VANCOUVER, April 25, 2019 /CNW/ - First Quarter Highlights

• Sales of $1.2 billion
• Adjusted EBITDA¹ of $110 million or 9% of sales
• Curtailed 125 million board feet of B.C. production in the quarter
• Permanently reduced B.C. production by 300 million board feet on an annual basis
• Reinvested $108 million through capital expenditure and returned $64 million to shareholders through share buybacks and dividends
• Net debt to capital ratio of 27% and available liquidity of $208 million
• Additional $100 million operating credit facility made available on April 24, 2019

Results Compared to Previous Periods

Highlights

Our lumber segment generated operating earnings of $2 million (Q4-18 - $22 million loss) and Adjusted EBITDA of $84 million (Q4-18 - $68 million). The current quarter's results were negatively impacted by lower SPF and SYP production and a decline in SPF market demand compared to the previous quarter. SPF production for the quarter was affected by the previously announced temporary curtailments at our Williams Lake, Chasm, 100 Mile and Chetwynd sawmills and the permanent curtailment of the third-shift at our Quesnel and Fraser Lake sawmills resulting in 125 MMfbm of lower production (Q4-18 - 25 MMfbm lower from temporary curtailments). Despite this, operating earnings were higher in the current quarter due in part to improved SPF pricing and higher SYP shipments. Lastly, the impact on earnings of log and lumber inventory write-downs to market value was nil in the current quarter compared to $17 million in the fourth quarter of 2018.  

Our panels segment generated operating earnings in the quarter of $11 million (Q4-18 - $4 million) and Adjusted EBITDA of $15 million (Q4-18 - $9 million). Improved plywood pricing was the major contributor to the improved results.

Our pulp & paper segment generated operating earnings of $1 million (Q4-18 - $36 million) and Adjusted EBITDA of $11 million (Q4-18 - $47 million). This quarter, our Hinton pulp mill experienced planned and unplanned shutdowns which resulted in 22,000 tonnes of lost production compared to the previous quarter. This gave rise to higher manufacturing costs which when accompanied with lower pulp pricing resulted in lower operating earnings compared to the previous quarter. This was partially offset by lower fibre costs, higher BCTMP shipment volumes and lower manufacturing costs at our Quesnel River pulp mill following their planned shutdowns in the fourth quarter of 2018.

We ended the quarter with $208 million of available liquidity and remain well within our leverage parameters. Subsequent to quarter end, we secured a new $100 million of demand operating credit facility as well as an additional $20 million on our letter of credit facility.

Outlook

Several of the fundamental factors for U.S. housing demand including mortgage rates and applications, housing permits, as well as employment and job gains have been showing positive signs early in 2019. As of yet, this has not translated into an increase in demand for lumber which we believe has been negatively impacted by persistently wet weather across major construction markets in the U.S. In the second quarter, normal spring logging curtailments will significantly reduce log inventories at our Canadian lumber and panel mills which will be an additional source of liquidity.

We have an upcoming maintenance shut down in May at our jointly owned NBSK mill in Quesnel.

Fibre costs in British Columbia ("B.C.") remain challenging due to a tight market for purchase wood which will impact quota wood in the second half of 2019. We are expecting a moderation of fibre costs in the U.S. South provided weather conditions normalize more in line with past trends.

The B.C. government has launched a number of policy measures that will affect the B.C. forest sector. The government has: (1) commenced a consultation process on a draft agreement called the Caribou Protection Plan which the province estimates may remove at least 300,000 m³ from the timber supply in the northeast of B.C.; (2) introduced Bill 22, Forest Amendment Act, 2019, which if passed into law will make it harder to dispose of or transfer a tenure agreement to a third party; and (3) initiated the Interior Revitalization process which is meant to encourage collaborative forest planning activities and update land-use planning and usage. We are still assessing the impact these changes may have on our operations.

The Company

West Fraser is a diversified wood products company producing lumber, LVL, MDF, plywood, pulp, newsprint, wood chips and energy with facilities in western Canada and the southern United States.

