West Fraser Timber Co. Ltd. (TSX:WFT) today reported earnings for the third
quarter of 2011 from continuing operations of $6 million or basic earnings per
share of $0.14 on sales of $705 million. In the quarter the Company completed
the sale of its Eurocan deep-sea wharf which contributed to earnings after
discontinued operations of $37 million or $0.87 per share. After adjusting for
certain non-operational items, adjusted earnings from continuing operations were
$3 million or $0.06 per share. For the first nine months of 2011, similarly
adjusted earnings from continuing operations were $37 million or $0.87 per share
on sales of $2.1 billion.
These results compare with previous periods as follows:
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($ million except earnings 2011 2010
per share ("EPS")) YTD Q3 Q2 YTD Q3
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Sales 2,112 705 720 2,167 707
EBITDA(1) 208 66 62 379 115
Operating earnings 80 23 22 232 66
Earnings from continuing operations 37 6 11 154 49
Basic EPS from continuing operations ($) 0.87 0.14 0.27 3.60 1.15
Adjusted earnings (loss) from continuing
operations(2) 37 3 (4) 160 47
Adjusted EPS from continuing operations(2) 0.87 0.06 (0.09) 3.75 1.08
Earnings after discontinued operations 66 37 10 143 48
Basic EPS after discontinued operations
($) 1.56 0.87 0.24 3.35 1.12
Diluted EPS after discontinued
operations ($) 1.26 0.44 (0.09) 3.35 1.12
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(1) In 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 measure of cash available prior to debt service, capital
expenditures and income taxes. Reference is also made to Adjusted
earnings (loss) from continuing operations (calculated as set out in
the table described in footnote 2 and Adjusted EPS (collectively, with
EBITDA, "these measures"). None of these measures is a generally
accepted earnings measure under International Financial Reporting
Standards ("IFRS") and none have a standardized meaning prescribed by
IFRS. Investors are cautioned that these measures should not be
considered as an alternative to earnings, earnings per share or cash
flow, as determined in accordance with IFRS. As there is no
standardized method of calculating any of these measures, our method of
calculating each of them may differ from the methods used by other
entities and, accordingly, our use of any of these measures may not be
directly comparable to similarly titled measures used by other entities.
(2) Refer to the table titled "Earnings Adjustments for Certain Non-
Operational Items" in Management's Discussion and Analysis of the third
quarter 2011 results for details of adjustments.
"Political and economic turmoil has increased global risk and uncertainty and
may further delay the recovery of our key U.S. housing market," said Hank
Ketcham, the Company's Chairman, President and CEO. "We plan on completing our
previously-announced capital program and will continue to focus on cost control
which will enable us to take full advantage of the eventual market recovery."
Operational Results
In the quarter the lumber segment generated an operating loss of $15 million and
EBITDA of $6 million reflecting continuing weak demand as U.S. new home
construction remains at or near historically low levels. Lumber shipments to
Asia were slightly lower than in the previous quarter but continue to be
stronger than comparative periods of 2010.
The panels segment, which includes plywood, LVL and MDF, generated an operating
loss in the quarter of $2 million and EBITDA of $2 million. The slight
improvement in panel results compared to the previous quarter reflected
increases in plywood and MDF prices. MDF and LVL operations continue to operate
on a curtailed basis.
Our pulp and paper operations generated operating earnings of $20 million and
EBITDA of $36 million in the quarter. The decline in earnings from the previous
quarter was due to lower NBSK prices and rising chemical, maintenance and
electricity costs, offset in-part by increased revenue from our power purchase
agreement. Pulp production was similar to the previous quarter as a planned
shutdown at our Quesnel pulp mill and power-related production curtailments in
some of our Alberta mills offset the previous quarter's production loss at the
Slave Lake pulp mill related to the Slave Lake forest fire and at the Cariboo
pulp mill for the planned maintenance shutdown.
Outlook
Lumber prices are expected to remain at or fall below current levels as low U.S.
housing starts will continue to limit demand. The pulp market continues to
weaken due to growing worldwide inventories.
The Company
West Fraser is an integrated wood products company producing lumber, wood chips,
LVL, MDF, plywood, pulp and newsprint. The Company has operations in western
Canada and the southern United States.
Forward-Looking Statements
This news release contains historical information, descriptions of current
circumstances and statements about potential future developments. The latter,
which are forward-looking statements are included under the heading "Outlook",
and 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 which are also described under this heading. Actual outcomes and
results will depend on a number of factors. Accordingly, readers should exercise
caution in relying upon forward-looking statements and the Company undertakes no
obligation to publicly revise them to reflect subsequent events or
circumstances, except as required by applicable securities laws.
Conference Call
Investors are invited to listen to the quarterly conference call on Tuesday,
October 25, 2011 at 9:00 a.m. Pacific Time (12:00 p.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
third 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 third quarter of 2011 should be read
in conjunction with the unaudited condensed consolidated interim financial
statements and accompanying notes included in this quarterly report and the 2010
annual MD&A included in our 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 or information 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 (a) expectations
concerning the proposed sale of the industrial site under the heading
"Discussion & Analysis of Non-Operational Items", (b) the description of
expectations relating to improved profitability of our Fraser Lake and Chetwynd
sawmills in relation to their green energy projects under the heading
"Discussion & Analysis by Product Segment - Lumber Segment", (c) the description
of expectations relating to the Pulp and Paper Green Transformation Program
under the heading "Discussion & Analysis by Product Segment - Pulp & Paper
Segment" and (d) under the heading "Business Outlook". Actual outcomes and
results will depend on a number of factors that could affect our ability to
execute our 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 we undertake 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). We believe that, in addition to earnings, EBITDA is a useful
performance indicator and is a useful measure of cash available prior to debt
service, capital expenditures and income taxes. Reference is also made to
Adjusted earnings (loss) from continuing operations (calculated as set out in
the table titled "Earnings Adjustments for Certain Non-Operational Items") and
Adjusted EPS (collectively, with EBITDA, "these measures"). None of these
measures is a generally accepted earnings measure under International Financial
Reporting Standards ("IFRS") and none have a standardized meaning prescribed by
IFRS. Investors are cautioned that these measures should not be considered as an
alternative to earnings, earnings per share or cash flow, as determined in
accordance with IFRS. As there is no standardized method of calculating any of
these measures, our method of calculating each of them may differ from the
methods used by other entities and, accordingly, our use of any of these
measures may not be directly comparable to similarly titled measures used by
other entities.
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 24, 2011
unless otherwise indicated.
