------------------------------------------------------------------
Income taxes at statutory
rates $ (9.0) (26.5) $ (14.9) (28.5)
Non taxable amounts (5.1) (14.9) 1.5 2.9
Rate differentials between
jurisdictions and on
specified activities (0.3) (0.9) 0.4 0.8
Recognition of prior year's
tax losses 0.4 1.1 1.2 2.3
Other (0.1) (0.2) (2.5) (4.8)
--------------------------------------------------------------------------
Income tax provision $ (14.1) (41.4) $ (14.3) (27.3)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
13. Discontinued operation
The Company permanently closed its Kitimat linerboard and kraft paper mill in
January 2010. The results of the discontinued operation are as follows:
January 1 to January 1 to
March 31, 2011 March 31, 2010
--------------------------------------------------------------------------
Sales $ - $ 51.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Operating loss $ (1.3) $ (11.9)
Other expense - (0.8)
--------------------------------------------------------------------------
Loss before income tax (1.3) (12.7)
Income tax recovery 0.3 3.6
--------------------------------------------------------------------------
Loss $ (1.0) $ (9.1)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash flows from operating activities $ (0.2) (0.9)
Cash flows from investing activities (0.2) -
--------------------------------------------------------------------------
Decrease in cash $ (0.4) $ (0.9)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
14. 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 shareholders for diluted earnings per share
are greater than earnings available to shareholders for basic earnings per
share, the calculation is anti-dilutive, therefore basic and diluted earnings
per share are the same.
--------------------------------------------------------------------------
January 1 to March 31
2011 2010
After After
From discon- From discon-
continuing tinued continuing tinued
operations operations operations operations
--------------------------------------------------------------------------
Earnings
Basic $ 19.9 $ 18.9 $ 38.0 $ 28.9
Share option expense 22.9 22.9 9.9 9.9
Equity settled share
option adjustment (2.3) (2.3) (0.3) (0.3)
--------------------------------------------------------------------------
Diluted $ 40.5 $ 39.5 $ 47.6 $ 38.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Weighted average
number of shares
Basic 42,836,143 42,836,143 42,817,733 42,817,733
Share options 572,217 572,217 324,500 324,500
--------------------------------------------------------------------------
Diluted 43,408,360 43,408,360 43,142,233 43,142,233
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings per share
(dollars)
Basic $ 0.46 $ 0.44 $ 0.89 $ 0.67
Diluted $ 0.46 $ 0.44 $ 0.89 $ 0.67
--------------------------------------------------------------------------
--------------------------------------------------------------------------
15. Green transformation program
In 2009 the Government of Canada confirmed an allocation of credits totalling
$88 million to the Company under the Pulp and Paper Green Transformation Program
(the "Program"). The Program provides funding for capital projects that improve
the energy efficiency or environmental performance of Canadian pulp and paper
mills. Credits may be used until the Program end date of March 31, 2012. During
the quarter, the Company received $7.5 million for eligible expenditures under
the Program and has incurred a further $14.6 million of qualifying reimbursable
expenditures.
