West Fraser Timber Co. Ltd. (TSX:WFT) today reported earnings of $10 million and
a diluted loss per share of $0.09 on sales of $720 million in the second quarter
of 2011. For the first half of 2011, earnings were $29 million and diluted
earnings per share were $0.68, on sales of $1.4 billion.
"Historic low housing starts and economic uncertainty continue to negatively
affect lumber and panel prices," said Hank Ketcham, the Company's Chairman,
President and CEO. "On a positive note, lumber shipments to Japan are stable
while shipments to China are continuing to grow at a steady rate."
These results compare with previous periods as follows:
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($ million except
earnings per 2011 2010
share ("EPS")) YTD Q2 Q1 YTD Q2
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Sales 1,407 720 687 1,460 772
EBITDA(1) 142 62 80 264 157
Operating earnings from
continuing operations 57 22 35 166 109
Earnings from
continuing operations 31 11 20 105 67
Earnings after
discontinued
operations 29 10 19 96 67
Basic EPS after
discontinued
operations ($) 0.68 0.24 0.44 2.23 1.56
Diluted EPS after
discontinued
operations ($) 0.68 (0.09) 0.44 2.16 1.27
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(1) Throughout this News Release, reference is made to EBITDA (defined as
operating earnings plus amortization). Management of the Company
believes that, in addition to earnings, EBITDA is a useful performance
indicator and is a useful measure of cash available prior to debt
service, capital expenditures and income taxes. However, EBITDA is not
a generally accepted earnings measure under International Financial
Reporting Standards ("IFRS") and does not have a standardized meaning
prescribed by IFRS. Investors are cautioned that EBITDA should not be
considered as an alternative to earnings or cash flow as determined in
accordance with IFRS. As there is no standardized method of calculating
EBITDA, the Company's method of calculating EBITDA may differ from the
methods used by other entities and, accordingly, the Company's use of
that term may not be directly comparable to similarly titled measures
used by other entities.
Operational Results
In the quarter the lumber segment generated an operating loss of $8 million and
EBITDA of $11 million. Sharp declines in lumber prices combined with higher
Canadian log costs and a stronger Canadian dollar were the key factors in the
decline in earnings from the previous quarter. SPF shipments to offshore markets
increased in the first half of 2011 but North American markets remain weak.
The panels segment, which includes plywood, LVL and MDF, generated an operating
loss in the quarter of $5 million and negative EBITDA of $1 million. Weak
plywood prices and higher log costs adversely affected earnings during the
quarter. MDF and LVL operations continue to operate on a curtailed basis.
Pulp and paper operations generated operating earnings of $21 million and EBITDA
of $38 million. Pulp prices increased in the quarter with the average NBSK
benchmark price for the quarter increasing to US$1,025 per tonne, an increase of
6% from the previous quarter. Despite an eight-day unplanned shutdown at the
Slave Lake pulp mill due to forest fires and a 13-day planned maintenance
shutdown at the Cariboo pulp mill, total pulp production was marginally higher
than in the previous quarter.
Outlook
Without industry production curtailments, lumber prices in the second half of
the year are expected to be lower than in the first half of the year as low U.S.
housing starts will continue to limit demand. Although the pulp market appears
to be slowing, we anticipate that demand will remain at levels that should
support reasonable prices for the balance of the year.
Slave Lake Forest Fire
In June a devastating forest fire destroyed a third of the town of Slave Lake,
Alberta where the Company operates a veneer plant and a pulp mill. Many of the
Company's employees lost their homes and possessions and are trying to rebuild
their lives in the aftermath of this disaster. The Company is grateful for the
courage they displayed in helping to protect West Fraser's mills and in
returning them to full production while at the same time dealing with their own
personal tragedies.
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 Friday, July
22, 2011 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time) by dialing
1-877-440-9795 (toll-free North America). The call may also be accessed through
West Fraser's website at www.westfraser.com. A presentation summarizing the
second quarter results will also be available on the Company's website.
West Fraser shares trade on the Toronto Stock Exchange under the symbol: "WFT".
MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion and analysis by West Fraser's management ("MD&A") of the
Company's financial performance during the second 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 the Company's 2010 Annual Report. Dollar amounts are
expressed in Canadian currency, unless otherwise indicated.
This MD&A contains historical information, descriptions of current circumstances
and statements about potential future developments and anticipated financial
results. The latter, which are forward-looking statements, are presented to
provide reasonable guidance to the reader but their accuracy depends on a number
of assumptions and is subject to various risks and uncertainties.
Forward-looking statements are included in the description of expectations
relating to the Pulp and Paper Green Transformation Program under the heading
"Discussion & Analysis by Product Segment - Pulp & Paper Segment" and under the
headings "Discontinued Operations" and "Business Outlook". Actual outcomes and
results will depend on a number of factors that could affect the ability of the
Company to execute its business plans, including those matters described under
"Risks and Uncertainties" in the 2010 annual MD&A, and may differ materially
from those anticipated or projected. Accordingly, readers should exercise
caution in relying upon forward-looking statements and the Company undertakes no
obligation to publicly revise them to reflect subsequent events or
circumstances, except as required by applicable securities laws.
Throughout this MD&A reference is made to EBITDA (defined as operating earnings
plus amortization). Management believes that, in addition to earnings, EBITDA is
a useful performance indicator and is a useful measure of cash available prior
to debt service, capital expenditures and income taxes. EBITDA is not a
generally accepted earnings measure under International Financial Reporting
Standards ("IFRS") and does not have a standardized meaning prescribed by IFRS.
Investors are cautioned that EBITDA should not be considered as an alternative
to earnings or cash flow, as determined in accordance with IFRS. As there is no
standardized method of calculating EBITDA, the Company's method of calculating
EBITDA may differ from the methods used by other entities and, accordingly, the
Company's use of that term may not be directly comparable to similarly titled
measures used by other entities.
This MD&A includes references to benchmark prices over selected periods for
products of the type produced by West Fraser. These benchmark prices do not
necessarily reflect the prices obtained by West Fraser for those products during
such period. The information in this interim MD&A is as at July 21, 2011 unless
otherwise indicated.