Production, Shipments and Financial Comparisons
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Q3-11 Q2-11 YTD-11 Q3-10 YTD-10
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Production
Lumber - MMfbm
SPF 848 880 2,607 827 2,514
SYP 371 391 1,144 373 1,010
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1,219 1,271 3,751 1,200 3,524
Plywood - MMsf (3/8" basis) 199 194 589 203 601
MDF - MMsf (3/4" basis) 47 49 144 52 147
LVL - Mcf 388 415 1,208 362 1,536
BCTMP - Mtonnes 157 157 468 160 455
NBSK - Mtonnes 136 135 409 143 384
Newsprint - Mtonnes 30 32 93 34 98
Linerboard and Kraft Paper - Mtonnes - - - - 29
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Shipments
Lumber - MMfbm
SPF 880 915 2,560 837 2,509
SYP 388 396 1,131 382 998
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1,268 1,311 3,691 1,219 3,507
Plywood - MMsf (3/8" basis) 206 196 579 218 591
MDF - MMsf (3/4" basis) 45 53 150 46 146
LVL - Mcf 436 412 1,230 363 1,507
BCTMP - Mtonnes 154 175 483 131 443
NBSK - Mtonnes 129 121 386 120 370
Newsprint - Mtonnes 31 32 93 33 104
Linerboard and Kraft Paper - Mtonnes - - - 8 120
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Financial Comparisons - $ millions
Sales 705 720 2,112 707 2,167
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EBITDA 66 62 208 115 379
Amortization (43) (40) (128) (49) (147)
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Operating earnings 23 22 80 66 232
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Interest expense - net (5) (6) (16) (7) (22)
Exchange gain (loss) on long-term debt (25) 1 (16) 11 7
Other income (expense) 17 - 13 1 (5)
Provision for income taxes (4) (6) (24) (22) (58)
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Earnings from continuing operations 6 11 37 49 154
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Earnings (loss) from discontinued
operations 31 (1) 29 (1) (11)
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Earnings 37 10 66 48 143
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Cdn. $1.00 converted to U.S. - average 1.020 1.033 1.023 0.962 0.965
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Selected Quarterly Information
($ millions except earnings per share ("EPS") amounts which are in $)
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Q3-11 Q2-11 Q1-11 Q4-10 Q3-10 Q2-10 Q1-10 Q4-09(2)
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Sales(1) 705 720 687 719 707 772 688 570
Earnings(1) 6 11 20 28 49 67 38 8
Earnings after
discontinued
operations 37 10 19 43 48 67 29 (20)
Basic EPS(1) 0.14 0.27 0.46 0.65 1.15 1.56 0.89 0.18
Diluted EPS(1) (0.29) (0.07) 0.46 0.65 1.15 1.28 0.89 0.18
Basic EPS after
discontinued
operations 0.87 0.24 0.44 1.00 1.12 1.56 0.67 (0.47)
Diluted EPS after
discontinued
operations 0.44 (0.09) 0.44 1.00 1.12 1.27 0.67 (0.47)
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(1) From continuing operations.
(2) Prepared in accordance with Canadian generally accepted accounting
principles in place at December 31, 2009.
Earnings Adjustments for Certain Non-Operational Items
($ millions except EPS amounts which are in $)
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Q3-11 Q2-11 YTD-11 Q3-10 YTD-10
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Earnings from continuing operations 6 11 37 49 154
Adjustments to earnings from continuing
operations
After tax (gain) loss on:
Long-term equity-based compensation (19) (14) (8) 7 9
U.S. dollar-denominated long-term debt 22 (1) 14 (9) (6)
Sale of Terrace sawmill (6) - (6) - -
Derivative contracts - - - - 3
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Net effect of above items (3) (15) - (2) 6
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Adjusted earnings (loss) from continuing
operations 3 (4) 37 47 160
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Adjusted EPS from continuing operations(1) 0.06 (0.09) 0.87 1.08 3.75
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(1) Calculated using the basic weighted average number of shares
outstanding during the period.
Discussion & Analysis of Non-Operational Items
In the current quarter we generated earnings from continuing operations of $6
million compared to $11 million in the previous quarter and $49 million in the
third quarter of 2010. For a description of our operational results see
"Discussion & Analysis by Product Segment" which follows this section. Our
results include several significant non-operational items some of which are
identified in the table immediately above this section. After taking into
account the adjustments, we generated adjusted earnings from continuing
operations of $3 million in the current quarter compared to an adjusted loss of
$4 million in the previous quarter and adjusted earnings of $47 million in the
third quarter of 2010.
In the current quarter a recovery of $20 million was recorded related to
long-term equity-based compensation compared to a recovery of $14 million in the
previous quarter. This compares to a $9 million expense in the third 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 valuation models that consider various factors relating to outstanding
options and phantom share units. 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 third quarter of 2011 the market value of the
Company's shares decreased from $52.57 per share at the close of the previous
quarter to $39.85 per share at the close of the current quarter. The expense or
recovery does not necessarily represent the actual amount which will ultimately
be paid by the Company.
In the current quarter we completed the sale of the Terrace sawmill and related
Crown timber tenures and recorded an $8 million gain which is included in other
income.
During the quarter the deep-sea terminal and certain related assets that had
been part of the Eurocan mill were sold for proceeds of $40 million resulting in
a gain of $39 million which has been included in discontinued operations. We
have entered into an agreement to sell the Eurocan industrial site and expect
that sale to be completed before the end of 2011.
Interest expense was essentially unchanged from the previous quarter, reflecting
ongoing low borrowings but was lower than in the same period last year due to
higher net borrowings and higher borrowing rates during the 2010 period.
To view the associated chart, click on the following link:
http://media3.marketwire.com/docs/WFTchart.jpg
The change in the value of the Canadian dollar relative to the value of the U.S.
dollar resulted in the revaluation of certain U.S. dollar-denominated
liabilities and assets. A loss on U.S. dollar-denominated long-term debt for the
quarter is shown in the table "Earnings Adjustments for Certain Non-Operational
Items". Included in other income is a translation gain on current monetary items
of $12 million, compared to a loss of $1 million in the previous quarter and a
loss of $3 million in the same period of 2010.
The results of the current quarter include a $4 million provision for income
taxes compared to provisions of $6 million for the previous quarter and $22
million for the third quarter of 2010. Note 12 to the accompanying condensed
consolidated interim financial statements provides a reconciliation of the
statutory income tax rate to the effective income tax rate.
The funded position of our defined benefit pension plans and other
post-retirement plans, whether surplus or deficit, is estimated at the end of
each quarter. The funded position, as shown in note 10 of the accompanying
condensed consolidated interim financial statements, is determined by
subtracting plan assets from plan obligations, and making adjustments for
minimum funding requirements, if any. The plan obligations are estimated by
discounting the estimated future cash flows required to discharge them using a
discount rate based on current market yields on high quality, corporate bond
rates. The plan assets are estimated based on their market value at the end of
the prior month rolled forward a month with estimated cash flows and index
returns for each asset class. The decrease in the discount rate from the
beginning of the period, combined with asset returns being lower than those
anticipated during the period, resulted in an increase in our net liabilities
accrued on our balance sheet at September 30, 2011 of $108 million compared to
June 30, 2011 (net increase of $119 million compared to December 31, 2010). The
decrease in funded position for the quarter was charged to comprehensive
earnings, net of taxes of $26 million ($29 million year-to-date).
Discussion & Analysis by Product Segment
Lumber Segment
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Q3-11 Q2-11 YTD-11 Q3-10 YTD-10
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Sales - $ millions 429 438 1,278 423 1,297
EBITDA - $ millions 6 11 73 50 191
EBITDA margin - % 1 3 6 12 15
Operating earnings - $ millions (15) (8) 10 24 113
Benchmark prices
SPF #2 & Better 2 x 4(1) (US$ per Mfbm) 246 242 261 222 251
SYP #2 West 2 x 4(2) (US$ per Mfbm) 262 266 277 248 315
SPF #2 & Better 2 x 4 (Cdn.$ per Mfbm)(3) 241 234 255 231 260
SYP #2 West 2 x 4 (Cdn.$ per Mfbm)(3) 257 258 271 258 326
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(1) Source: Random Lengths - 2 x 4, #2 & Better - Net FOB mill.
(2) Source: Random Lengths - 2 x 4 - Net FOB mill Westside.
(3) Calculated by applying the average Canadian/U.S. dollar exchange rate
for the period to the US$ benchmark price.
The lumber segment's operating earnings for the current quarter reflect
continuing weak demand as U.S. new home construction remains at or near
historically low levels. In addition, compared to the previous year, results
were adversely affected by rising log costs related to our Canadian lumber
operations. During the current quarter several of our U.S. sawmills took
downtime or reduced hours of operations in response to weakening markets which
resulted in a decline in SYP-lumber production for the quarter compared to the
previous quarter. Aside from these planned curtailments and some isolated
weather-related log shortages, operations ran consistently.
