VANCOUVER, BC -- West Fraser Timber Co. Ltd. (TSX:WFT) today reported earnings after discontinued operations of $45 million or $1.04 per share on sales of $707 million in the third quarter of 2010 and earnings after discontinued operations of $128 million or $2.95 per share, on sales of $2.2 billion for the first nine months of 2010.
"Although we are experiencing a slow recovery in some of our key markets, we are generally very pleased with our results. Our improved
cash flows allow us the opportunity to reinvest in our operations which will better position us to take advantage of the eventual economic
recovery," said Hank Ketcham, the Company's Chairman, President and CEO.
Throughout this News Release, reference is made to EBITDA (defined as operating earnings plus amortization and asset impairments). 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 Canadian generally accepted accounting principles ("GAAP") and does not have a standardized meaning prescribed by Canadian GAAP. Investors are cautioned that EBITDA should not be considered as an alternative to earnings or cash flow as determined in accordance with Canadian GAAP. 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.
In the quarter the lumber segment generated operating earnings of $22 million and EBITDA of $49 million. After a period of higher lumber
prices in the second quarter of 2010, prices weakened in the third quarter reflecting a continuing weak U.S. housing market. SYP lumber
prices were particularly hard hit. Shipments to China continued to increase in the quarter, supporting lumber prices.
The panel segment, which includes plywood, LVL and MDF, generated operating earnings in the quarter of $14 million and EBITDA of $20 million. Plywood prices came under pressure in the quarter with the average benchmark price declining 13% from the previous quarter as
U.S.-produced plywood was sold into the Canadian market. The impact of this decline on panel segment results was largely offset by stronger MDF prices.
Pulp and paper operations generated operating earnings of $41 million and EBITDA of $55 million. Pulp prices increased in the quarter with the average NBSK benchmark price for the quarter increasing to US$1,000 per tonne compared to US$993 in the previous quarter. Record pulp production of over 300,000 tonnes for the quarter contributed to the strong segment results.
The economic uncertainty in the U.S. continues to delay a recovery in U.S. new home construction, which is a key market for the Company's
lumber, MDF and LVL. The Company expects pulp prices to be reasonable over the near term as a result of the improving global economy.
Mr. Ketcham concluded, "Despite the uncertain recovery, we are confident that our well capitalized mills, our strong balance sheet and our low cost culture will allow us to maintain our leadership position in our industry."
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.
Investors are invited to listen to the quarterly conference call on Tuesday, October 26, 2010 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time) by dialing 1-866-226-1792 (toll-free North America). The call may also be accessed through West Fraser's website at www.westfraser.com
Management's Discussion & Analysis
This discussion and analysis by West Fraser's management ("MD&A") of the Company's financial performance during the third quarter of 2010 (the "current quarter") should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes
included in this quarterly report and the 2009 annual MD&A included in the Company's 2009 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 under the headings "Discontinued Operations" (comment concerning expected sale of Eurocan inventory), "Business Outlook" and "New Accounting Pronouncements". 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 2009 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 and asset impairments). 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 Canadian generally accepted accounting principles ("GAAP") and does not have a standardized meaning prescribed by Canadian GAAP. Investors are cautioned that EBITDA should not be considered as an alternative to earnings or cash flow, as determined in accordance with Canadian GAAP. 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 October 25, 2010 unless otherwise indicated.
Discussion & Analysis
Earnings for the current quarter were very positive although moderately weaker than the previous quarter's strong results. The decline in
earnings was the result of weakening lumber prices, including sharply weaker SYP lumber prices, during the quarter as well as a modest decline in pulp prices in the latter part of the current quarter.
The current quarter selling, general and administrative expenses include $8 million related to equity-based compensation. Equity-based
compensation varies based on the period-ending closing price of the Company's Common shares and had resulted in a recovery of $10 million in the previous quarter. The current quarter's results also include a gain on the translation of U.S. dollar-denominated debt of $10 million (after-tax $9 million or $0.21 per share), reflecting a strengthening of the Canadian dollar against its U.S. counterpart.
The Company's 2010 results represent a significant improvement over earnings for comparable periods of 2009, which have been restated to present results of the Eurocan linerboard and kraft paper business ("Eurocan") as a discontinued operation. Comparing third quarter results, the $146 million improvement in earnings from continuing operations reflects higher lumber and pulp prices as well as increased
shipments of lumber as some previously-curtailed capacity was brought back into production. On a year-to-date basis, 2010 earnings from
continuing operations improved by $345 million compared to the same period of 2009 as both SPF lumber and pulp prices improved dramatically and shipments of SPF lumber reached near capacity levels.