Production, Shipments and Financial Comparisons
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Q2-11 Q1-11 YTD-11 Q2-10 YTD-10
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Production
Lumber - MMfbm
SPF 880 879 1,759 860 1,687
SYP 391 382 773 363 637
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1,271 1,261 2,532 1,223 2,324
Plywood - MMsf (3/8"
basis) 194 196 390 207 398
MDF - MMsf (3/4" basis) 49 48 97 47 95
LVL - Mcf 415 405 820 594 1,174
BCTMP - Mtonnes 157 154 311 139 295
NBSK - Mtonnes 135 138 273 116 240
Newsprint - Mtonnes 32 31 63 31 64
Linerboard and Kraft
Paper - Mtonnes - - - - 29
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Shipments
Lumber - MMfbm
SPF 915 765 1,680 842 1,672
SYP 396 347 743 346 616
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1,311 1,112 2,423 1,188 2,288
Plywood - MMsf (3/8"
basis) 196 178 374 192 373
MDF - MMsf (3/4" basis) 53 52 105 49 100
LVL - Mcf 412 383 795 580 1,144
BCTMP - Mtonnes 175 153 328 170 312
NBSK - Mtonnes 121 136 257 118 250
Newsprint - Mtonnes 32 30 62 36 70
Linerboard and Kraft
Paper - Mtonnes - - - 22 111
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Financial Comparisons -
$ millions
Sales 720 687 1,407 772 1,460
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EBITDA 62 80 142 157 264
Amortization (40) (45) (85) (48) (98)
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Operating earnings 22 35 57 109 166
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Interest expense - net (6) (5) (11) (7) (15)
Exchange gain (loss) on
long-term debt 1 8 9 (15) (4)
Other income (expense) - (4) (4) 2 (6)
Provision for income
taxes (6) (14) (20) (22) (36)
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Earnings from continuing
operations 11 20 31 67 105
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Loss from
discontinued
operations (1) (1) (2) - (9)
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Earnings 10 19 29 67 96
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Cdn. $1.00 converted to
U.S. - average 1.033 1.015 1.024 0.973 0.967
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Selected Quarterly Information
Selected Quarterly Information
($ millions, except earnings per share ("EPS") amounts which are in $)
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Q4-09 Q3-09
Q2-11 Q1-11 Q4-10 Q3-10 Q2-10 Q1-10 (2) (2)
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Sales(1) 720 687 719 707 772 688 570 612
Earnings(1) 11 20 28 49 67 38 8 (100)
Earnings after
discontinued
operations 10 19 43 48 67 29 (20) (199)
Basic EPS(1) 0.27 0.46 0.65 1.15 1.56 0.89 0.18 (2.34)
Diluted EPS(1) (0.07) 0.46 0.65 1.15 1.28 0.89 0.18 (2.34)
Basic EPS
after
discontinued
operations 0.24 0.44 1.00 1.12 1.56 0.67 (0.47) (4.64)
Diluted EPS
after
discontinued
operations (0.09) 0.44 1.00 1.12 1.27 0.67 (0.47) (4.64)
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1. From continuing operations.
2. Prepared in accordance with Canadian generally accepted accounting
principles in place at December 31, 2009.
Discussion & Analysis
The Company's operating results in the quarter reflect low lumber and panel
prices and a continuing strong Canadian dollar. These negative factors were
partially offset by higher NBSK prices and a recovery of long-term equity-based
compensation expense.
U.S. housing starts remained very low, with the spring building season
negatively affected by continued economic uncertainty and poor weather through
much of North America. However, with continuing demand from Asia, specifically
China, lumber prices remained above the extreme lows reached in 2009.
NBSK demand remained strong and prices continued to rise in the current quarter
after falling in the second half of 2010. The BCTMP market improved in the
quarter on lower worldwide supply but there was no price improvement due to
impending new supply in China.
The Canadian dollar strengthened further in the quarter, a contributing factor
in the operating losses in the lumber and panels segments. The panels segment
was also negatively affected by competition from U.S. plywood producers which
more readily enter the Canadian market when the Canadian dollar is strong.
Selling, general and administrative expenses were essentially unchanged from the
previous quarter and the second quarter of 2010.
The Company recorded a recovery of $14 million related to long-term equity-based
compensation after an expense of $27 million in the previous quarter. This
compares to a $12 million recovery in the second quarter of 2010. An expense is
recorded on the issuance of share options or phantom share units and a further
expense or recovery is recorded each quarter based primarily on a Black-Scholes
valuation model that considers various factors relating to outstanding options.
The most significant of these factors is the change in the market value of the
Company's shares from the beginning to the end of the particular period. In the
second quarter of 2011 the market value of the Company's shares decreased from
$60.43 at the close of the previous quarter to $52.57 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.
Interest expense increased only slightly in the current quarter compared to the
previous quarter but was down from the same period last year due to lower
borrowings and lower interest rates.
The change in value of the Canadian dollar relative to the U.S. dollar during
the periods presented resulted in the following foreign exchange gains and
losses:
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Q2-11 Q1-11 YTD-11 Q2-10 YTD-10
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Included in other income
Translation gain (loss)
on current monetary
items (1) (4) (5) 3 (1)
Loss on foreign currency
contracts - - - (1) -
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Gain (loss) on U.S.
dollar-denominated
long-term debt 1 8 9 (15) (4)
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Translation gain (loss)
on foreign operations (1) (5) (6) 10 3
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The results of the current quarter include a $6 million provision for income
taxes compared to provisions of $14 million for the preceding quarter and $22
million for the second 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.
In the second quarter of 2011 the following significant items were included in
earnings from continuing operations:
-- a recovery for long-term equity-based compensation of $14 million (after
tax $14 million or $0.32 per share); and
-- the translation of U.S. dollar-denominated debt which resulted in a
foreign exchange gain of $1 million (after tax $1 million or $0.03 per
share).
Discussion & Analysis by Product Segment
Lumber Segment
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Q2-11 Q1-11 YTD-11 Q2-10 YTD-10
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Sales - $ millions 438 411 849 464 873
EBITDA - $ millions 11 56 67 75 142
EBITDA margin - % 3 13 8 16 16
Operating earnings -
$ millions (8) 33 25 50 89
Benchmark prices (US$
per Mfbm)
SPF #2 & Better
2 x 4(1) 242 296 269 264 267
SYP #2 West 2 x 4(2) 266 308 287 377 350
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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.
Despite sharp declines in SPF and SYP lumber prices and a stronger Canadian
dollar compared to the previous quarter, the lumber segment achieved improved
sales as a result of increased product shipments. However, the lower lumber
prices and a significant increase in Canadian log costs resulted in a decrease
in operating earnings compared to the previous quarter and compared to the
second quarter of 2010. Despite the increase in shipments, the U.S.-related
export taxes were lower in the current quarter compared to the previous quarter,
reflecting the growth of offshore lumber markets and lower SPF prices.
Compared to the first half of the previous year, operating earnings were lower
due mainly to lower SYP prices, the effect of the stronger Canadian dollar on
SPF sales realizations and higher Canadian log costs. These factors were
partially offset by higher shipments for both SPF and SYP in the current
quarter.
Benchmark U.S. dollar SPF prices were lower by 18% in the quarter compared to
the previous quarter and down 8% compared to the second quarter of 2010. The
continued strengthening of the Canadian dollar also negatively affected mill
returns in Canada. Benchmark U.S. prices for SYP lumber were 14% lower in the
current quarter compared to the previous quarter and down 29% compared to the
second quarter of 2010. Lumber prices reflected an increase in production and
supply without a corresponding improvement in demand, particularly demand
associated with U.S. new home construction which remained flat.