Sales for the current quarter declined slightly from the previous quarter due
largely to reduced shipments and a decline in SYP lumber prices. Shipments in
the previous quarter were elevated due to weather-related backlogs occurring
late in the first quarter and shipments on a year-to-date basis are ahead of the
previous year's pace. The variance in operating earnings between the two
quarters also reflects increased electricity costs in the current quarter
associated with the Canadian operations. Canadian log costs were slightly higher
in the current quarter reflecting increased operating and purchase log costs.
U.S. log costs trended lower during the quarter.
Although the operating environment for the lumber segment was substantially
similar for the second and third quarters of 2011, there were significant
variances between the current quarter and the same quarter of 2010 and on a
year-to-date basis between 2011 and 2010. A collapse of the U.S. lumber market
in 2009 resulted in significant North American production curtailments. This in
turn reduced demand for logs and those services which are ancillary to logging
and log delivery. At various times during the first half of 2010 both SPF and
SYP lumber benchmark prices spiked while log costs remained relatively low. West
Fraser's lumber segment generated $142 million of EBITDA in the first half of
2010, a margin of 16%. Even in the third quarter of 2010, as average benchmark
lumber prices fell sharply, the segment achieved an EBITDA margin of 12%.
In contrast, there have been no similar price spikes in 2011 but the lumber
segment has experienced increases in some of its key cost items, particularly
Canadian logs. In the current quarter the lumber segment generated EBITDA of $6
million which represented a 1% margin while for the first nine months of 2011
the segment has generated EBITDA of $73 million representing a margin of 6%.
Canadian unit log costs in the current quarter were 17% greater than in the
third quarter of 2010 and for the first nine months of 2011 Canadian unit log
costs have increased by 13% compared to the same period of 2010. A combination
of longer haul distances, more competition for purchase logs in B.C. and a
general shortage of equipment operators and truck drivers has contributed to the
log cost increases. Fuel costs also added to lumber transportation costs in the
2011 periods compared with the same periods of 2010.
The bulk of our U.S. sawmills were purchased in 2007 and were not as
technologically advanced as most of our Canadian sawmills. Although we are in
the midst of a major capital improvement program which includes upgrades at
various U.S. sawmills, the U.S. operations continue to face significant
challenges in terms of costs, efficiency and, critically, markets. The table
below shows the average spread of the SYP benchmark price over the SPF benchmark
price. The traditional margin has eroded and we believe that this is
attributable, at least in part, to increased sales of SPF lumber to China. SYP
lumber does not have a comparably robust source of demand outside of its
traditional markets and as a result SYP-lumber producers are currently more
reliant on U.S. housing than SPF-lumber producers. This reliance, and the
continuing weakness of SYP-lumber markets, are reflected in the reduced
operating rate of our U.S. operations which was 74% of capacity in the current
quarter, down from 78% in the previous quarter and 75% in the third quarter of
2010.
To view the associated chart, click on the following link:
http://media3.marketwire.com/docs/WFTchart2.jpg
Two of our green energy projects were selected by B.C. Hydro as part of its
Phase II biomass power call. The projects are expected to generate 180 GWh of
power generated from wood biomass, or enough energy to power over 16,000 homes
annually. These facilities are to be constructed adjacent to each of our
sawmills located in Fraser Lake and Chetwynd, B.C. The projects are scheduled to
be commissioned in the first half of 2014. The electricity generated will be
sold to B.C. Hydro under 20-year contracts at pre-determined prices and the
projects are expected to improve the profitability of both mills.
In August 2011 the United States filed a petition setting out the particulars of
its claim of a breach of the Softwood Lumber Agreement by the B.C. government in
relation to the application or alleged amendment of its timber pricing policy. A
reply by Canada is scheduled for November 2011. We, along with other industry
participants and associations, continue to work with and support representatives
of the Canadian government in this dispute. We are currently unable, based on
available information, to reasonably estimate the likelihood or effect of an
adverse determination of this dispute.
Panels Segment
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Q3-11 Q2-11 YTD-11 Q3-10 YTD-10
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Sales - $ millions 97 96 284 107 315
EBITDA - $ millions 2 (1) 4 20 51
EBITDA margin - % 2 n/a 1 19 16
Operating earnings - $ millions (2) (5) (7) 15 37
Benchmark prices
Plywood (Cdn.$ per Msf 3/8" basis)(1) 310 303 306 327 345
MDF (US$ per Msf 3/4" basis)(2) 551 545 545 563 532
MDF (Cdn.$ per Msf 3/4" basis)(3) 540 528 533 585 551
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(1) Source: Crow's Market Report - Delivered Toronto.
(2) Source: Resource Information Systems, Inc. - MDF Western U.S. - Net FOB
mill.
(3) Calculated by applying the average Canadian/U.S. dollar exchange rate
for the period to the U.S. benchmark price.
The panels segment is comprised of our plywood, MDF and LVL operations.
Lower product prices for plywood and MDF resulted in lower operating earnings
compared to 2010. Plywood and LVL results have also been adversely affected by
increased log costs compared to 2010.
Demand in Canada has remained relatively stable compared to 2010. The strong
Canadian dollar appears to have made it economic for U.S. producers to ship
plywood into Canada and this has put downward pressure on plywood prices. This
is expected to continue as long as the Canadian dollar remains at current or
stronger levels or the U.S. housing market recovers.
The MDF plants and the LVL plant continued to operate in the quarter on a
curtailed basis at approximately 65% and 50% respectively to more closely match
supply with demand.
Pulp & Paper Segment
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Q3-11 Q2-11 YTD-11 Q3-10 YTD-10
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Sales - $ millions 206 211 626 204 633
EBITDA - $ millions 36 38 122 59 154
EBITDA margin - % 18 18 19 29 24
Operating earnings - $ millions 20 21 70 41 102
Benchmark price
NBSK (US$ per tonne)(1) 993 1,025 996 1,000 958
Newsprint (US$ per tonne)(2) 640 640 640 635 595
NBSK (Cdn.$ per tonne)(3) 974 992 974 1,040 993
Newsprint (Cdn.$ per tonne)(3) 627 620 626 660 617
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(1) Source: Resource Information Systems, Inc. - U.S. list price delivered
U.S.
(2) Source: Resource Information Systems, Inc. - delivered 48.8 gram
newsprint.
(3) Calculated by applying the average Canadian/U.S. dollar exchange rate
for the period to the U.S. benchmark price.
The pulp & paper segment is comprised of our NBSK, BCTMP and newsprint businesses.
Operating earnings were similar to the previous quarter, with decreased NBSK
prices and higher maintenance costs being offset by increased revenue from our
power purchase agreement (the "PPA"). The slightly weaker Canadian dollar in the
quarter also provided a partial offset to the lower NBSK prices. Operating
earnings were down from the third quarter of 2010 primarily due to lower mill
nets for all pulp products which we manufacture offset only partially by
increased PPA revenue in the current quarter.
Total pulp production was similar to the previous quarter. Production in the
current quarter was reduced as a result of a maintenance shutdown at the QRP
mill and some curtailments related to high Alberta electricity prices.
Production in the previous quarter was affected by the loss of eight operating
days at the Slave Lake pulp mill due to a large forest fire near Slave Lake,
Alberta and a major maintenance shutdown of the Cariboo pulp mill. Production in
the current quarter was lower than in the third quarter of 2010 when record
production was achieved. A scheduled maintenance shutdown of the Hinton pulp
mill began October 1, 2011 and startup began October. The loss of production
related to this shutdown is currently estimated at 25,000 MT.