16. Segmented information
Corpor-
Pulp & ate Consol-
Lumber Panels paper & other idated
--------------------------------------------------------------------------
January 1, 2011 to
March 31, 2011
Sales at market
prices
To external
customers $ 389.7 $ 88.6 $ 208.7 $ - $ 687.0
----------
----------
To other segments 21.5 2.3 - -
--------------------------------------------------------------
$ 411.2 $ 90.9 $ 208.7 $ -
--------------------------------------------------------------
--------------------------------------------------------------
EBITDA (1) $ 55.2 $ 3.6 $ 46.9 $ (26.1) $ 79.6
Amortization (22.3) (3.9) (17.8) (0.7) (44.7)
--------------------------------------------------------------------------
Operating earnings 32.9 (0.3) 29.1 (26.8) 34.9
Interest expense -
net (2.6) (0.8) (1.4) - (4.8)
Exchange gain on
long-term debt - - - 7.5 7.5
Other income
(expense) (2.5) (0.2) (1.8) 0.9 (3.6)
--------------------------------------------------------------------------
Earnings from
continuing
operations
before income taxes $ 27.8 $ (1.3) $ 25.9 $ (18.4) $ 34.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
January 1, 2010 to
March 31, 2010
Sales at market
prices
To external
customers $ 386.4 $ 97.7 $ 203.7 $ - $ 687.8
----------
To other segments 23.0 1.8 - - ----------
--------------------------------------------------------------
$ 409.4 $ 99.5 $ 203.7 $ -
--------------------------------------------------------------
--------------------------------------------------------------
EBITDA (1) $ 66.3 $ 11.2 $ 42.3 $ (13.2) $ 106.6
Amortization (26.8) (5.1) (16.7) (0.8) (49.4)
--------------------------------------------------------------------------
Operating earnings 39.5 6.1 25.6 (14.0) 57.2
Interest expense -
net (4.6) (0.8) (1.9) (0.3) (7.6)
Exchange gain on
long-term debt - - - 10.6 10.6
Other income
(expense) (1.5) (0.4) (6.3) 0.3 (7.9)
--------------------------------------------------------------------------
Earnings from
continuing
operations
before income taxes $ 33.4 $ 4.9 $ 17.4 $ (3.4) $ 52.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------
1. Non GAAP measure:
EBITDA is defined as operating earnings plus amortization.
The geographic distribution of external sales is as follows:
Sales by geographic area(1)
--------------------------------------------------------------------------
January 1 to January 1 to
March 31, 2011 March 31, 2010
--------------------------------------------------------------------------
Canada $ 156.0 $ 170.5
United States 340.4 349.1
China 84.7 51.6
Other Asia 73.9 84.2
Other 32.0 32.4
--------------------------------------------------------------------------
$ 687.0 $ 687.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
1. Sales are attributed to areas based on the location of product delivery
by the Company.
17. Contingency
On January 18, 2011 the United States requested arbitration with Canada under
the Softwood Lumber Agreement ("SLA") over its concern that the province of
British Columbia ("B.C.") is charging too low a price for certain timber
harvested on public lands in the B.C. interior.
The Company believes that Canada and B.C. are complying with their obligations
under the SLA and intends to cooperate fully with the B.C. and Canadian
governments in defending this claim. The results of the arbitration process are
not determinable at this point in time and accordingly no provision has been
recorded by the Company.
West Fraser Timber Co. Ltd.
Appendix A to Condensed Consolidated Interim Financial Statements
Significant Accounting Policies
Principles of consolidation
These condensed consolidated interim financial statements include the accounts
of the Company and its subsidiaries after elimination of intercompany
transactions and balances.
Investments in and operations of joint ventures are accounted for by the
proportionate consolidation method.
Financial instruments
The following financial assets and financial liabilities are measured at fair
value through profit and loss with changes reflected in other income (expense):
-- Cash and short-term investments
-- Cheques issued in excess of funds on deposit
-- Accounts payable and accrued liabilities
-- Derivatives
The following financial assets and financial liabilities are measured at
amortized cost using the effective interest rate method:
-- Accounts receivable, net of provisions for impairment
-- Loans receivable, net of provisions for impairment
-- Operating loans, net of financing charges
-- Long-term debt, net of financing charges
Financing charges are netted against debt and amortized over the life of the debt.
Long-term investments are measured at fair value with changes in value recorded
in other comprehensive income. When the asset is sold or impaired the effect is
recognized immediately in earnings and recycled from accumulated other
comprehensive earnings.
Use of estimates
The preparation of financial statements requires estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Significant areas requiring estimates are asset valuations, share based
compensation, reforestation obligations, other decommissioning obligations,
income taxes and employee future benefits. Actual amounts could differ
materially from those estimates.