SPF lumber shipments returned to more normal levels in the quarter, representing
an improvement of 20% over the previous quarter when winter weather conditions
affected truck and railcar availability. SPF shipments to offshore markets
continued to increase, quarter over quarter, but not enough to eliminate an
oversupplied condition in North America. SYP shipment volumes in the quarter
were higher by 14% compared to the previous quarter, also due mostly to the poor
weather conditions in the previous quarter.
SPF shipment volumes were 9% higher in the current quarter compared to the
second quarter of 2010, including a significant increase in shipments to
offshore markets. SYP shipments were up 14% in the current quarter compared to
the second quarter of 2010.
SYP production was 2% higher in the current quarter compared to the previous
quarter and 8% higher compared to the second quarter of 2010 reflecting the
addition of operating shifts in many of the U.S. sawmills. In the current
quarter the U.S sawmills operated at approximately 78% of capacity compared to
75% in the previous quarter and 75% in the second quarter of 2010. The Canadian
sawmills operated at capacity in the current and previous quarters and at near
capacity in the second quarter of 2010.
Unit conversion costs for SPF and SYP in the current quarter were similar to the
previous quarter. Also in the quarter, log costs in the U.S. were relatively
stable but were up in Canada from the previous quarter.
Compared to the second quarter of 2010, unit conversion costs were similar in
Canada. Conversion costs declined marginally in the U.S. operations compared to
the second quarter of 2010 due to higher operating rates. Canadian log costs
were approximately 12% higher due principally to higher fuel costs which led to
higher harvesting and hauling rates.
Average export tax charges under the Softwood Lumber Agreement were 33% lower in
the quarter compared to the previous quarter, attributable mostly to lower SPF
prices and increased offshore SPF shipments. Charges were 3% higher than in the
second quarter of 2010 as composite prices had increased sufficiently in the
second quarter of 2010 that the export tax was reduced to 10% for the month of
May and eliminated for the month of June.
The sale of the Terrace sawmill and related Crown timber tenures, previously
announced in April, 2011, was completed on July 19, 2011. The sawmill operation
had been curtailed since July 2007.
Panels Segment
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Q2-11 Q1-11 YTD-11 Q2-10 YTD-10
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Sales - $ millions 96 91 187 108 208
EBITDA - $ millions (1) 4 3 20 31
EBITDA margin - % n/a 4 2 19 15
Operating earnings -
$ millions (5) - (5) 16 22
Benchmark price
Plywood (per Msf 3/8"
basis)(1) Cdn$ 303 307 305 377 355
MDF (per Msf 3/4"
basis)(2) US$ 545 539 542 536 505
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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.
The Company's panels segment is comprised of its plywood, MDF and LVL operations.
The panels segment continues to produce weak operating results owing mainly to a
significant decrease in plywood prices.
Benchmark plywood prices decreased only slightly in the current quarter compared
to the previous quarter but were down 20% compared to the second quarter of
2010. Although demand in Canada has remained relatively stable compared to 2010,
additional plywood from the U.S. is entering the Canadian market and putting
downward pressure on prices. The strong Canadian dollar has permitted U.S.
producers to competitively ship plywood into Canada.
In addition to weak plywood prices, the segment's operating earnings have been
adversely affected by rising log costs.
Plywood shipments increased by 10% from the previous quarter and increased by 2%
compared to the second quarter of 2010.
MDF and LVL results are comparable to prior periods as prices for both products
remain low due to low housing starts in the U.S. 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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Q2-11 Q1-11 YTD-11 Q2-10 YTD-10
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Sales - $ millions 211 209 420 226 429
EBITDA - $ millions 38 47 85 53 95
EBITDA margin - % 18 22 20 23 22
Operating earnings -
$ millions 21 29 50 36 61
Benchmark price
NBSK (US$ per tonne)(1) 1,025 970 998 993 937
Newsprint (US$ per
tonne)(2) 640 640 640 564 576
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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.
The Company's pulp & paper segment is comprised of its NBSK, BCTMP and newsprint
businesses.
Operating earnings were lower than the previous quarter largely due to increased
fibre and power costs. The U.S.-dollar NBSK benchmark price reached a peak of
$1,035 per tonne in the quarter but the increase was tempered by the stronger
Canadian dollar. U.S.-dollar BCTMP prices increased marginally from the previous
quarter but the effect of the stronger Canadian dollar kept Canadian dollar
price realizations essentially flat. Operating earnings were down from the
second quarter of 2010 primarily due to lower BCTMP mill nets and higher fibre
and power costs.
Total pulp production was marginally higher than the previous quarter despite a
loss of eight days of production at the Slave Lake mill due to a large forest
fire near Slave Lake. Although the mill was not directly affected by the fire,
the area around the town of Slave Lake was evacuated for an extended period.
Pulp production was also reduced as a result of the 13-day annual maintenance
shutdown of the Cariboo mill. Disregarding this downtime, all the mills ran very
well in the quarter with the Cariboo mill achieving record daily production
during the month of June. Production in the current quarter was 15% higher than
in the second quarter of 2010 mainly due to a 15-day shutdown of the QRP mill
and an 11-day annual maintenance shutdown of the Hinton mill in the second
quarter of 2010.
Pulp freight costs were higher than the previous quarter as a result of an
increased use of trucks due to reduced railcar availability. Unit production
costs were higher in the quarter compared to the previous quarter due to an
increase in fibre costs and a net increase in power costs, which was in part
attributable to a large net benefit of selling power during the previous quarter
when power prices reached high levels. Unit production costs were lower than in
the second quarter of 2010 due to less downtime in the current quarter.
Benchmark U.S.-dollar newsprint prices were flat in the quarter from the
previous quarter but the effect of the stronger Canadian dollar caused mill nets
to be lower. Benchmark U.S.-dollar newsprint prices were higher by approximately
13% compared to the second quarter of 2010, or 7% on a Canadian dollar basis.
In 2009 the Government of Canada confirmed an allocation of credits totalling
$88 million to West Fraser under the Pulp and Paper Green Transformation
Program. The Company has received approval under this program for six projects
that are expected to significantly reduce future energy costs and expects
approval of two additional projects in the third quarter of 2011. West Fraser
expects to utilize its full allocation under the Program with expenditures to
date totalling $38 million including expenditures in the first half of 2011 of
$27 million.
Discontinued Operations
The Eurocan mill was closed in the first quarter of 2010. Total restructuring
charges of approximately $50 million related to the closure of this facility
have been recorded to date. We do not anticipate any further closure costs.
As at June 30, 2011 the assets and liabilities associated with the Eurocan
business are as follows:
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Q2-11
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Current assets 2
Non-current assets 1
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Total assets 3
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Current liabilities (6)
Non-current liabilities (10)
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Total liabilities (16)
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In July 2011 an agreement was entered into to sell the remaining assets related
to the Eurocan mill. That sale, and the previously-announced sale of the wharf
facilities, are expected to close in the second half of the year.