Forward‑Looking Statements

This Report contains historical information, descriptions of current circumstances and statements about potential future developments. The latter, which are forward-looking statements, are presented to provide reasonable guidance to the reader but their accuracy depends on a number of assumptions and is subject to various risks and uncertainties. Actual outcomes and results will depend on a number of factors that could affect the ability of the Company to execute its business plans, including those matters described in the 2018 annual Management's Discussion & Analysis under "Risks and Uncertainties", and may differ materially from those anticipated or projected.  Accordingly, readers should exercise caution in relying upon forward-looking statements and the Company undertakes no obligation to publicly revise them to reflect subsequent events or circumstances, except as required by applicable securities laws.

Conference Call

Investors are invited to listen to the quarterly conference call on Friday, April 26, 2019 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time) by dialing 1-888-390-0546 (toll-free North America). The call and an earnings presentation may also be accessed through West Fraser's website at www.westfraser.com.

West Fraser shares trade on the Toronto Stock Exchange under the symbol: "WFT".

West Fraser Timber Co. Ltd.
Notes to Condensed Consolidated Interim Financial Statements
(figures are in millions of dollars, except where indicated - unaudited)

1. Nature of operations

West Fraser Timber Co. Ltd. ("West Fraser", "we", "us" or "our") is a diversified wood products company producing lumber, LVL, MDF, plywood, pulp, newsprint, wood chips and energy with facilities in western Canada and the southern United States. Our executive office is located at 858 Beatty Street, Suite 501, Vancouver, British Columbia.  West Fraser was formed by articles of amalgamation under the Business Corporations Act (British Columbia) and is registered in British Columbia, Canada. Our Common shares are listed for trading on the Toronto Stock Exchange under the symbol WFT.

2. Basis of presentation and statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting as issued by the International Accounting Standards Board and use the same accounting policies and methods of their application as the December 31, 2018 annual audited consolidated financial statements. These condensed consolidated interim financial statements should be read in conjunction with our 2018 annual audited consolidated financial statements.

3. Changes in accounting standards

IFRS 16 – Leases

We have adopted IFRS 16 effective January 1, 2019 using the modified retrospective approach, accordingly the information presented for 2018 has not been restated. The new standard replaces IAS 17 - Leases and the related interpretations. IFRS 16 provides a single lessee accounting model and requires lessees to recognize assets and liabilities for all major leases.

On initial application, we elected to record right-of-use assets equal to the corresponding present value of the remaining lease liability. Right-of-use assets and lease obligations of $14 million were recorded as of January 1, 2019 for leases related to some of our office spaces and mobile equipment.      

When measuring lease liabilities, we discounted lease payments using our incremental borrowing rate at January 1, 2019. The weighted-average rate applied is 4.19%.

We elected to apply practical expedients, including recognition exemptions for short-term and low value leases.  

During the three months ended March 31, 2019, we recorded a $1 million amortization expense on the right-of-use assets and we made a $1 million payment on the lease obligations.

4. Seasonality of operations

Our operating results are subject to seasonal fluctuations that impact quarter-to-quarter operating results. Log availability has a direct impact on our operations. We build up log inventory in Canada during the winter to sustain our lumber and plywood production during the second quarter when logging is curtailed due to wet land conditions. Extreme weather conditions, wildfires in Western Canada and hurricanes in the U.S. South may periodically affect operations including logging, manufacturing and transportation. Consequently, interim operating results do not proportionately reflect operating results for a full year.

5.  Inventories

Inventories at March 31, 2019 were written down by $30 million (December 31, 2018 - $30 million; March 31, 2018 - $7 million) to reflect net realizable value being lower than cost.

6. Operating loans and long-term debt

Operating loans

Our revolving lines of credit consist of a $500 million committed revolving credit facility which matures August 25, 2022, a $33 million (US$25 million) demand line of credit dedicated to our U.S. operations and an $8 million demand line of credit dedicated to our jointly owned newsprint operation. In addition, we have demand lines of credit totalling $70 million dedicated to letters of credit, of which US$15 million is dedicated to our U.S. operations.

At March 31, 2019, $327 million (net of deferred financing costs of $2 million) was drawn under our revolving credit facility. Letters of credit in the amount of $61 million were also supported by our facilities.

Subsequent to the quarter end, we established a new $100 million uncommitted operating credit facility dedicated to our Canadian operations. We also expanded our letters of credit facility by an additional $20 million.