Benchmark U.S.-dollar newsprint prices were flat in the quarter compared to the
previous quarter but the somewhat weaker Canadian dollar provided a small
benefit. For the first nine months of 2011 U.S.-dollar newsprint prices were
approximately 8% higher than in the comparable period of 2010 but the stronger
Canadian dollar in 2011 offset most of this increase.
Newsprint production was lower in the quarter compared to the previous quarter,
largely due to curtailments during periods of high electricity prices. The large
gain achieved from selling electricity during those periods more than offset the
effect of lower production.
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 "GT Program"). The Company has received approval for seven projects under
this program that are expected to significantly reduce future energy costs. West
Fraser expects to utilize its full allocation under the GT Program and
expenditures up to the end of September 2011 totalled $57 million.
Business Outlook
For a detailed description of our business outlook for 2011 see our 2010 annual
MD&A under "Business Outlook", which is included in our 2010 Annual Report.
In the short term we see no signs of a sustained resolution of the U.S. housing
depression. As a result we do not expect a material improvement in prices for
our solid wood products over the balance of 2011 and into 2012. We also see in
the short term increasing global pulp inventories which is putting downward
pressure on prices. However, on a longer-term basis we do expect that U.S.
housing, along with the U.S. economy, will recover.
In the first nine months of 2011, excluding GT Program expenditures, we have
invested a total of $83 million in our operations and we expect to invest a
similar amount in the fourth quarter of 2011. With respect to the GT Program, we
plan to complete the investment of $88 million in our pulp mills for approved
projects by the end of the first quarter of 2012 and to receive final
reimbursement under the GT Program by the end of June 2012. These investments,
along with additional non-GT Program capital improvements, are expected to
result in lower costs, improved efficiency and overall improved competitiveness
of our operations.
Capital Requirements and Liquidity
Summary of Financial Position ($ millions, except as otherwise indicated)
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Q3-11 Q4-10 Q3-10
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Cash(1) 208 161 213
Current assets 867 789 781
Current liabilities 352 389 385
Ratio of current assets to current liabilities 2.5 2.0 2.0
Net debt 102 148 113
Shareholders' equity 1,504 1,534 1,516
Net debt to capitalization(2) - % 6 9 7
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(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 and deferred financing costs) 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)
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Q3-11 Q2-11 YTD-11 Q3-10 YTD-10
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Operating Activities
Cash provided before operating working
capital changes 57 54 144 91 439
Non-cash operating working capital
change 20 61 (8) 26 (3)
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Cash provided from operating activities 77 115 136 117 436
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Financing Activities
Debt and operating loans - (11) (15) 7 (160)
Interest paid (1) (8) (11) (2) (14)
Dividends and other (6) (6) (18) (3) (9)
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Cash provided (used) in financing
activities (7) (25) (44) 2 (183)
---------------------------------------------------------------------------
Investing Activities
Additions to capital assets (55) (49) (124) (15) (70)
Other - net 20 14 43 4 5
---------------------------------------------------------------------------
Cash used in investing activities (35) (35) (81) (11) (65)
---------------------------------------------------------------------------
Change in cash from continuing
operations 35 55 11 108 188
---------------------------------------------------------------------------
Change in cash from discontinued
operations 39 (2) 36 11 35
---------------------------------------------------------------------------
Change in cash 74 53 47 119 223
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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 October 24, 2011, the Common share equity of the Company consisted of
40,062,564 Common shares and 2,781,478 Class B Common shares for a total of
42,844,042 shares issued and outstanding.
In addition, as of October 24, 2011 there were 1,999,067 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.
During the quarter, the Company extended its revolving committed credit facility
to take advantage of easing market conditions and reduced pricing. The facility
now matures September 30, 2016.
The Company is rated by three rating agencies. 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 we are subject, see our
2010 annual MD&A which is included in our 2010 Annual Report.
Changes In Accounting
Conversion to International Financial Reporting Standards
We adopted IFRS effective January 1, 2011. Prior to the adoption of IFRS we
prepared our 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 our 2010 Annual Report and the unaudited
condensed consolidated interim financial statements accompanying this MD&A.
New Accounting Pronouncements Issued but not yet Applied
The International Accounting Standards Board periodically issues new standards
and amendments or interpretations to existing standards. The new pronouncements
listed below are those that we consider the most significant. They are not
intended to be a complete list of new pronouncements that may affect our
financial statements.
IFRS 9, Financial Instruments
In November 2009 IFRS 9 was issued which 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. IFRS 9 is effective for
annual periods beginning on or after January 1, 2013 with earlier application
permitted. We do not expect this standard to have a significant effect on our
financial statements.
IFRS 10, Consolidated Financial Statements
In May 2011 IFRS 10 was issued which provides a single model to be applied in
the control analysis for all investees and supersedes IAS 27 Consolidated and
Separate Financial Statements and SIC-12 Consolidation - Special Purpose
Entities. IFRS 10 is effective for annual periods beginning on or after January
1, 2013 with earlier application permitted. We have not yet completed our
assessment of the impact of the standard.
IFRS 11, Joint Arrangements
In May 2011 IFRS 11 was issued which provides guidance for determining if a
joint arrangement is a joint venture or joint operation. The standard requires
that joint ventures be accounted for by the equity method as opposed to the
choice, presently available under IAS 31, of applying the equity method or
proportionate consolidation. Joint operations are required to be accounted for
using the proportionate consolidation method. IFRS 11 is effective for annual
periods beginning on or after January 1, 2013 with earlier application
permitted. We have not yet completed our assessment of the impact of the
standard.
IFRS 12, Disclosure of Interests in Other Entities
In May 2011 IFRS 12 was issued which sets out the required disclosures for
companies that have adopted IFRS 10 and 11 described above. It requires
disclosure of information that helps users to evaluate the nature, risks and
financial effects associated with a company's interests in subsidiaries,
associates and joint arrangements. IFRS 12 is effective for annual periods
beginning on or after January 1, 2013 with earlier application permitted. We
have not yet assessed the impact of the standard.
IFRS 13, Fair Value Measurement
In May 2011 IFRS 13 was issued which defines fair value, establishes a framework
for measuring fair value and sets out disclosure requirements for fair value
measurements. Prior to the introduction of the standard there was no single
source of guidance on fair value measurement. IFRS 13 is effective for annual
periods beginning on or after January 1, 2013 with earlier application
permitted. We have not yet assessed the impact of the standard.
IAS 19 Amendment, Employee Benefits
In August 2011 IAS 19 was amended. The amendment will result in significant
changes to the recognition and measurement of defined benefit pension expense
and termination benefits, and to the disclosures for all employee benefits. The
amendment is effective for annual periods beginning on or after January 1, 2013
with earlier application permitted. We have not yet assessed the impact of the
amendment.