Business Outlook
For a detailed description of West Fraser's business outlook for 2011 see its
2010 annual MD&A under "Business Outlook", which is included in the Company's
2010 Annual Report.
Benchmark prices for both SPF and SYP lumber, although volatile, remain low
overall, having weakened dramatically since the end of the first quarter of
2011. Unless demand levels increase or production curtailments occur, prices are
likely to remain at depressed levels for the balance of the year. The continuing
weak state of the U.S. economy and the current oversupply situation with respect
to homes for sale and potential new foreclosures is expected to prolong
homebuilder uncertainty and delay pricing improvements for the building products
produced by the Company.
Pulp demand, although strong, is reducing somewhat on a general economic
slowdown and NBSK prices are trending lower. Impending new supply of BCTMP in
China, offset in part by some closures of older mills in China, has kept prices
generally flat. Should the economic slowdown continue, prices may come under
further downward pressure.
Capital Requirements and Liquidity
Summary of Financial Position ($ millions, except as otherwise indicated)
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Q2-11 Q4-10 Q2-10
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Cash(1) 134 161 94
Current assets 783 789 682
Current liabilities 333 389 344
Ratio of current assets to current
liabilities 2.4 2.0 2.0
Net debt 152 148 235
Shareholders' equity 1,537 1,534 1,477
Net debt to capitalization(2) - % 9 9 14
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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) 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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Q2-11 Q1-11 YTD-11 Q2-10 YTD-10
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Operating Activities
Cash provided before
operating working
capital changes 54 33 87 162 348
Non-cash operating
working capital change 61 (89) (28) 83 (29)
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Cash provided (used) in
operating activities 115 (56) 59 245 319
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Financing Activities
Debt and operating loans (11) (4) (15) (123) (167)
Interest paid (8) (2) (10) (10) (12)
Dividends and other (6) (6) (12) (1) (6)
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Cash used in financing
activities (25) (12) (37) (134) (185)
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Investing Activities
Additions to capital
assets (49) (20) (69) (27) (55)
Other - net 14 9 23 - 1
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Cash used in investing
activities (35) (11) (46) (27) (54)
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Change in cash from
continuing operations 55 (79) (24) 84 80
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Change in cash from
discontinued
operations (2) (1) (3) 25 24
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Change in cash 53 (80) (27) 109 104
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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 July 21, 2011, the Common share equity of the Company consisted of 40,059,299
Common shares and 2,781,478 Class B Common shares for a total of 42,840,777
shares issued and outstanding.
In addition, as of July 21, 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.
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
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Agency Rating Outlook
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Dominion Bond Rating Service BB(high) Stable
Moody's Ba1 Positive
Standard & Poor's BB+ Positive
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These ratings are not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the rating agencies.
Risks and Uncertainties
For a review of the risks and uncertainties to which the Company is subject, see
the 2010 annual MD&A which is included in the Company's 2010 Annual Report.
Changes In Accounting
Conversion to International Financial Reporting Standards
The Company has adopted IFRS effective January 1, 2011. Prior to the adoption of
IFRS the Company prepared its financial statements in accordance with Canada's
previous Generally Accepted Accounting Principles for publicly accountable
profit-oriented enterprises. For additional information on the conversion to
IFRS, see the 2010 annual MD&A which is included in the Company's 2010 Annual
Report and the unaudited 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 the Company considers the most significant. They are
not intended to be a complete list of new pronouncements that may impact the
Company's 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. The Company has not yet assessed the impact of the standard.
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. The Company has not yet assessed 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. The Company has not yet assessed 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 the 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. The
Company has 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. The Company has not yet assessed the impact of the standard.
Disclosure Controls and Procedures and Internal Control Over Financial Reporting
West Fraser's management, including the Chairman, President and Chief Executive
Officer and the Executive Vice-President, Finance and Chief Financial Officer
acknowledge responsibility for the design of disclosure controls and procedures
(DC&P) and internal controls over financial reporting (ICFR) as those terms are
defined in National Instrument 52-109.
There were no changes in internal controls over financial reporting that
occurred during the quarter ended June 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 the Company, including the Company's Annual
Information Form, is available on SEDAR at www.sedar.com.
West Fraser Timber Co. Ltd.
Condensed Consolidated Balance Sheets
(in millions of Canadian dollars - unaudited)
As at As at
June 30 December 31
2011 2010
--------------------------------------------------------------------------
Assets
Current assets
Cash and short-term investments $ 134.7 $ 163.1
Accounts receivable 276.3 246.0
Inventories (note 4) 352.7 372.4
Prepaid expenses 19.4 7.6
--------------------------------------------------------------------------
783.1 789.1
Property, plant, and equipment (note 5) 899.3 924.7
Timber licences 501.5 509.6
Goodwill and other intangibles (note 6) 340.4 345.4
Other assets 30.6 41.5
--------------------------------------------------------------------------
$ 2,554.9 $ 2,610.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liabilities
Current liabilities
Cheques issued in excess of funds on
deposit $ 0.7 $ 2.4
Operating loans (note 8) - 8.8
Accounts payable and accrued liabilities 270.0 271.0
Income taxes payable 14.9 58.3
Reforestation obligations 41.0 41.4
Decomissioning obligations 6.4 6.8
Current portion of long-term debt (note 8) 0.3 0.3
--------------------------------------------------------------------------
333.3 389.0
Long-term debt (note 8) 290.3 299.5
Other liabilities (note 9) 239.5 225.7
Deferred income taxes 154.5 162.3
--------------------------------------------------------------------------
1,017.6 1,076.5
--------------------------------------------------------------------------
Shareholders' equity
Share capital 600.7 600.5
Accumulated other comprehensive earnings (15.7) (9.6)
Retained earnings 952.3 942.9
--------------------------------------------------------------------------
1,537.3 1,533.8
--------------------------------------------------------------------------
$ 2,554.9 $ 2,610.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Contingency (note 17)
Number of Common shares and Class B Common shares outstanding at
July 21, 2011 was 42,840,777.
West Fraser Timber Co. Ltd.