Interest on the facilities is payable at floating rates based on Prime, Base Rate Advances, Bankers' Acceptances or LIBOR Advances at our option.

All debt is unsecured except the $8 million joint operation demand line of credit, which is secured by that joint operation's current assets.

Long-term debt

On March 15, 2019, we entered into an interest rate swap agreement, maturing in August 2022, with a US$100 million notional amount to limit our exposure to fluctuations in interest rates and fix interest rates on a portion of our long-term debt. Under this agreement, we pay a fixed interest rate of 2.47% and receive a floating interest rate equal to 3-month LIBOR. The agreement is accounted for as a derivative. The gain or losses related to changes in the fair value are included in other income on our consolidated statements of earnings. In the quarter, a $1 million loss associated with the agreement was recorded in other income.

The fair value of the long-term debt at March 31, 2019 was $686 million (December 31, 2018 - $689 million) based on rates available to us at the balance sheet date for long-term debt with similar terms and remaining maturities.

7. Other liabilities

8. Post-retirement benefits

We maintain defined benefit and defined contribution pension plans covering a majority of our employees. The defined benefit plans generally do not require employee contributions and provide a guaranteed level of pension payable for life based either on length of service or on earnings and length of service, and in most cases do not increase after commencement of retirement. We also provide group life insurance, medical and extended health benefits to certain employee groups.

The status of the defined benefit pension plans and other retirement benefit plans, in aggregate, is as follows:

The significant actuarial assumptions used to determine our balance sheet date post-retirement assets and liabilities are as follows:

For the three months ended March 31, 2019, we recognized in other comprehensive earnings a $49 million loss (before tax) to reflect the changes in the valuation of the post-retirement benefit plans. The loss reflects the decrease in the discount rate used to calculate plan liabilities from the beginning of the year, partially offset by the return on plan assets. The actuarial loss on post-retirement benefits, included in other comprehensive earnings, is as follows:

9. Share Capital

During the quarter, we repurchased 718,500 Common shares under our normal course issuer bid at an average price of $70.75 per share for a cost of approximately $50 million.

10. Other

11. Tax provision

The tax provision differs from the amount that would have resulted from applying the British Columbia statutory income tax rate to earnings before tax as follows:

12. 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.

13. Segmented information

The geographic distribution of external sales is as follows¹:

14. Countervailing ("CVD") and antidumping ("ADD") duty dispute

In November 2016, a coalition of U.S. lumber producers filed a CVD/ADD petition against Canadian softwood lumber producers who import lumber into the United States. The petition alleged that Canadian lumber producers are subsidized. CVD and ADD duties have been imposed against Canadian softwood lumber imports beginning in 2017. See Note 27 "Countervailing ("CVD") and antidumping ("ADD") duty dispute" of our 2018 audited annual consolidated financial statements.

During the three months ended March 31, 2019, our lumber segment posted cash deposits for CVD at a 17.99% rate and for ADD at a 5.57% rate. Starting January 1, 2019, we moved into a new period of review that ends December 31, 2019. Our estimate of the ADD rate for the 2019 review period, using our actual sales and cost data and the same calculation methodology as the U.S. Department of Commerce ("USDOC"), is 2.03% which is lower than the ADD deposit rate of 5.57%.  

For the lumber segment, during the three months ended March 31, 2019 we incurred duty deposits of $28 million related to CVD (March 31, 2018 - $34 million) and $9 million related to ADD (March 31, 2018 - $11 million) which were recorded as follows:

Export duty deposits receivable included on our consolidated balance sheets is as follows:

As at March 31, 2019, export duties paid and payable on deposit with the USDOC are US$201 million for CVD and US$75 million for ADD for a total of US$276 million.

The duty rates are subject to change based on administrative reviews and appeals available to us.  In addition, we will update our ADD rate at each reporting date considering our actual results for each period of review. Changes to estimated rates may be material and any changes will be reflected through earnings in the period of the change. Notwithstanding the deposit rates assigned under the investigations, our final liability for the assessment of CVD and ADD will not be determined until each annual administrative review process is complete and related appeal processes are concluded.

SOURCE West Fraser Timber Co. Ltd.

View original content: http://www.newswire.ca/en/releases/archive/April2019/25/c2684.html