Cash flows from operations continued to be very positive as reflected in the net debt to total capitalization ratio of 6% at the end of the current quarter compared to 12% at the end of the previous quarter. Many of the Company's operations are benefiting from the combination of a lower cost structure and high operating rates in a very difficult market. In light of the Company's continued strong performance, during the quarter West Fraser's Board approved an increase of its quarterly dividend from $0.03 to $0.06 as well as a new $125 million capital expenditure program.
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 from continuing operations.
Discussion & Analysis by Product Segment
The current U.S. housing collapse, which began in 2006 and was worsened by the global financial crisis which began in 2008, resulted in a sharp and extended decline in demand for lumber and other building products, including those manufactured by the Company. 2009 marked what many analysts consider a low point in the current lumber downcycle as production greatly exceeded demand and benchmark prices weakened
sharply. In response, lumber producers, including the Company, curtailed higher-cost production and by early 2010 lumber prices had recovered to levels reflecting an improved, although fragile, balance between supply and demand. In the first half of 2010 benchmark prices for both SPF and
SYP lumber spiked sharply higher, due in large part to constrained supply. In the case of SPF lumber, production curtailments and reduced
log inventories during the spring breakup played a key role in constraining supply while in the case of SYP lumber, extreme weather conditions in many areas of the U.S. South caused the reduction or suspension of logging activities which resulted in production curtailments. By the end of the second quarter of 2010 these supply constraints had been substantially alleviated and benchmark prices weakened as a result. In the case of SYP lumber benchmark prices, the decline was significant.
Operating earnings for the lumber segment followed the same pattern as the Company's overall operating earnings, reflecting a moderate weakening in the current quarter compared to the previous quarter but a substantial improvement compared to the same quarter of 2009. Year-to-date 2010 operating earnings were $273 million higher than in the same period of 2009.
Lumber shipments were substantially the same as in the previous quarter but were 10% higher than in the third quarter of 2009. On a year-to-date basis, shipments were 5% higher in 2010 than in 2009. While U.S. demand continued to reflect the depressed housing market, lumber demand showed continued growth in China. Strong demand for all grades has allowed Canadian lumber to gain greater market share and geographic penetration in China.
The Company's Canadian mills continued to operate near capacity in the current quarter. SPF lumber production was slightly lower in the current quarter compared to the previous quarter but was 14% greater compared to the third quarter of 2009.
SYP production was slightly higher in the current quarter compared to the previous quarter and 11% higher compared to the third quarter of 2009. However, many of the Company's U.S. sawmills continued to operate on reduced shifts due to uncertain markets, achieving an overall operating rate of approximately 75% in the current quarter.
Amortization in the period was lower compared to the third quarter of 2009 largely due to asset impairment charges relating to certain sawmill assets recorded in the earlier period.
During the current quarter the benchmark lumber composite price decreased which resulted in the reinstatement of export taxes on certain Canadian softwood lumber exports to the United States under the 2006 Softwood Lumber Agreement (the "S.L.A."). During the months of May, June and July, 2010 the Company's Canadian lumber exports were subject to a 10%, 0% and 10% base tax rate, respectively. For the remaining months of 2010 and for all of 2009 West Fraser's lumber exports were subject to a 15% base tax rate. For any month where shipments from B.C. or Alberta exceed the provincial surge limit, the base tax rate will be increased by one-half. For several months in 2009 and 2010, lumber shipments from the province of Alberta exceeded the prescribed surge volumes which caused shipments in those months to be subject to a higher export tax.
As allowed under the S.L.A., in early October 2010 the U.S. government requested consultations with Canada, which is an initial step in the dispute resolution mechanism under that agreement. A dispute has arisen between the two countries which relates to the prices charged to harvest pine-beetle killed timber on public lands located in the interior region of B.C. and therefore could have implications for several of West Fraser's operations. If the dispute is not resolved through consultation, either party may require that the issue in dispute be referred to arbitration for determination. Representatives of the B.C. government, which sets prices for Crown timber harvested from public lands, have indicated that they believe that the U.S. complaint is without merit. West Fraser is currently unable, based on available information, to reasonably estimate the likelihood or effect of an
adverse determination of this dispute.
In October 2010, the Company concluded collective bargaining in six of its B.C. solid wood operations and the agreements are expected to be
ratified by early November.
The Company's panels segment is comprised of its plywood, MDF and LVL operations.
Operating earnings were comparable in the current and previous quarters as weakening plywood prices in the current quarter were substantially offset by lower plywood production costs and improved MDF prices. Operating earnings in the current quarter were slightly higher than in the third quarter of 2009 as MDF prices improved and amortization for the plywood segment declined as certain assets became fully depreciated.