Condensed Consolidated Statement of Changes in Equity
(in millions of Canadian dollars - unaudited)
April 1 to June 30 January 1 to June 30
2011 2010 2011 2010
--------------------------------------------------------------------------
Retained earnings
Balance -
beginning of
period $ 987.1 $ 865.3 $ 942.9 $ 823.3
Actuarial loss on
employee future
benefits (39.2) (57.4) (7.9) (43.1)
Earnings for the
period 10.3 66.7 29.2 95.6
Dividends (5.9) (1.4) (11.9) (2.6)
--------------------------------------------------------------------------
Balance - end of
period $ 952.3 $ 873.2 $ 952.3 $ 873.2
--------------------------------------------------------------------------
Accumulated other
comprehensive
earnings
Balance -
beginning of
period $ (14.9) $ (6.8) $ (9.6) $ -
Translation gain
(loss) of foreign
operations (0.8) 10.0 (6.1) 3.2
--------------------------------------------------------------------------
Balance - end of
period $ (15.7) $ 3.2 $ (15.7) $ 3.2
--------------------------------------------------------------------------
Share capital
Balance -
beginning of
period $ 600.6 $ 599.8 $ 600.5 $ 599.7
Issuance of Common
shares 0.1 0.2 0.2 0.3
--------------------------------------------------------------------------
Balance - end of
period $ 600.7 $ 600.0 $ 600.7 $ 600.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Shareholders'
equity $ 1,537.3 $ 1,476.4 $ 1,537.3 $ 1,476.4
--------------------------------------------------------------------------
--------------------------------------------------------------------------
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
(in millions of Canadian dollars - unaudited)
April 1 to June 30 January 1 to June 30
2011 2010 2011 2010
--------------------------------------------------------------------------
Sales $ 719.7 $ 772.2 $ 1,406.7 $ 1,460.0
--------------------------------------------------------------------------
Costs and expenses
Cost of products
sold 509.2 474.9 941.5 890.2
Freight and other
distribution
costs 123.2 114.4 228.8 224.0
Export taxes 12.3 10.8 27.9 30.0
Amortization 40.4 48.2 85.1 97.6
Selling, general
and
administration 26.7 26.8 54.1 49.1
Long-term
equity-based
compensation (13.7) (11.8) 12.8 3.0
--------------------------------------------------------------------------
698.1 663.3 1,350.2 1,293.9
--------------------------------------------------------------------------
Operating earnings 21.6 108.9 56.5 166.1
Interest expense -
net (5.4) (7.6) (10.2) (15.2)
Exchange gain
(loss) on long-
term debt 1.5 (14.7) 9.0 (4.1)
Other income
(expense) (note 11) - 2.0 (3.6) (5.9)
--------------------------------------------------------------------------
Earnings from
continuing
operations before
income taxes 17.7 88.6 51.7 140.9
Provision for
income taxes
(note 12) (6.3) (21.6) (20.4) (35.9)
--------------------------------------------------------------------------
Earnings from
continuing
operations 11.4 67.0 31.3 105.0
Loss from
discontinued
operations (note 13) (1.1) (0.3) (2.1) (9.4)
--------------------------------------------------------------------------
Earnings $ 10.3 $ 66.7 $ 29.2 $ 95.6
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Actuarial loss on
employee future
benefits $ (52.0) $ (80.3) $ (10.5) $ (60.3)
Income tax on
actuarial loss on
employee future
benefits 12.8 22.9 2.6 17.2
Translation gain
(loss) on foreign
operations (0.8) 10.0 (6.1) 3.2
--------------------------------------------------------------------------
Comprehensive
earnings $ (29.7) $ 19.3 $ 15.2 $ 55.7
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings per share
(dollars) (note 14)
Basic from
continuing
operations $ 0.27 $ 1.56 $ 0.73 $ 2.45
Diluted from
continuing
operations $ (0.07) $ 1.28 $ 0.73 $ 2.38
Basic after
discontinued
operations $ 0.24 $ 1.56 $ 0.68 $ 2.23
Diluted after
discontinued
operations $ (0.09) $ 1.27 $ 0.68 $ 2.16
--------------------------------------------------------------------------
--------------------------------------------------------------------------
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Cash Flows
(in millions of Canadian dollars - unaudited)
April 1 to June 30 January 1 to June 30
2011 2010 2011 2010
--------------------------------------------------------------------------
Operating
activities
Earnings from
continuing
operations $ 11.4 $ 67.0 $ 31.3 $ 105.0
Adjustments to
reconcile
earnings to cash
flows from
operating
activities
Amortization 40.4 48.2 85.1 97.6
Interest expense -
net 5.4 7.6 10.2 15.2
Exchange (gain)
loss on
long-term debt (1.5) 14.7 (9.0) 4.1
Provision for
income taxes 6.3 21.6 20.4 35.9
Income taxes
received (paid) (6.9) 6.9 (68.2) 69.6
Change in
reforestation
obligations (3.6) (4.8) 7.9 8.4
Other 2.8 0.3 9.2 11.6
--------------------------------------------------------------------------
54.3 161.5 86.9 347.4
--------------------------------------------------------------------------
Changes in
non-cash
operating
working capital
Accounts
receivable (0.2) (7.0) (29.7) (67.6)
Inventories 125.1 102.3 17.3 33.2
Prepaid
expenses (5.5) (3.9) (10.1) (8.1)
Accounts
payable and
accrued
liabilities (58.5) (8.2) (5.8) 13.9
--------------------------------------------------------------------------
Subtotal of
changes in
non-cash
operating
working capital 60.9 83.2 (28.3) (28.6)
--------------------------------------------------------------------------
Cash flows from
operating
activities 115.2 244.7 58.6 318.8
--------------------------------------------------------------------------
Financing
activities
Repayment of
long-term debt - - (0.3) (100.3)
Repayment of
operating loans (10.9) (123.2) (14.6) (66.7)
Interest paid (8.3) (9.8) (9.9) (12.0)
Dividends (5.9) (1.4) (11.9) (2.6)
Other - 0.1 - (3.4)
--------------------------------------------------------------------------
Cash flows from
financing
activities (25.1) (134.3) (36.7) (185.0)
--------------------------------------------------------------------------
Investing
activities
Additions to
capital assets (48.7) (26.9) (68.5) (55.0)
Proceeds from
Green
Transformation
Program 13.4 - 20.9 -
Proceeds from
disposal of
capital assets - 0.1 0.8 0.6
Other 0.8 0.2 1.2 0.2
--------------------------------------------------------------------------
Cash flows from
investing
activities (34.5) (26.6) (45.6) (54.2)
--------------------------------------------------------------------------
Change in cash
from continuing
operations 55.6 83.8 (23.7) 79.6
Change in cash
from discontinued
operations
(note 13) (2.6) 24.8 (3.0) 23.9
Cash - beginning
of period 81.0 (14.9) 160.7 (9.8)
--------------------------------------------------------------------------
Cash - end of
period $ 134.0 $ 93.7 $ 134.0 $ 93.7
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash consists of
Cash and
short-term
investments $ 134.7 $ 96.6
Cheques issued in
excess of funds
on deposit (0.7) (2.9)
--------------------------------------------------------------------------
$ 134.0 $ 93.7
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 quarter ended March 31, 2011,
with consideration of the IFRS transition disclosures included in Appendix A of
these condensed consolidated interim financial statements.
4. Inventories
Inventories at June 30, 2011 were written down by $8.6 million (June 30, 2010 -
$6.7 million; December 31, 2010 - $3.8 million) to reflect net realizable value
being lower than cost.