Revenue recognition
Revenues are derived from product sales and are recognized upon the transfer of
significant risks and rewards of ownership, provided collectibility is
reasonably assured.
Foreign currency translation
The Company's functional and presentation currency is Canadian dollars.
Assets and liabilities of foreign operations that have a functional currency
other than Canadian dollars are translated at the period-end exchange rate and
revenues and expenses are translated at average exchange rates during the
reporting period. The resulting unrealized gains or losses are included in other
comprehensive earnings.
Monetary assets and liabilities denominated in foreign currencies, including
long-term debt, are translated into Canadian dollars at the period-end exchange
rate. Income and expense items are translated at average exchange rates during
the reporting period. The resulting gains or losses are included in other income
(expense).
Cash and short-term investments
Cash and short-term investments consist of cash on deposit and short-term
interest-bearing securities maturing within three months of the date of
purchase.
Inventories
Inventories of logs, other raw materials and manufactured products are valued at
the lower of average cost and net realizable value. Processing materials and
supplies are valued at the lower of average cost and replacement cost.
Property, plant, and equipment
Property, plant, and equipment are stated at historical or deemed cost, less
accumulated amortization and accumulated impairment losses. Expenditures for
additions and improvements are capitalized. Government grants received that
pertain to the construction of manufacturing assets are applied to reduce their
cost. Expenditures for maintenance and repairs are charged to earnings. Upon
retirement, disposal or destruction of an asset, the cost and related
amortization are removed from the accounts and any gain or loss is included in
earnings.
Property, plant and equipment are amortized on a straight-line basis over their
estimated useful lives as follows:
Buildings 10 - 30 years
Manufacturing equipment and machinery 10 - 20 years
Fixtures and other equipment 3 - 10 years
Roads Not exceeding 40 years
Maintenance shutdowns Over the period to the next
maintenance shutdown
Amortization expense relates primarily to cost of sales.
Timber licences and other intangible assets
Timber licences and other intangible assets are stated at historical cost, less
accumulated amortization and accumulated impairment losses and are amortized on
a straight-line basis over their estimated useful lives as follows:
Timber licences 40 years
Power purchase agreement Over the life of the agreement
Software 3 - 5 years
Timber deposits As timber is logged
Amortization expense relates primarily to cost of sales.
Impairment of property, plant, equipment, timber licences and other intangibles
The Company reviews property, plant, equipment, timber licences and other
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be fully recoverable. For the purpose
of impairment testing property, plant, equipment, timber and other intangible
assets are separated into cash generating units ("CGU"). The Company has
identified each mill as a CGU for impairment testing of property, plant,
equipment and other intangibles. Timber is tested for impairment by combining
CGU's within the economic area of the related timber.
Recoverability is assessed by comparing the CGU carrying amount to the
discounted estimated net future cash flows the assets are expected to generate.
If the carrying amount exceeds the discounted estimated net future cash flows,
the assets of the cash generating unit are written down to the higher of fair
value less costs to sell and value in use (being the present value of the
expected net future cash flows of the relevant asset or CGU).
Estimated net future cash flows are based on several estimates including the
future selling price of products, future US/Canadian dollar exchange rates,
future production rates, future input costs and future capital requirements. The
estimated net future cash flows are discounted at rates based on management's
estimate of the Company's weighted average cost of capital.
Where an impairment loss subsequently reverses the carrying amount of the asset
or cash generating unit is increased to the lesser of the revised estimate of
recoverable amount and the carrying amount that would have been recorded had no
impairment loss been recognized previously.
Goodwill
Goodwill represents the excess of the purchase price paid for an acquisition
over the fair value of the net assets acquired. Goodwill is not amortized, but
is subject to an impairment test annually or more frequently if events or
circumstances indicate that it may be impaired.