Benchmark plywood prices were 13% lower in the current quarter compared to the previous quarter and the third quarter of 2009. As the Canadian
dollar began its strengthening trend against the U.S. dollar in 2009, more U.S.-produced plywood began entering the Canadian market, putting
downward pressure on plywood prices. MDF prices improved in the current quarter compared to the previous quarter and the third quarter of 2009,
reflecting a reduction of overall supply in the North American market.
The Company's two MDF plants operated in the quarter at approximately 70% of capacity. In the previous quarter a press fire at the Quesnel MDF plant reduced production by approximately 8,300 Msf. The Company's LVL plant was reduced to running at 45% of capacity during the quarter as a
result of weakened demand.
Pulp & Paper Segment
The pulp & paper segment includes operations that produce NBSK, BCTMP and newsprint. Results from the Eurocan business are included in discontinued operations.
While the average benchmark NBSK prices increased compared to the previous quarter, the effect was somewhat offset by a decline in BCTMP prices and reduced BCTMP sales volumes. Benchmark NBSK prices reached a peak of US$1,020 per tonne in June as worldwide pulp inventories hit a cyclical low during the second quarter 2010. The restart of Chilean pulp capacity, new capacity startups in China and a slowdown in Asian pulp demand contributed to an increase in inventories during the current quarter and a subsequent NBSK price decline to US$990 per tonne. BCTMP pricing declined by a wider margin during the quarter given that the majority of the demand for this product is in the Asian market. Towards the end of the quarter demand for BCTMP improved as Asian demand picked up.
The significant improvement in earnings in 2010 compared to 2009 reflect the substantial improvement in both NBSK and BCTMP prices.
A pulp production record was achieved in the current quarter as all plants operated well. Production was 19% higher than in the previous quarter as planned maintenance shutdowns occurred in the second quarter at both NBSK mills and the Quesnel BCTMP mill. Production in the current quarter was 5% higher than in the corresponding quarter in 2009 reflecting improved operating rates in each of the pulp mills.
Average unit pulp production costs were 10% lower in the current quarter than in the previous quarter, in spite of increased fibre costs, as energy, chemical and other conversion costs declined. In addition, $4 million of investment tax credits were applied to reduce production costs. Compared to the corresponding quarter in 2009, average unit production costs were 6% higher largely due to higher fibre and maintenance costs.
Newsprint prices have shown some improvement, increasing by 6% from the previous quarter and 43% from the third quarter of 2009. Newsprint production was 10% higher in the current quarter compared to the previous quarter as production was curtailed in the previous quarter due to high electricity costs. Production was substantially greater than in the corresponding quarter of 2009 due to downtime taken in the earlier period to permit modifications to the paper machine.
Average unit production costs for newsprint were higher in the current quarter compared to the previous quarter as higher electricity sales revenues generated in the previous quarter under the Company's power purchase agreement reduced average production costs. Unit production costs for the quarter were lower compared to the third quarter of 2009 due to the downtime taken during the earlier period.
The Eurocan mill ceased operations in the first quarter of 2010 and by the end of the third quarter most of the finished product inventory had been sold or committed to specific customers. All remaining inventory should be sold by the end of the year. The mill recorded an after-tax loss of $1 million in the current quarter compared to after-tax earnings of $1 million in the previous quarter and an after-tax loss of $99 million in the corresponding quarter of 2009. The current quarter results include a small amount from the sale of product inventory as well as site security and other costs.
West Fraser has initiated the sale of various fixed assets associated with the Eurocan mill and completed the sale of one of two paper machines in October 2010. Further asset sales are expected to be completed over the next 12 months.
For a description of West Fraser's business outlook for 2010 see its 2009 annual MD&A under "Business Outlook" which is included in the Company's Annual Report.
A recovery of U.S. new home construction, which is a key market for the Company's lumber, MDF and LVL, continues to be hampered by economic uncertainty in the U.S., including high levels of unemployment and lack of consumer confidence. This uncertainty is expected to continue at least over the next several quarters. Although Canadian solid wood product prices reflect a degree of balance between supply and demand, current weak SYP lumber prices reflect a continuing oversupply of that U.S. product.
The strength of the Canadian dollar and a weak U.S. housing market is likely to continue to result in the import of U.S.-produced plywood into Canada which will continue to put downward pressure on plywood prices. This trend is likely to be reversed either by a decline in the value of the Canadian dollar against the U.S. dollar or a recovery of the U.S. housing market.