5. Property, plant and equipment
--------------------------------------------------------------------------
June 30, December 31,
2011 2010
--------------------------------------------------------------------------
Manufacturing plant, equipment & machinery $ 789.0 $ 848.0
Construction-in-progress 40.5 12.8
Roads and bridges 40.0 34.4
Other 29.8 29.5
--------------------------------------------------------------------------
$ 899.3 $ 924.7
--------------------------------------------------------------------------
--------------------------------------------------------------------------
6. Goodwill and other intangible assets
--------------------------------------------------------------------------
June 30, December 31,
2011 2010
--------------------------------------------------------------------------
Goodwill $ 263.7 $ 263.7
Power purchase agreement 69.5 73.2
Timber deposits 3.0 3.4
Other 4.2 5.1
--------------------------------------------------------------------------
$ 340.4 $ 345.4
--------------------------------------------------------------------------
--------------------------------------------------------------------------
7. Restructuring charges
Restructuring charges relate to the closure of the Eurocan 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
June 30, December 31,
2011 2010
--------------------------------------------------------------------------
Accrued liability - beginning of period $ 4.5 $ 40.2
Paid during period (1.9) (35.1)
Change in accrual 0.3 (0.6)
--------------------------------------------------------------------------
Accrued liability - end of period $ 2.9 $ 4.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
8. Long-term debt and operating loans
Long-term debt
--------------------------------------------------------------------------
June 30, December 31,
2011 2010
--------------------------------------------------------------------------
US$300 million senior notes due October
2014; interest at 5.2% $ 289.4 $ 298.4
Note payable due in instalments to 2020;
interest at 5.5% 2.4 2.7
--------------------------------------------------------------------------
291.8 301.1
Less:
Current portion (0.3) (0.3)
Deferred financing costs (1.2) (1.3)
--------------------------------------------------------------------------
$ 290.3 $ 299.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Operating loans
The Company has $530 million in revolving lines of credit, of which nil (net of
deferred financing costs of $0.4 million) was drawn as at June 30, 2011
(December 31, 2010 - $8.8 million, net of deferred financing costs of $6.2
million). Additional deferred financing costs of $5.0 million are included in
other assets at June 30, 2011.
These facilities include a committed revolving line of credit in the amount of
$500 million maturing December 2014, a $25 million demand line of credit
dedicated to letters of credit and a $5 million demand line of credit dedicated
to the newsprint joint venture operations. 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 June 30, 2011, letters of credit in the
amount of $35.4 million have been issued under these facilities.
The $500 million committed facility and the US$300 million senior notes are
secured by the Company's assets.
9. Other liabilities
--------------------------------------------------------------------------
June 30, December 31,
2011 2010
--------------------------------------------------------------------------
Post-retirement obligations $ 123.2 $ 118.2
Reforestation obligations 73.2 64.4
Other decommissioning obligations 19.4 19.6
Timber damage deposits 13.3 13.9
Other 10.4 9.6
--------------------------------------------------------------------------
$ 239.5 $ 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 $7.3 million for the
three months ended June 30, 2011 (three months ended June 30, 2010 - $6.1
million) and $15.6 million for the six months ended June 30, 2011 (six months
ended June 30, 2010 - $12.2 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:
--------------------------------------------------------------------------
June 30, December 31,
2011 2010
--------------------------------------------------------------------------
Projected benefit obligations $ (1,005.5) $ (983.6)
Fair value of plan assets 905.7 904.1
--------------------------------------------------------------------------
Deficit $ (99.8) $ (79.5)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Represented by
Pension surplus(1) $ 23.4 $ 38.7
Post-retirement obligations(2) (123.2) (118.2)
--------------------------------------------------------------------------
$ (99.8) $ (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:
--------------------------------------------------------------------------
June 30, March 31, December 31,
2011 2011 2010
--------------------------------------------------------------------------
Discount rate on obligation 5.50% 5.75% 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 obligation and the difference between the
actual rate of return and the expected rate of return on plan assets generated
an actuarial loss of $52.0 million for the three months ended June 30, 2011
(three months ended June 30, 2010 - $80.3 million) and $10.5 million for the six
months ended June 30, 2011 (six months ended June 30, 2010 - $60.3 million)
which is included in comprehensive earnings, net of income taxes.
11. Other income (expense)
--------------------------------------------------------------------------
April 1 to June 30 January 1 to June 30
2011 2010 2011 2010
--------------------------------------------------------------------------
Foreign exchange
gain (loss) - net $ (0.9) $ 3.2 $ (5.3) $ (0.7)
Loss on derivatives - (1.1) - (5.1)
Other - net 0.9 (0.1) 1.7 (0.1)
--------------------------------------------------------------------------
$ - $ 2.0 $ (3.6) $ (5.9)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
12. Income taxes
The Company's effective tax rate on earnings from continuing operations is as
follows:
-------------------------------------------------------------------------
April 1 to June 30
2011 2010
Amount % Amount %
-------------------------------------------------------------------------
Income taxes at statutory
rates $ (4.7) (26.5) $ (25.2) (28.5)
Non taxable amounts 3.9 22.0 (2.1) (2.4)
Rate differentials
between jurisdictions
and on specified
activities 1.9 10.7 (0.2) (0.2)
Change in valuation
allowance (5.1) (28.8) 6.0 6.8
Other (2.3) (13.0) (0.1) (0.1)
-------------------------------------------------------------------------
Income tax provision $ (6.3) (35.6) $ (21.6) (24.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
January 1 to June 30
2011 2010
Amount % Amount %
-------------------------------------------------------------------------
Income taxes at statutory
rates $ (13.7) (26.5) $ (40.1) (28.5)
Non taxable amounts (1.2) (2.4) (0.6) (0.4)
Rate differentials
between jurisdictions
and on specified
activities 1.6 3.2 0.2 0.2
Change in valuation
allowance (4.7) (9.2) 7.2 5.1
Other (2.4) (4.6) (2.6) (1.9)
-------------------------------------------------------------------------
Income tax provision $ (20.4) (39.5) $ (35.9) (25.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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:
--------------------------------------------------------------------------
April 1 to June 30 January 1 to June 30
2011 2010 2011 2010
--------------------------------------------------------------------------
Sales $ 0.1 $ 13.7 $ 0.1 $ 64.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Operating loss (1.5) (1.9) (2.8) (13.8)
Other income - 1.6 - 0.8
--------------------------------------------------------------------------
Loss before income
tax (1.5) (0.3) (2.8) (13.0)
Income tax
recovery 0.4 - 0.7 3.6
--------------------------------------------------------------------------
Loss $ (1.1) $ (0.3) $ (2.1) $ (9.4)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash flows from
operating
activities $ (2.4) $ 24.8 $ (2.6) $ 23.9
Cash flows from
investing
activities (0.2) - (0.4) -
--------------------------------------------------------------------------
Increase
(decrease) in
cash $ (2.6) $ 24.8 $ (3.0) $ 23.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------
14. Earnings per share
Basic earnings per share is calculated based on earnings available to Common
shareholders, as set out below, using the weighted average number of Common
shares and Class B common shares outstanding.