Goodwill impairment is assessed by comparing the fair value of its CGU to the
underlying carrying amount of the CGU's net assets, including goodwill. When the
carrying amount of the CGU exceeds its fair value, the fair value of the unit's
goodwill is compared with its carrying amount to measure the amount of
impairment loss, if any.
The Company has attributed $217.6 million of goodwill to a CGU made up of the
Company's Canadian lumber operations and $46.1 million of goodwill to a CGU made
up of the Company's plywood and LVL operations.
Reforestation and decommissioning obligations
The Company harvests timber under various timber rights that require the Company
to conduct reforestation. Future reforestation obligations are measured at fair
value and accrued and charged to earnings when timber is harvested. The
reforestation obligation is reviewed periodically and changes to estimates are
credited or charged to earnings.
The Company records the estimated fair value of a liability for other
decommissioning obligations in the period a reasonable estimate of fair value
can be made. The fair value is added to the carrying amount of the associated
asset and amortized over its useful life, or if there is no associated asset it
is expensed. Other decommissioning obligations are reviewed annually and changes
to estimates are adjusted to the associated asset or where there is no asset it
is expensed.
Reforestation and other decommissioning obligations are discounted at the risk
free rate at the balance sheet date and accreted over time through periodic
charges to earnings. The liabilities are reduced by actual costs of settlement.
Long-term equity-based compensation
The Company's share option plan gives share option holders the right to elect to
receive a cash payment in lieu of exercising an option to purchase Common
shares. The Company estimates fair value using a Black Scholes option pricing
model at each balance sheet date and records the resulting expense or recovery,
over the vesting period, through a charge to earnings. If an option holder
elects to purchase Common shares, both the exercise price and the accrued
liability are credited to shareholders' equity.
The Company's phantom share unit plan provides for future cash payments to
certain officers and employees based on the Company's share price at the vesting
date and, in some cases, based on the Company's relative financial performance
compared to a peer group of forest products companies. The Company records an
expense or recovery through earnings over the vesting period based on the quoted
market price of the Company's Common shares.
Employee future benefits
The Company accrues for its obligations under employee benefit plans and the
related costs net of plan assets.
The Company has adopted the following policies:
-- The measurement date used for accounting purposes is December 31;
-- The cost of pensions earned by employees is determined using the
projected unit credit method, pro-rated for estimated service periods
where appropriate, and management's estimate of expected plan investment
performance, discount rate, salary escalation, retirement ages of
employees and other relevant factors;
-- For the purpose of calculating expected return, plan assets are valued
at fair value;
-- Past service costs arising from plan amendments are recognized
immediately to the extent the benefits are vested, and otherwise are
amortized straight-line over the average period until the benefits
become vested; and
-- Net actuarial gains or losses are reported as part of other
comprehensive earnings in the period incurred.
For defined contribution plans, pension expense is the amount of contributions
the Company is required to make in respect of services rendered by employees.
Income taxes
Deferred taxes are provided for using the liability method. Under this method,
deferred taxes are recognized for temporary differences between the tax and
financial statement bases of assets, liabilities and certain carry-forward
items.
Deferred tax assets are recognized only to the extent that it is probable that
they will be realized. Current and deferred income taxes relating to items
recognized directly in equity are also recognized directly in equity. Deferred
income tax assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of substantive enactment.
Accounting standards issued but not yet applied
IFRS 9 Financial Instruments was issued in November 2009. It addresses
classification and measurement of financial assets and replaces the multiple
category and measurement models in IAS 39 for debt instruments with a new mixed
measurement model having only two categories: amortized cost and fair value
through profit and loss. IFRS 9 also replaces the models for measuring equity
instruments and such instruments are either recognized at fair value through
profit or loss or at fair value through other comprehensive earnings. This
standard is required to be applied for accounting periods beginning on or after
January 1, 2013, with earlier adoption permitted. The Company has not yet
assessed the impact of the standard or determined whether it will adopt the
standard early.
West Fraser Timber Co. Ltd.