Disclosure Controls and Procedures and Internal Control Over Financial Reporting
West Fraser's management, including the Chairman, President and Chief Executive
Officer and the 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 September 30, 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 West Fraser, including our 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
September 30 December 31
2011 2010
---------------------------------------------------------------------------
Assets
Current assets
Cash and short-term investments $ 210.1 $ 163.1
Accounts receivable 282.6 246.0
Inventories (note 4) 360.0 372.4
Prepaid expenses 13.8 7.6
---------------------------------------------------------------------------
866.5 789.1
Property, plant, and equipment (note 5) 912.9 924.7
Timber licences 497.4 509.6
Goodwill and other intangibles (note 6) 338.6 345.4
Other assets 28.3 41.5
---------------------------------------------------------------------------
$ 2,643.7 $ 2,610.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Liabilities
Current liabilities
Cheques issued in excess of funds on deposit $ 2.1 $ 2.4
Operating loans (note 8) - 8.8
Accounts payable and accrued liabilities 293.6 271.0
Income taxes payable 12.6 58.3
Reforestation obligations 41.0 41.4
Decomissioning obligations 2.2 6.8
Current portion of long-term debt (note 8) 0.3 0.3
---------------------------------------------------------------------------
351.8 389.0
Long-term debt (note 8) 315.6 299.5
Other liabilities (note 9) 339.1 225.7
Deferred income taxes 133.1 162.3
---------------------------------------------------------------------------
1,139.6 1,076.5
---------------------------------------------------------------------------
Shareholders' equity
Share capital 600.8 600.5
Accumulated other comprehensive earnings 1.3 (9.6)
Retained earnings 902.0 942.9
---------------------------------------------------------------------------
1,504.1 1,533.8
---------------------------------------------------------------------------
$ 2,643.7 $ 2,610.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Contingency (note 17)
Number of Common shares and Class B Common shares outstanding at October
24, 2011 was 42,844,042.
West Fraser Timber Co. Ltd.
Condensed Consolidated Statement of Changes in Equity
(in millions of Canadian dollars - unaudited)
January 1 to
July 1 to September 30 September 30
2011 2010 2011 2010
---------------------------------------------------------------------------
Retained earnings
Balance - beginning of period $ 952.3 $ 873.2 $ 942.9 $ 823.3
Actuarial gain (loss) on
employee future benefits (note
10) (81.7) 1.0 (89.6) (42.1)
Earnings for the period 37.4 47.8 66.6 143.4
Dividends (6.0) (2.5) (17.9) (5.1)
---------------------------------------------------------------------------
Balance - end of period $ 902.0 $ 919.5 $ 902.0 $ 919.5
---------------------------------------------------------------------------
Accumulated other comprehensive
earnings
Balance - beginning of period $ (15.7) $ 3.2 $ (9.6) $ -
Translation gain (loss) on
foreign operations 17.0 (6.7) 10.9 (3.5)
---------------------------------------------------------------------------
Balance - end of period $ 1.3 $ (3.5) $ 1.3 $ (3.5)
---------------------------------------------------------------------------
Share capital
Balance - beginning of period $ 600.7 $ 600.0 $ 600.5 $ 599.7
Issuance of Common shares 0.1 0.1 0.3 0.4
---------------------------------------------------------------------------
Balance - end of period $ 600.8 $ 600.1 $ 600.8 $ 600.1
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Shareholders' equity $ 1,504.1 $ 1,516.1 $ 1,504.1 $ 1,516.1
---------------------------------------------------------------------------
---------------------------------------------------------------------------
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
(in millions of Canadian dollars - unaudited)
January 1 to
July 1 to September 30 September 30
2011 2010 2011 2010
---------------------------------------------------------------------------
Sales $ 705.4 $ 706.8 $ 2,112.1 $ 2,166.8
---------------------------------------------------------------------------
Costs and expenses
Cost of products sold 499.4 436.1 1,440.9 1,326.3
Freight and other distribution
costs 120.3 104.9 349.1 328.9
Export taxes 14.9 13.0 42.8 43.0
Amortization 42.6 49.2 127.7 146.8
Selling, general and
administration 24.4 29.3 78.5 78.4
Long-term equity-based
compensation (19.6) 9.1 (6.8) 12.1
---------------------------------------------------------------------------
682.0 641.6 2,032.2 1,935.5
---------------------------------------------------------------------------
Operating earnings 23.4 65.2 79.9 231.3
Interest expense - net (5.2) (6.5) (15.4) (21.7)
Exchange gain (loss) on long-
term debt (25.0) 10.7 (16.0) 6.6
Other income (expense) (note
11) 16.4 1.2 12.8 (4.7)
---------------------------------------------------------------------------
Earnings from continuing
operations before income taxes 9.6 70.6 61.3 211.5
Provision for income taxes
(note 12) (3.5) (21.6) (23.9) (57.5)
---------------------------------------------------------------------------
Earnings from continuing
operations 6.1 49.0 37.4 154.0
Earnings (loss) from
discontinued operations (note
13) 31.3 (1.2) 29.2 (10.6)
---------------------------------------------------------------------------
Earnings $ 37.4 $ 47.8 $ 66.6 $ 143.4
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Actuarial gain (loss) on
employee future benefits (note
10) $ (108.1) $ 1.4 $ (118.6) $ (58.9)
Income tax on actuarial gain
(loss) on employee future
benefits 26.4 (0.4) 29.0 16.8
Translation gain (loss) on
foreign operations 17.0 (6.7) 10.9 (3.5)
---------------------------------------------------------------------------
Comprehensive earnings $ (27.3) $ 42.1 $ (12.1) $ 97.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Earnings per share (dollars)
(note 14)
Basic from continuing
operations $ 0.14 $ 1.15 $ 0.87 $ 3.60
Diluted from continuing
operations $ (0.29) $ 1.15 $ 0.58 $ 3.60
Basic after discontinued
operations $ 0.87 $ 1.12 $ 1.56 $ 3.35
Diluted after discontinued
operations $ 0.44 $ 1.12 $ 1.26 $ 3.35
---------------------------------------------------------------------------
---------------------------------------------------------------------------
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Cash Flows
(in millions of Canadian dollars - unaudited)
January 1 to
July 1 to September 30 September 30
2011 2010 2011 2010
---------------------------------------------------------------------------
Operating activities
Earnings from continuing
operations $ 6.1 $ 49.0 $ 37.4 $ 154.0
Adjustments to reconcile
earnings to cash flows from
operating activities
Amortization 42.6 49.2 127.7 146.8
Interest expense - net 5.2 6.5 15.4 21.7
Exchange (gain) loss on
long-term debt 25.0 (10.7) 16.0 (6.6)
Provision for income taxes 3.5 21.6 23.9 57.5
Income taxes received
(paid) (6.9) (2.0) (75.1) 67.6
Change in reforestation
obligations (5.6) (5.7) 2.3 2.7
Other (13.3) (16.7) (4.1) (5.1)
---------------------------------------------------------------------------
56.6 91.2 143.5 438.6
---------------------------------------------------------------------------
Changes in non-cash
operating working capital
Accounts receivable 6.0 25.2 (23.7) (42.4)
Inventories (0.9) (16.9) 16.4 16.3
Prepaid expenses 4.7 5.3 (5.4) (2.8)
Accounts payable and
accrued liabilities 10.6 12.4 4.8 26.3
---------------------------------------------------------------------------
Subtotal of changes in non-
cash operating working
capital 20.4 26.0 (7.9) (2.6)
---------------------------------------------------------------------------
Cash flows from operating
activities 77.0 117.2 135.6 436.0
---------------------------------------------------------------------------
Financing activities
Repayment of long-term debt - - (0.3) (100.3)
Proceeds from (repayment of)
operating loans (0.3) 6.5 (14.9) (60.2)
Interest paid (0.9) (1.8) (10.8) (13.8)
Dividends (6.0) (2.5) (17.9) (5.1)
Other 0.3 - 0.3 (3.4)
---------------------------------------------------------------------------
Cash flows from financing
activities (6.9) 2.2 (43.6) (182.8)
---------------------------------------------------------------------------
Investing activities
Additions to capital assets (55.2) (15.5) (123.7) (70.5)
Proceeds from Green
Transformation Program 10.6 1.4 31.5 1.4
Proceeds from disposal of
capital assets 9.1 2.7 9.9 3.3
Other 0.6 0.3 1.8 0.5
---------------------------------------------------------------------------
Cash flows from investing
activities (34.9) (11.1) (80.5) (65.3)
---------------------------------------------------------------------------
Change in cash from continuing
operations 35.2 108.3 11.5 187.9
Change in cash from
discontinued operations (note
13) 38.8 10.9 35.8 34.8
Cash - beginning of period 134.0 93.7 160.7 (9.8)
---------------------------------------------------------------------------
Cash - end of period $ 208.0 $ 212.9 $ 208.0 $ 212.9
---------------------------------------------------------------------------
Cash consists of
Cash and short-term investments $ 210.1 $ 221.5
Cheques issued in excess of
funds on deposit (2.1) (8.6)
---------------------------------------------------------------------------
$ 208.0 $ 212.9
---------------------------------------------------------------------------
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 financial 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 of the March 31, 2011 quarterly financial statements.