Diluted earnings per share is calculated based on earnings available to Common
shareholders adjusted to remove the actual share option expense (recovery)
charged to earnings and after deducting a notional charge for share option
expense assuming the use of the equity settled method, as set out below. The
diluted weighted average number of shares is calculated using the treasury stock
method. When earnings available to shareholders for diluted earnings per share
are greater than earnings available to shareholders for basic earnings per
share, the calculation is anti-dilutive, therefore basic and diluted earnings
per share are the same.
--------------------------------------------------------------------------
April 1 to June 30
2011 2010
After After
From discont- From discont-
continuing inued continuing inued
operations operations operations operations
--------------------------------------------------------------------------
Earnings
Basic $ 11.4 $ 10.3 $ 67.0 $ 66.7
Share option recovery (14.0) (14.0) (11.4) (11.4)
Equity settled share
option adjustment (0.3) (0.3) (0.2) (0.2)
--------------------------------------------------------------------------
Diluted $ (2.9) $ (4.0) $ 55.4 $ 55.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Weighted average
number of shares
Basic 42,838,619 42,838,619 42,821,150 42,821,150
Share options 534,216 534,216 524,137 524,137
--------------------------------------------------------------------------
Diluted 43,372,835 43,372,835 43,345,287 43,345,287
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings per share
(dollars)
Basic $ 0.27 $ 0.24 $ 1.56 $ 1.56
Diluted $ (0.07) $ (0.09) $ 1.28 $ 1.27
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
January 1 to June 30
2011 2010
After After
From discont- From discont-
continuing inued continuing inued
operations operations operations operations
--------------------------------------------------------------------------
Earnings
Basic $ 31.3 $ 29.2 $ 105.0 $ 95.6
Share option expense
(recovery) 8.8 8.8 (1.5) (1.5)
Equity settled share
option adjustment (2.5) (2.5) (0.6) (0.6)
--------------------------------------------------------------------------
Diluted $ 37.6 $ 35.5 $ 102.9 $ 93.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Weighted average
number of shares
Basic 42,837,381 42,837,381 42,819,441 42,819,441
Share options 555,526 555,526 436,553 436,553
--------------------------------------------------------------------------
Diluted 43,392,907 43,392,907 43,255,994 43,255,994
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings per share
(dollars)
Basic $ 0.73 $ 0.68 $ 2.45 $ 2.23
Diluted $ 0.73 $ 0.68 $ 2.38 $ 2.16
--------------------------------------------------------------------------
--------------------------------------------------------------------------
15. Green transformation program
In 2009 the Government of Canada confirmed an allocation of credits totalling
$88 million to the Company under the Pulp and Paper Green Transformation Program
(the "Program"). The Program provides funding for capital projects that improve
the energy efficiency or environmental performance of Canadian pulp and paper
mills. Credits may be used until the Program end date of March 31, 2012. During
the quarter, the Company received $13.4 million for eligible expenditures (six
months ended June 30, 2011 - $20.9 million; year ended December 31, 2010 - $1.6
million) under the Program and has incurred a further $15.0 million of
qualifying reimbursable expenditures which are included in accounts receivable.
16. Segmented information
Corpo-
Pulp & rate Consoli-
Lumber Panels paper & other dated
--------------------------------------------------------------------------
April 1, 2011 to
June 30, 2011
Sales at market
prices
To external
customers $ 414.3 $ 94.2 $ 211.2 $ - $ 719.7
---------
To other segments 23.5 2.2 - - ---------
----------------------------------------------------------------
$ 437.8 $ 96.4 $ 211.2 $ -
---------------------------------------------------------------
---------------------------------------------------------------
EBITDA(1) $ 11.3 $ (1.0) $ 38.2 $ 13.5 $ 62.0
Amortization (19.1) (3.8) (16.9) (0.6) (40.4)
--------------------------------------------------------------------------
Operating earnings (7.8) (4.8) 21.3 12.9 21.6
Interest income
(expense) - net (3.2) (0.8) (1.6) 0.2 (5.4)
Exchange gain on
long-term debt - - - 1.5 1.5
Other income
(expense) (0.9) - 1.1 (0.2) -
--------------------------------------------------------------------------
Earnings from
continuing
operations before
income taxes $ (11.9) $ (5.6) $ 20.8 $ 14.4 $ 17.7
--------------------------------------------------------------------------
--------------------------------------------------------------------------
April 1, 2010 to
June 30, 2010
Sales at market
prices
To external
customers $ 440.3 $ 106.3 $ 225.6 $ - $ 772.2
---------
To other segments 23.7 2.0 - - ---------
----------------------------------------------------------------
$ 464.0 $ 108.3 $ 225.6 $ -
---------------------------------------------------------------
---------------------------------------------------------------
EBITDA (1) $ 75.3 $ 20.1 $ 52.6 $ 9.1 $ 157.1
Amortization (25.7) (4.6) (17.0) (0.9) (48.2)
--------------------------------------------------------------------------
Operating earnings 49.6 15.5 35.6 8.2 108.9
Interest income
(expense) - net (5.0) (1.0) (1.9) 0.3 (7.6)
Exchange loss on
long-term debt - - - (14.7) (14.7)
Other income
(expense) (0.6) - 3.5 (0.9) 2.0
--------------------------------------------------------------------------
Earnings from
continuing
operations before
income taxes $ 44.0 $ 14.5 $ 37.2 $ (7.1) $ 88.6
--------------------------------------------------------------------------
--------------------------------------------------------------------------
1. Non GAAP measure:
EBITDA is defined as operating earnings plus amortization.
Corpo-
Pulp & rate Consol-
Lumber Panels paper & other idated
--------------------------------------------------------------------------
January 1, 2011 to
June 30, 2011
Sales at market
prices
To external
customers $ 804.0 $ 182.8 $ 419.9 $ - $ 1,406.7
---------
To other segments 45.0 4.5 - - ---------
---------------------------------------------------------------
$ 849.0 $ 187.3 $ 419.9 $ -
---------------------------------------------------------------
---------------------------------------------------------------
EBITDA (1) $ 66.5 $ 2.6 $ 85.1 $ (12.6) $ 141.6
Amortization (41.4) (7.7) (34.7) (1.3) (85.1)
--------------------------------------------------------------------------
Operating earnings 25.1 (5.1) 50.4 (13.9) 56.5
Interest income
(expense) - net (5.8) (1.6) (3.0) 0.2 (10.2)
Exchange gain on
long-term debt - - - 9.0 9.0
Other income
(expense) (3.4) (0.2) (0.7) 0.7 (3.6)
--------------------------------------------------------------------------
Earnings from
continuing
operations before
income taxes $ 15.9 $ (6.9) $ 46.7 $ (4.0) $ 51.7
--------------------------------------------------------------------------
--------------------------------------------------------------------------
January 1, 2010 to
June 30, 2010
Sales at market
prices
To external
customers $ 826.7 $ 204.0 $ 429.3 $ - $ 1,460.0
---------
To other segments 46.7 3.8 - - ---------
---------------------------------------------------------------
$ 873.4 $ 207.8 $ 429.3 $ -
---------------------------------------------------------------
---------------------------------------------------------------
EBITDA (1) $ 141.6 $ 31.3 $ 94.9 $ (4.1) $ 263.7
Amortization (52.5) (9.7) (33.7) (1.7) (97.6)
--------------------------------------------------------------------------
Operating earnings 89.1 21.6 61.2 (5.8) 166.1
Interest expense -
net (9.6) (1.8) (3.8) - (15.2)
Exchange loss on
long-term debt - - - (4.1) (4.1)
Other expense (2.1) (0.4) (2.8) (0.6) (5.9)
--------------------------------------------------------------------------
Earnings from
continuing
operations before
income taxes $ 77.4 $ 19.4 $ 54.6 $ (10.5) $ 140.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------
1. Non GAAP measure:
EBITDA is defined as operating earnings plus amortization.