Appendix B to Condensed Consolidated Interim Financial Statements
Transition to IFRS
(figures are in millions of dollars except where indicated - unaudited)
Transition to IFRS
The Company's transition date is January 1, 2010 (the "Transition Date") and the
Company has prepared its opening IFRS balance sheet as at that date. The Company
will ultimately prepare its opening balance sheet and financial statements for
2010 and 2011 by applying the existing IFRS with an effective date of December
31, 2011 or earlier. The standard setting body of IFRS has significant ongoing
projects that could affect the ultimate differences between CGAAP and IFRS and
these changes could have a material effect on the Company's financial
statements. Accordingly, the opening balance sheet and reconciliations may
differ from those presented.
The Company's 2010 annual management's discussion and analysis included a
preliminary January 1, 2010 IFRS balance sheet that provided a line by line
reconciliation of the changes from CGAAP. This report can be found on the
Company's website at www.westfraser.com and on the System for Electronic
Document Analysis and Retrieval at www.sedar.com under the Company's profile.
The following tables and their notes reconcile IFRS equity and comprehensive
earnings to the CGAAP versions previously published.
Estimated adjustments to comprehensive earnings on adoption of IFRS
Earn- Earn-
ings ings Trans-
from from lation
For the contin- discon- of Actua- Compre-
3 months uing tinued foreign rial hensive
ended March opera- opera- Earn- opera- gain earn-
31, 2010 Notes tions tions ings tions (loss) ings
--------------------------------------------------------------------------
Earnings
reported under
CGAAP $ 34.3 $ (14.9) $ 19.4 $ (9.3) $ - $ 10.1
Earnings
adjustment
PPE(1)
amortization 2 3.6 - 3.6 2.4 - 6.0
Employee future
benefits 3 0.8 1.6 2.4 0.1 20.0 22.5
Decommissioning
obligations 4 (0.8) 0.4 (0.4) - - (0.4)
Share option
expense 5 0.5 - 0.5 - - 0.5
Restructuring
charges 6 - 6.0 6.0 - - 6.0
Deferred tax on
above items 7 (0.4) (2.2) (2.6) - (5.7) (8.3)
--------------------------------------------------------------------------
Earnings
adjustment 3.7 5.8 9.5 2.5 14.3 26.3
--------------------------------------------------------------------------
Earnings
reported under
IFRS $ 38.0 $ (9.1) $ 28.9 $ (6.8) $ 14.3 $ 36.4
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earn- Earn-
ings ings Trans-
from from lation
For the year contin- discon- of Actua- Compre-
year ended uing tinued foreign rial hensive
December opera- opera- Earn- opera- gain earn-
31, 2010 Notes tions tions ings tions (loss) ings
--------------------------------------------------------------------------
Earnings
reported under
CGAAP $ 169.8 $ (3.6) $ 166.2 $ (12.3) $ - $ 153.9
Earnings
adjustment
PPE(1)
amortization 2 13.6 - 13.6 2.6 - 16.2
Employee future
benefits 3 1.0 3.5 4.5 0.1 (77.6) (73.0)
Decommissioning
obligations 4 (1.6) 1.9 0.3 - - 0.3
Share option
expense 5 3.7 - 3.7 - - 3.7
Restructuring
charges 6 - 6.0 6.0 - - 6.0
Deferred tax on
above items 7 (4.7) (3.2) (7.9) - 18.5 10.6
--------------------------------------------------------------------------
Earnings
adjustment 12.0 8.2 20.2 2.7 (59.1) (36.2)
--------------------------------------------------------------------------
Earnings
reported under
IFRS $ 181.8 $ 4.6 $ 186.4 $ (9.6) $ (59.1) $ 117.7
--------------------------------------------------------------------------
--------------------------------------------------------------------------
1. PPE - property, plant and equipment
Estimated adjustments to Shareholders' equity on adoption of IFRS
Transition
Date
As at As at As at
January 1, March 31, December 31,
Notes 2010 2010 2010
--------------------------------------------------------------------------
Equity reported under
CGAAP $ 1,618.2 $ 1,627.3 $ 1,765.2
Retained earnings
adjustment
Opening retained earnings
adjustment - (195.2) (195.2)
PPE - impairment 2 (94.8) - -
PPE - decommissioning