These condensed consolidated interim financial statements should be read in
conjunction with the Company's 2010 annual financial statements and the
Company's interim financial statements for the periods ended March 31, 2011 and
June 30, 2011, with consideration of the IFRS transition disclosures included in
Appendix A of these condensed consolidated interim financial statements.
4. Inventories
Inventories at September 30, 2011 were written down by $10.7 million (June 30,
2011 - $8.6 million; December 31, 2010 - $3.8 million; September 30, 2010 - $8.5
million) to reflect net realizable value being lower than cost.
5. Property, plant and equipment
----------------------------------------------------------------------------
September 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Manufacturing plant, equipment &
machinery $ 782.6 $ 848.0
Construction-in-progress 68.2 12.8
Roads and bridges 32.8 34.4
Other 29.3 29.5
----------------------------------------------------------------------------
$ 912.9 $ 924.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Goodwill and other intangibles
----------------------------------------------------------------------------
September 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Goodwill $ 263.7 $ 263.7
Power purchase agreement 67.7 73.2
Other 7.2 8.5
----------------------------------------------------------------------------
$ 338.6 $ 345.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. Restructuring charges
Restructuring charges relate to the closure of the Eurocan linerboard and kraft
paper 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
September 30, 2011 December 31, 2010
---------------------------------------------------------------------------
Accrued liability - beginning of
period $ 4.5 $ 40.2
Paid during period (2.9) (35.1)
Change in accrual 0.8 (0.6)
---------------------------------------------------------------------------
Accrued liability - end of period $ 2.4 $ 4.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------
8. Long-term debt and operating loans
Long-term debt
---------------------------------------------------------------------------
September 30, 2011 December 31, 2010
---------------------------------------------------------------------------
US$300 million senior notes due
October 2014; interest at 5.2% $ 314.5 $ 298.4
Note payable due in installments to
2020; interest at 5.5% 2.5 2.7
---------------------------------------------------------------------------
317.0 301.1
Less:
Current portion (0.3) (0.3)
Deferred financing costs (1.1) (1.3)
---------------------------------------------------------------------------
$ 315.6 $ 299.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating loans
The Company has $530 million in revolving lines of credit, of which nil was
drawn as at September 30, 2011 (December 31, 2010 - $8.8 million, net of
deferred financing costs of $6.2 million). Deferred financing costs of $6.0
million are included in other assets at September 30, 2011.
In September 2011 the Company and participating banks amended the $500 million
revolving credit facility to extend its maturity until September 30, 2016. In
addition to this facility the Company has a $25 million demand line of credit
dedicated to letters of credit and a $5 million demand line of credit dedicated
to a jointly-owned newsprint operation. Interest on the three facilities is
payable at floating rates based on Prime, U.S. base, Bankers' Acceptances or
LIBOR at the Company's option. As at September 30, 2011, letters of credit in
the amount of $35.3 million have been issued under these facilities.
The $500 million committed facility, the $25 million demand facility and the
US$300 million senior notes are secured by the Company's assets.
9. Other liabilities
----------------------------------------------------------------------------
September 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Post-retirement obligations (note 10) $ 217.9 $ 118.2
Reforestation obligations 67.8 64.4
Other decommissioning obligations 29.9 19.6
Timber damage deposits 12.6 13.9
Other 10.9 9.6
----------------------------------------------------------------------------
$ 339.1 $ 225.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 $7.9 million for the
three months ended September 30, 2011 (three months ended September 30, 2010 -
$6.1 million) and $23.5 million for the nine months ended September 30, 2011
(nine months ended September 30, 2010 - $18.3 million). 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:
---------------------------------------------------------------------------
September 30, 2011 December 31, 2010
---------------------------------------------------------------------------
Projected benefit obligations $ (1,047.4) $ (983.6)
Fair value of plan assets 849.6 904.1
---------------------------------------------------------------------------
Deficit $ (197.8) $ (79.5)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Represented by
Pension surplus(1) $ 20.1 $ 38.7
Post-retirement obligations(2) (217.9) (118.2)
---------------------------------------------------------------------------
$ (197.8) $ (79.5)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Included in other assets.
(2) Included in other liabilities.
The significant assumptions used to determine the period end benefit obligations
are as follows:
---------------------------------------------------------------------------
September 30, 2011 June 30, 2011 December 31, 2010
---------------------------------------------------------------------------
Discount rate on
obligation 5.25% 5.50% 5.50%
Expected rate of
return on plan assets 6.50% 6.50% 6.50%
Rate of increase in
future compensation 3.50% 3.50% 3.50%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The change in the discount rate on obligations and the difference between the
actual rate of return and the expected rate of return on plan assets generated
an actuarial gain (loss) on employee future benefits, included in comprehensive
earnings, as follows:
---------------------------------------------------------------------------
January 1 to
July 1 to September 30 September 30
2011 2010 2011 2010
---------------------------------------------------------------------------
Actuarial gain (loss) on
employee future benefits $ (108.1) $ 1.4 $ (118.6) $ (58.9)
Income tax on actuarial gain
(loss) on employee future
benefits 26.4 (0.4) 29.0 16.8
---------------------------------------------------------------------------
$ (81.7) $ 1.0 $ (89.6) $ (42.1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
11. Other income (expense)
---------------------------------------------------------------------------
January 1 to
July 1 to September 30 September 30
2011 2010 2011 2010
---------------------------------------------------------------------------
Foreign exchange gain (loss) -
net $ 11.7 $ (3.2) $ 6.4 $ (3.9)
Gain on asset sales 8.5 2.8 8.6 2.7
Gain (loss) on derivatives - 0.4 - (4.7)
Other - net (3.8) 1.2 (2.2) 1.2
---------------------------------------------------------------------------
$ 16.4 $ 1.2 $ 12.8 $ (4.7)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
12. Provision for income taxes
The Company's effective tax rate on earnings from continuing operations is as
follows:
---------------------------------------------------------------------------
July 1 to September 30
2011 2010
Amount % Amount %
---------------------------------------------------------------------------
Income taxes at statutory rates $ (2.6) (26.5) $ (20.2) (28.5)
Non taxable amounts 1.5 15.4 1.8 2.5
Rate differentials between
jurisdictions and on specified
activities 3.3 34.1 1.9 2.7
Change in valuation allowance (6.3) (65.4) (4.5) (6.4)
Other 0.6 6.1 (0.6) (0.8)
---------------------------------------------------------------------------
Provision for income taxes $ (3.5) (36.3) $ (21.6) (30.5)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
January 1 to September 30
2011 2010
Amount % Amount %
---------------------------------------------------------------------------
Income taxes at statutory rates $ (16.3) (26.5) $ (60.3) (28.5)
Non taxable amounts 0.3 0.5 1.2 0.6
Rate differentials between
jurisdictions and on specified
activities 4.9 8.0 2.1 1.0
Change in valuation allowance (11.0) (18.0) 2.7 1.3
Other (1.8) (3.0) (3.2) (1.5)
---------------------------------------------------------------------------
Provision for income taxes $ (23.9) (39.0) $ (57.5) (27.1)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
13. Discontinued operation
The Company permanently closed its Eurocan linerboard and kraft paper mill in
January 2010. The results of the discontinued operation are as follows:
---------------------------------------------------------------------------
January 1 to
July 1 to September 30 September 30
2011 2010 2011 2010
---------------------------------------------------------------------------
Sales $ - $ 5.7 $ 0.1 $ 70.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating loss (2.2) (1.4) (5.0) (15.2)
Other income 39.5 0.1 39.5 0.9
---------------------------------------------------------------------------
Earnings (loss) before income
tax 37.3 (1.3) 34.5 (14.3)
Income tax recovery (provision) (6.0) 0.1 (5.3) 3.7
---------------------------------------------------------------------------
Earnings (loss) $ 31.3 $ (1.2) $ 29.2 $ (10.6)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Cash flows from operating
activities $ (1.0) $ 10.8 $ (3.6) $ 34.7
Cash flows from investing
activities 39.8 0.1 39.4 0.1
---------------------------------------------------------------------------
Increase in cash $ 38.8 $ 10.9 $ 35.8 $ 34.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------
In the third quarter of 2011, the Company sold the wharf and related assets
associated with the Eurocan linerboard and kraft paper mill for proceeds of
$40.0 million, resulting in a gain of $39.0 million.