The geographic distribution of external sales is as follows:
--------------------------------------------------------------------------
April 1 to June 30 January 1 to June 30
2011 2010 2011 2010
--------------------------------------------------------------------------
United States $ 319.2 $ 395.1 $ 659.6 $ 744.2
Canada 172.4 175.6 328.4 346.1
China 150.7 96.6 235.4 148.2
Other Asia 47.1 60.5 121.0 144.7
Other 30.3 44.4 62.3 76.8
--------------------------------------------------------------------------
$ 719.7 $ 772.2 $ 1,406.7 $ 1,460.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Sales distribution is based on the location of product delivery by the Company.
17. Contingency
On January 18, 2011 the United States requested arbitration with Canada under
the Softwood Lumber Agreement ("SLA") over its concern that the province of
British Columbia ("B.C.") is charging too low a price for certain timber
harvested on public lands in the B.C. interior.
The Company believes that Canada and B.C. are complying with their obligations
under the SLA and intends to cooperate fully with the B.C. and Canadian
governments in defending this claim. The results of the arbitration process are
not determinable at this point in time and accordingly no provision has been
recorded by the Company.
West Fraser Timber Co. Ltd.
Appendix A to Condensed Consolidated Interim Financial Statements
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 June 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
June 30, opera- opera- Earn- opera- gain earn-
2010 Notes tions tions ings tions (loss) ings
--------------------------------------------------------------------------
Earnings
reported
under CGAAP $ 62.5 $ 0.8 $ 63.3 $ 14.3 $ - $ 77.6
Earnings
adjustment
PPE(1)
amortization 2 3.3 - 3.3 (4.3) - (1.0)
Employee
future
benefits 3 1.0 - 1.0 - (80.3) (79.3)
Decommissioning
obligations 4 (1.5) (1.3) (2.8) - - (2.8)
Share option
expense 5 2.2 - 2.2 - - 2.2
Deferred tax
on above
items 7 (0.5) 0.2 (0.3) - 22.9 22.6
--------------------------------------------------------------------------
Earnings
adjustment 4.5 (1.1) 3.4 (4.3) (57.4) (58.3)
--------------------------------------------------------------------------
Earnings
reported
under IFRS $ 67.0 $ (0.3) $ 66.7 $ 10.0 $ (57.4) $ 19.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earn-
ings Loss Trans-
from from lation
For the contin- discon- of Actua- Compre-
six months uing tinued foreign rial hensive
June 30, opera- opera- Earn- opera- gain earn-
2010 Notes tions tions ings tions (loss) ings
--------------------------------------------------------------------------
Earnings
reported
under CGAAP $ 96.8 $ (14.1) $ 82.7 $ 5.0 $ - $ 87.7
Earnings
adjustment
PPE(1)
amortization 2 6.9 - 6.9 (1.9) - 5.0
Employee
future
benefits 3 1.8 1.6 3.4 0.1 (60.3) (56.8)
Decommissioning
obligations 4 (2.3) (0.9) (3.2) - - (3.2)
Share option
expense 5 2.7 - 2.7 - - 2.7
Restructuring
charges 6 - 6.0 6.0 - - 6.0
Deferred tax
on above
items 7 (0.9) (2.0) (2.9) - 17.2 14.3
--------------------------------------------------------------------------
Earnings
adjustment 8.2 4.7 12.9 (1.8) (43.1) (32.0)
--------------------------------------------------------------------------
Earnings
reported
under IFRS $ 105.0 $ (9.4) $ 95.6 $ 3.2 $ (43.1) $ 55.7
--------------------------------------------------------------------------
--------------------------------------------------------------------------
1. PPE - property, plant and equipment
Shareholders' Equity Adjustment on adoption of IFRS
As at
June 30,
Notes 2010
--------------------------------------------------------------------------
Equity reported under CGAAP $ 1,703.6
Retained earnings adjustment
Transition Date retained earnings adjustment 1 (195.2)
Q1 2010 retained earnings adjustment 1 23.8
Q2 2010 employee future benefits - actuarial
loss (net of tax) 3 (57.4)
Q2 2010 earnings adjustments (see above) 3.4
--------------------------------------------------------------------------
Retained earnings adjustment (225.4)
Cumulative translation adjustment (first
half of 2010) 8 (1.8)
--------------------------------------------------------------------------
Equity reported under IFRS $ 1,476.4
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 March 31, 2010 and 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. This report can be found on the
Company's website at www.westfraser.com and on the System for Electronic
Document Analysis and Retrieval at www.sedar.com under the Company's profile.
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
being charged through Transition Date retained earnings. Depreciation expense
under IFRS was reduced by $3.3 million for the three months ended June 30, 2010
and $6.9 million for the six months ended June 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 31st measurement date, while IFRS
requires a December 31st measurement date.
iii. The Company has chosen to adjust actuarial gains and losses after the
Transition Date to retained earnings via comprehensive earnings. Under CGAAP
these amounts are deferred and amortized over the average remaining service
period of the affected employees within certain limits.
The differences in methodology resulted in a reduction of deferred pension costs
of $106.3 million and an increase in post retirement obligations of $0.5 million
on the Transition Date. Under IFRS, employee future benefit expense was reduced
by $1.0 million for the three months ended June 30, 2010 and by $3.4 million for
the six months ended June 30, 2010. A charge of $57.4 million (net of tax of
$22.9 million) for the three months ended June 30, 2010 and $43.1 million (net
of tax of $17.2 million) for the six months ended June 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 $2.8 million for the three months
ended June 30, 2010 and $3.2 million for the six months ended June 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 decreased by $2.2
million for the three months ended June 30, 2010 and by $2.7 million for the six
months ended June 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 six months ended June 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 June 30,
2010 was $0.3 million and for the six months ended June 30, 2010 was $2.9
million.
8. Cumulative translation adjustment
The Company elected to set the cumulative translation balance, which was
included in accumulated other comprehensive earnings, to zero at January 1, 2010
by absorbing the $59.8 million into opening retained earnings. The foreign
currency translation of IFRS adjustments to the Company's U.S. operations
decreased the cumulative translation gain by $4.3 million for the three months
ended June 30, 2010 and $1.8 million for the six months ended June 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.
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