obligation 4 1.8 - -
Employee future benefits 3 (106.8) - -
Decommissioning
obligation increase 4 (15.2) - -
Share option liability 5 (16.6) - -
Restructuring liability 6 (6.0) - -
Deferred income tax on
above items 7 42.4 - -
Employee future
benefits - actuarial
losses (net of tax) 3 - 14.3 (59.1)
Earnings adjustments
(see above) - 9.5 20.2
--------------------------------------------------------------------------
Retained earnings
adjustment (195.2) (171.4) (234.1)
Cumulative translation
adjustment 8 - 2.5 2.7
--------------------------------------------------------------------------
Equity reported under IFRS $ 1,423.0 $ 1,458.4 $ 1,533.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Notes to Shareholders' equity and comprehensive earnings reconciliations
1. IFRS 1 - Elected exemptions
In accordance with IFRS 1 First-time Adoption of International Financial
Reporting Standards ("IFRS 1"), the Company has elected to apply the following
exemptions from full retrospective application of IFRS.
Business combinations
The Company has elected to apply the business combination exemption in IFRS 1 to
business combinations that occurred before January 1, 2010. Accordingly, the
CGAAP purchase cost accounting values carry forward under IFRS.
Fair value as deemed cost
The Company has elected to apply the fair value as deemed cost exemption to
items of property, plant, and equipment that were impaired under IFRS at the
transition date. The result is that the asset cost base is restated to fair
value for the items on which the exemption was applied.
Employee future benefits
The Company has elected to recognize the January 1, 2010 cumulative unamortized
actuarial gains and losses in opening retained earnings for the Company's
employee benefit plans.
Cumulative translation differences
The Company has elected to set the cumulative translation balance, which was
included in accumulated other comprehensive earnings, to zero at January 1, 2010
by absorbing it into opening retained earnings.
Decommissioning liabilities
The Company has elected to apply the IFRS 1 exemption to its decommissioning
liabilities included in the cost of property, plant and equipment.
2. Property, plant, and equipment impairment
IFRS requires the assessment of asset impairment to be based on discounted cash
flows while CGAAP only requires discounting if the carrying value of assets
exceeds the undiscounted cash flows. The assumptions used to estimate cash flows
are based on industry sources, including Forest Economic Advisors, LLC and
Resource Information Systems, Inc., as well as industry analysts and management
estimates. Future cash flows were then discounted using an interest rate of 10%
to determine the net present value of future cash flows.
The difference in methodology resulted in asset impairment charges of $75.3
million related to certain U.S. sawmill assets and $19.5 million related to
certain MDF assets being charged through Transition Date retained earnings.
Depreciation expense under IFRS was reduced by $3.5 million for the three months
ended March 31, 2010 and $13.6 million for the year ended December 31, 2010 due
to the impairments.
Fair value for the impaired items of property, plant and equipment at January 1,
2010 was $105.7 million after the impairment charge of $94.8 million.
3. Employee future benefits
The significant differences between CGAAP and IFRS are as follows:
i. The Company elected to recognize the January 1, 2010 cumulative deferred
actuarial gains and losses in opening retained earnings for the Company's
defined benefit pension plans under IFRS 1.
ii. Under CGAAP the Company used an October 31st measurement date, while IFRS
requires a December 31st measurement date.
iii. The Company has chosen to adjust actuarial gains and losses after the
Transition Date to retained earnings via comprehensive earnings. Under CGAAP
these amounts are deferred and amortized over the average remaining service
period of the affected employees within certain limits.