Although there may be a short-term weakening of certain key pulp markets, the general recovery of the global economy and limited sources of new production should support reasonable price levels over the next few years. However, as new supply does come onto the market, pulp prices may face downward pressure.
Capital Requirements and Liquidity
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.
As at September 30, 2010 the Company had cash and short-term investments, less cheques issued in excess of funds on deposit, of $213 million. Its net debt (total debt less cash) as a proportion of its net debt plus shareholders equity was 6% compared to 24% as at December 31, 2009 and 12% as at June 30, 2010.
The Company has $605 million in revolving lines of credit as at September 30, 2010, of which $16 million (net of deferred financing cost of $4 million) was drawn and $38 million was allocated to issued letters of credit supported by these facilities.
Capital Structure and Debt Ratings
At September 30, 2010 the Common share equity of the Company consisted of 40,019,484 Common shares and 2,806,478 Class B Common shares for a total of 42,825,962 shares issued and outstanding.
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 has historically maintained an investment grade rating by each of its three rating agencies. In 2009, as a result of the significant and prolonged downturn in the U.S. housing industry, each of these agencies downgraded its rating of the Company. However, during the current quarter, Standard & Poor's raised its rating from BB to BB+ while maintaining the stable outlook. West Fraser believes that the performance. The Company's current rating by each of these agencies is as follows:
Risks and Uncertainties
For a review of the risks and uncertainties to which the Company is subject, see the 2009 annual MD&A which is included in the Company's 2009 Annual Report.
New Accounting Pronouncements
International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board confirmed that International Financial Reporting Standards ("IFRS") will replace Canada's current GAAP for publicly accountable profit-oriented enterprises effective January 1, 2011. IFRS requires that in the year of implementation the comparative financial statements be restated to conform to the standards.
Update on IFRS Conversion Plan
West Fraser has commenced the process to transition from GAAP to IFRS. The Company has established a project team and a project plan has been developed and is being implemented. Regular progress reporting to the Audit Committee of the Board of Directors on the status of the IFRS implementation project has been instituted.
The project plan consists of three major phases, which at times will run concurrently:
-- Assessment phase - This phase involves identifying the differences between GAAP and IFRS. These differences are then analysed to determine the possible effect on the Company including changes required to existing accounting policies and information systems, together with analysis of policy choices under IFRS.
-- Design phase - During this phase additional specialist personnel will be identified to assist as necessary on system and process changes. Training requirements for staff will be assessed and appropriate training programs will be completed. In addition, optional exemptions for first time adopters of IFRS and accounting policy choices under IFRS will be evaluated.
-- Implementation phase - This phase includes execution of changes to information systems and business processes, obtaining authorization for recommended exemptions for first time adopters and for accounting policy choices. During this phase draft IFRS-compliant financial statements will be completed for discussion and approval by senior management and the Audit Committee. Additional training will be provided to financial and other staff as necessary.
The assessment and design phases have been completed and the Company is now in the implementation phase of the project plan. All financial staff in key control positions have been provided with initial IFRS training with additional training being provided to members of the project team.
Implementation of changes to ensure that information systems are capable of dual reporting of GAAP and IFRS information for 2010 has been completed. In addition, changes to the Company's fixed asset system to account for impairment accounting under IFRS are scheduled to be implemented in the fourth quarter of the year.
The expected effect of accounting policy choices and system changes on disclosure controls and internal controls over financial reporting is being monitored and appropriate control changes will be made prior to implementation of IFRS.
Differences between IFRS and GAAP
The standard-setting body of IFRS has significant ongoing projects that could affect the ultimate differences between GAAP and IFRS and these changes may have a material effect on the Company's financial statements. As a result, the final effect on the Company's consolidated financial statements will only be measurable once all of the applicable IFRS standards as at the date of the final changeover are known.
There are a number of differences between GAAP and IFRS that have been identified. Many of the differences identified are not expected to have a material effect on the reported results or the financial position of West Fraser. However, there may be significant changes resulting from the initial adoption of IFRS and accounting policy choices for certain areas. The adoption of IFRS is not expected to materially affect cash flows or debt covenant calculations as current covenants contemplate that they will continue to be calculated based on current GAAP.
While the qualitative effects of IFRS on future financial statements have not yet been determined, the Company has identified a number of key
areas which are likely to be significantly affected, including property, plant, equipment and timber, impairment of assets, employee future
benefits, asset retirement obligations (including reforestation obligations) and presentation of financial statements.
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 NI52-109.
There were no changes in internal controls over financial reporting that occurred during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, West Fraser's internal control over financial reporting.
SOURCE: West Fraser Timber Co. Ltd.
Have something to say? Share your thoughts with us in the comments below.