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 common shareholders for diluted earnings per
share are greater than earnings available to common shareholders for basic
earnings per share, the calculation is anti-dilutive and diluted earnings per
share are deemed to be the same as basic earnings per share.
---------------------------------------------------------------------------
July 1 to September 30
2011 2010
From After From After
continuing discontinued continuing discontinued
operations operations operations operations
---------------------------------------------------------------------------
Earnings
Basic $ 6.1 $ 37.4 $ 49.0 $ 47.8
Share option expense
(recovery) (18.3) (18.3) 8.3 8.3
Equity settled share
option adjustment (0.3) (0.3) (0.2) (0.2)
---------------------------------------------------------------------------
Diluted $ (12.5) $ 18.8 $ 57.1 $ 55.9
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Weighted average number of
shares
Basic 42,841,390 42,841,390 42,824,410 42,824,410
Share options 327,531 327,531 319,966 319,966
---------------------------------------------------------------------------
Diluted 43,168,921 43,168,921 43,144,376 43,144,376
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Earnings per share
(dollars)
Basic $ 0.14 $ 0.87 $ 1.15 $ 1.12
Diluted $ (0.29) $ 0.44 $ 1.15 $ 1.12
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
January 1 to September 30
2011 2010
From After From After
continuing discontinued continuing discontinued
operations operations operations operations
---------------------------------------------------------------------------
Earnings
Basic $ 37.4 $ 66.6 $ 154.0 $ 143.4
Share option expense
(recovery) (9.4) (9.4) 6.8 6.8
Equity settled share
option adjustment (2.8) (2.8) (0.8) (0.8)
---------------------------------------------------------------------------
Diluted $ 25.2 $ 54.4 $ 160.0 $ 149.4
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Weighted average number of
shares
Basic 42,838,717 42,838,717 42,821,098 42,821,098
Share options 480,445 480,445 404,589 404,589
---------------------------------------------------------------------------
Diluted 43,319,162 43,319,162 43,225,687 43,225,687
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Earnings per share
(dollars)
Basic $ 0.87 $ 1.56 $ 3.60 $ 3.35
Diluted $ 0.58 $ 1.26 $ 3.60 $ 3.35
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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 "GT Program"). The GT 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 GT Program end date of March 31,
2012. For the nine months ended September 30, 2011, the Company received $31.5
million under the GT Program (year ended December 31, 2010 - $1.6 million). At
September 30, 2011, $23.9 million is included in accounts receivable related to
expenditures under the GT Program.
16. Segmented information
Pulp & Corporate
Lumber Panels paper & other Consolidated
---------------------------------------------------------------------------
July 1, 2011 to September
30, 2011
Sales at market prices
To external customers $ 404.6 $ 94.5 $ 206.3 $ - $ 705.4
-------------
To other segments 24.7 2.1 - -
--------------------------------------------------------------
$ 429.3 $ 96.6 $ 206.3 $ -
--------------------------------------------------------------
EBITDA (1) $ 6.3 $ 1.6 $ 36.4 $ 21.7 $ 66.0
Amortization (21.4) (3.9) (16.7) (0.6) (42.6)
---------------------------------------------------------------------------
Operating earnings (15.1) (2.3) 19.7 21.1 23.4
Interest expense - net (2.7) (0.9) (1.6) - (5.2)
Exchange loss on long-term
debt - - - (25.0) (25.0)
Other income (expense) 11.2 0.3 9.5 (4.6) 16.4
---------------------------------------------------------------------------
Earnings from continuing
operations before income
taxes $ (6.6) $ (2.9) $ 27.6 $ (8.5) $ 9.6
---------------------------------------------------------------------------
---------------------------------------------------------------------------
July 1, 2010 to September
30, 2010
Sales at market prices
To external customers $ 397.9 $ 105.2 $ 203.7 $ - $ 706.8
-------------
To other segments 25.3 2.1 - -
--------------------------------------------------------------
$ 423.2 $ 107.3 $ 203.7 $ -
--------------------------------------------------------------
EBITDA (1) $ 49.6 $ 19.9 $ 59.2 $ (14.3) $ 114.4
Amortization (25.7) (4.7) (18.2) (0.6) (49.2)
---------------------------------------------------------------------------
Operating earnings 23.9 15.2 41.0 (14.9) 65.2
Interest expense - net (4.0) (0.6) (1.8) (0.1) (6.5)
Exchange gain on long-term
debt - - - 10.7 10.7
Other income (expense) 2.3 (0.3) (2.4) 1.6 1.2
---------------------------------------------------------------------------
Earnings from continuing
operations before income
taxes $ 22.2 $ 14.3 $ 36.8 $ (2.7) $ 70.6
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Non GAAP measure:
EBITDA is defined as operating earnings plus amortization.
Pulp & Corporate
Lumber Panels paper & other Consolidated
---------------------------------------------------------------------------
January 1, 2011 to September 30,
2011
Sales at market prices
To external customers $ 1,208.6 $ 277.3 $ 626.2 $ - $ 2,112.1
-------------
To other segments 69.7 6.6 - -
--------------------------------------------------------------
$ 1,278.3 $ 283.9 $ 626.2 $ -
--------------------------------------------------------------
EBITDA (1) $ 72.8 $ 4.2 $ 121.5 $ 9.1 $ 207.6
Amortization (62.8) (11.6) (51.4) (1.9) (127.7)
---------------------------------------------------------------------------
Operating earnings 10.0 (7.4) 70.1 7.2 79.9
Interest income (expense)
- net (8.5) (2.5) (4.6) 0.2 (15.4)
Exchange loss on long-term
debt - - - (16.0) (16.0)
Other income (expense) 7.8 0.1 8.8 (3.9) 12.8
---------------------------------------------------------------------------
Earnings from continuing
operations before income
taxes $ 9.3 $ (9.8) $ 74.3 $ (12.5) $ 61.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------
January 1, 2010 to September 30,
2010
Sales at market prices
To external customers $ 1,224.6 $ 309.2 $ 633.0 $ - $ 2,166.8
-------------
To other segments 72.0 5.9 - -
--------------------------------------------------------------
$ 1,296.6 $ 315.1 $ 633.0 $ -
--------------------------------------------------------------
EBITDA (1) $ 191.2 $ 51.2 $ 154.1 $ (18.4) $ 378.1
Amortization (78.2) (14.4) (51.9) (2.3) (146.8)
---------------------------------------------------------------------------
Operating earnings 113.0 36.8 102.2 (20.7) 231.3
Interest expense - net (13.6) (2.4) (5.6) (0.1) (21.7)
Exchange gain on long-term
debt - - - 6.6 6.6
Other income (expense) 0.2 (0.7) (5.2) 1.0 (4.7)
---------------------------------------------------------------------------
Earnings from continuing
operations before income
taxes $ 99.6 $ 33.7 $ 91.4 $ (13.2) $ 211.5
---------------------------------------------------------------------------
(1) Non GAAP measure:
EBITDA is defined as operating earnings plus amortization.