The differences in methodology resulted in a reduction of deferred pension costs
of $106.3 million and an increase in post retirement obligations of $0.5 million
on the Transition Date. Under IFRS, employee future benefit expense was reduced
by $2.4 million for the three months ended March 31, 2010 and by $4.5 million
for the year ended December 31, 2010. A charge of $59.1 million (net of tax of
$18.5 million) was recorded to comprehensive earnings for actuarial gains and
losses related to the year ended December 31, 2010.
4. Reforestation and decommissioning obligations
Under CGAAP decommissioning obligations are discounted at the risk free rate in
effect at the time the liability was recorded. IFRS requires asset retirement
obligations to be discounted at each balance sheet date based on the discount
rate in effect at that date.
The differences in methodology resulted in an increase to reforestation and
other decommissioning obligations of $15.2 million and an increase in property,
plant and equipment of $1.8 million on the Transition Date. The asset retirement
obligation adjustment for the three months ended March 31, 2010 resulted in a
$0.4 million increase in expenses and for the year ended December 31, 2010 a
$0.3 million decrease in expenses.
5. Share option liability
The determination of fair value of the Company's share option liability under
CGAAP is based on the intrinsic value method which uses the balance sheet date
share price to calculate the liability. IFRS requires the use of a share option
valuation model to fair value the share option liability.
The differences in methodology resulted in an increase to the liability of $16.6
million on the Transition Date. The share option expense was decreased by $0.5
million for the three months ended March 31, 2010 and by $3.7 million for the
year ended December 31, 2010.
The following are the inputs used in the balance sheet date Black-Scholes share
option valuation model:
--------------------------------------------------------------------------
January 1, March 31, December 31,
2010 2010 2010
--------------------------------------------------------------------------
Share price on balance sheet date 33.16 38.79 47.16
Weighted average exercise price 35.19 35.40 37.49
Expected weighted average
years to exercise 3.76 3.50 3.49
Share price volatility 33.56% 33.71% 35.41%
Expected annual dividend 0.43 0.43 0.53
Weighted average risk-free rate 2.14% 2.25% 1.99%
Weighted average fair value
of unit 7.99 11.44 16.22
--------------------------------------------------------------------------
--------------------------------------------------------------------------
6. Restructuring charges
Under CGAAP the company was required to record certain restructuring charges
related to discontinued operations in the first quarter of 2010. IFRS required
these charges to be recorded in the fourth quarter of 2009 upon the announcement
of the mill closure.
The difference in methodology resulted in an increase to accounts payable and
accrued liabilities of $6.0 million on the Transition Date. The restructuring
charge adjustment for the three months ended March 31, 2010 and the year ended
December 31, 2010 was a $6.0 million decrease in expenses.
7. Deferred income taxes
The deferred income tax adjustments reflect the change in temporary differences
resulting from the effect of the IFRS adjustments described in these notes. The
Transition Date adjustments resulted in a decrease in deferred taxes of $42.4
million. The deferred tax expense increase for the three months ended March 31,
2010 was $2.6 million and for the year ended December 31, 2010 was $7.9 million.
8. Cumulative translation adjustment
The Company elected to set the cumulative translation balance, which was
included in accumulated other comprehensive earnings, to zero at January 1, 2010
by absorbing the $59.8 million into opening retained earnings. The foreign
currency translation of IFRS adjustments to the Company's U.S. operations
decreased the cumulative translation loss by $2.5 million for the three months
ended March 31, 2010 and $2.7 million for the year ended December 31, 2010.
9. Cash flow statement
The cash flow statement presented under IFRS includes interest paid as part of
cash flows from financing activities, interest received as part of cash flows
from investing activities and expenditures on major planned maintenance
shutdowns as cash flows from investing activities. Previously these items were
included in cash flows from operating activities.
West Fraser shares trade on the Toronto Stock Exchange under the symbol: "WFT".
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