The geographic distribution of external sales is as follows:
----------------------------------------------------------------------------
January 1 to September
July 1 to September 30 30
2011 2010 2011 2010
----------------------------------------------------------------------------
United States $ 326.0 $ 338.3 $ 985.6 $ 1,082.5
Canada 166.3 191.2 494.7 537.3
China 124.7 74.1 360.1 222.3
Other Asia 55.4 93.7 176.4 238.4
Other 33.0 9.5 95.3 86.3
----------------------------------------------------------------------------
$ 705.4 $ 706.8 $ 2,112.1 $ 2,166.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sales distribution is based on the location of product delivery by the
Company.
17. Contingency
On January 18, 2011 the United States initiated an arbitration with Canada under
the Softwood Lumber Agreement ("SLA") over its concern that the province of
British Columbia ("B.C.") has misapplied or altered its timber pricing rules and
as a result has charged too low a price for certain timber harvested on public
lands in the B.C. interior. In August 2011 the United States filed a detailed
statement of claim with the arbitration panel. Canada is expected to deliver its
initial response to the United States claim in November 2011. A hearing before
the arbitration panel is expected to take place in February 2012 with a final
decision expected in the second half of 2012.
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 time and accordingly no provision has been recorded by
the Company.
West Fraser Timber Co. Ltd.
Appendix A 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 balance sheet was published as part of the March
31, 2011 quarterly financial statements. A line by line reconciliation of the
changes from CGAAP was included in the Company's 2010 annual management's
discussion and analysis. These reports 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 Company will ultimately prepare its Transition Date balance sheet and
financial statements for 2010 and 2011 by applying 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 Transition Date balance sheet and
reconciliations may differ from those presented.
The following tables and their notes reconcile September 30, 2010 IFRS equity
and comprehensive earnings to the CGAAP versions previously published.
Comprehensive Earnings Adjustment on adoption of IFRS
Earn-
For the ings Loss Trans-
three from from lation
months contin- discon- of Actua- Compre-
ended uing tinued foreign rial hensive
September 30, opera- opera- Earn- opera- gain earn-
2010 Notes tions tions ings tions (loss) ings
---------------------------------------------------------------------------
Earnings
reported
under CGAAP $ 46.4 $ (1.6) $ 44.8 $ (9.1) $ - $ 35.7
Earnings
adjustment
PPE(1)
amortization 2 3.4 - 3.4 2.4 - 5.8
Employee future
benefits 3 0.9 - 0.9 - 1.4 2.3
Decommissioning
obligations 4 (1.1) 0.5 (0.6) - - (0.6)
Share option
expense 5 (0.6) - (0.6) - - (0.6)
Deferred tax on
above items 7 - (0.1) (0.1) - (0.4) (0.5)
---------------------------------------------------------------------------
Earnings adjustment 2.6 0.4 3.0 2.4 1.0 6.4
---------------------------------------------------------------------------
Earnings reported
under IFRS $ 49.0 $ (1.2) $ 47.8 $ (6.7) $ 1.0 $ 42.1
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Earn-
For the ings Loss Trans-
nine from from lation
months contin- discon- of Actua- Compre-
ended uing tinued foreign rial hensive
September 30, opera- opera- Earn- opera- gain earn-
2010 Notes tions tions ings tions (loss) ings
---------------------------------------------------------------------------
Earnings
reported
under CGAAP $ 143.2 $ (15.7) $ 127.5 $ (4.1) $ - $ 123.4
Earnings
adjustment
PPE(1)
amortization 2 10.3 - 10.3 0.5 - 10.8
Employee future
benefits 3 2.7 1.6 4.3 0.1 (58.9) (54.5)
Decommissioning
obligations 4 (3.4) (0.4) (3.8) - - (3.8)
Share option
expense 5 2.1 - 2.1 - - 2.1
Restructuring
charges 6 - 6.0 6.0 - - 6.0
Deferred tax on
above items 7 (0.9) (2.1) (3.0) - 16.8 13.8
---------------------------------------------------------------------------
Earnings adjustment 10.8 5.1 15.9 0.6 (42.1) (25.6)
---------------------------------------------------------------------------
Earnings reported
under IFRS $ 154.0 $ (10.6) $ 143.4 $ (3.5) $ (42.1) $ 97.8
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) PPE - property, plant and equipment
Shareholders' Equity Adjustment on adoption of IFRS
As at
Notes September 30, 2010
---------------------------------------------------------------------------
Equity reported under CGAAP $ 1,736.9
Retained earnings adjustment
Transition Date retained earnings adjustment 1 (195.2)
Q1 2010 retained earnings adjustment 1 23.8
Q2 2010 retained earnings adjustment 1 (54.0)
Q3 2010 employee future benefits - actuarial
gain (net of tax) 3 1.0
Q3 2010 earnings adjustments (see above) 3.0
---------------------------------------------------------------------------
Retained earnings adjustment (221.4)
Cumulative translation adjustment (first nine
months of 2010) 8 0.6
---------------------------------------------------------------------------
Equity reported under IFRS $ 1,516.1
---------------------------------------------------------------------------
Notes to Comprehensive Earnings and Shareholders' Equity Adjustments on Adoption
of IFRS
1. Previously published information
A copy of the Company's accounting policies, IFRS 1 exemptions applied and
reconciliation of the December 31, 2010 IFRS shareholders' equity and
comprehensive earnings can be found in Appendix A and B of the March 31, 2011
quarterly financial statements. Equity and comprehensive earnings
reconciliations for the periods ended March 31, 2010 and June 30, 2010 can be
found in the appendixes of the associated quarterly reports of 2011. These
reports 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.
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 $94.8
million being charged through Transition Date retained earnings. Depreciation
expense under IFRS was reduced by $3.4 million for the three months ended
September 30, 2010 and $10.3 million for the nine months ended September 30,
2010 due to the impairments.
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 31 measurement date, while
IFRS requires a December 31 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 $0.9 million for the three months ended September 30, 2010 and by $4.3
million for the nine months ended September 30, 2010. A charge of $1.0 million
(net of tax of $0.4 million) for the three months ended September 30, 2010 and
$42.1 million (net of tax of $16.8 million) for the nine months ended September
30, 2010 was recorded in comprehensive earnings for actuarial gains and losses.
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 remediation
liability adjustment increased expenses by $0.6 million for the three months
ended September 30, 2010 and $3.8 million for the nine months ended September
30, 2010.
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 increased by $0.6
million for the three months ended September 30, 2010 and decreased by $2.1
million for the nine months ended September 30, 2010.
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 nine months ended September 30, 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 September
30, 2010 was $0.1 million and for the nine months ended September 30, 2010 was
$3.0 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 $2.4 million for the three months
ended September 30, 2010 and $0.6 million for the nine months ended September
30, 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.
Grafico Azioni Powerstar Intl (TSXV:SLA)
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