VANCOUVER, Oct. 21, 2019 /CNW/ - West Fraser Timber Co. Ltd. reports third quarter 2019 results:

Third Quarter Highlights

• Completed closure of Chasm, British Columbia ("B.C.") lumber facility sawmill and completed the shipment of all site inventories. 
• Implemented variable production schedule at remaining British Columbia lumber mills.
• U.S. South lumber production improved by 7% over second quarter.
• NBSK production up 14% over prior quarter.  
• Cash flow from operations of $116 million for the quarter.
• Lumber shipments exceed production by 179 million board feet year to date.
• Quarter ending net debt to capital ratio of 28% and available liquidity of $580 million.

Results Compared to Previous Periods

Recent Developments

In the third quarter we completed the permanent closure of our Chasm, B.C. lumber facility and the elimination of the third production shift at our 100 Mile House, B.C. facility. We also implemented a variable production schedule at our remaining B.C. mills given the difficult lumber market conditions and persistently high purchase log costs.

Operational Results

Lumber production was down 3% over the second quarter as the Chasm closure, 100 Mile House shift reduction and variable operating schedules in B.C. were partially offset by increased production at our U.S. South mills.  Reduced schedules and downtime in Alberta from temporary weather‑related log shortages were also a factor in reduced SPF production.  Lumber shipments exceeded production by approximately 48 MMfbm in the quarter due primarily to the Chasm closure and 100 Mile House shift reduction. Adjusted EBITDA for the lumber segment was $39 million, consistent with the previous quarter. For the year lumber shipments have exceeded production by 179 million board feet as inventories are aligned to shift reductions and mill closures.

Although plywood production and shipments were slightly off the prior quarter, panels segment Adjusted EBITDA increased to $13 million from $10 million in the prior quarter.

NBSK production was 14% higher than the prior quarter as we recovered from our major maintenance shut downs at both our NBSK mills that occurred in the first half of the year.  In spite of higher NBSK shipments, softer pulp pricing reduced Adjusted EBITDA for the pulp and paper segment to $3 million from $7 million for the quarter.

We generated cash flow from operations of $116 million in the quarter and net debt increased only modestly by $41 million all while maintaining significant available liquidity of $580 million.  Capital investment in the quarter was $133 million, most of which was committed to the modernization of our U.S. South operating platform.  

Outlook

Ray Ferris, CEO of West Fraser stated, "Despite difficult forest product markets over the past several quarters, we remain committed to executing our strategy.  We have taken significant action to right size our B.C. lumber operations over the past year.  We have also completed a number of long lead time capital projects in the U.S. South over the last two quarters.  We are beginning to see the benefits of these investments and remain convinced of additional potential in our U.S. South operations.  The combination of grade and recovery improvements, reduced operating costs, increased uptime and improvements to working conditions will have a long-term impact on our returns."

Management's Discussion & Analysis ("MD&A")

The Company's MD&A is available on the Company's website:  www.westfraser.com and on the System for Electronic Document Analysis and Retrieval at www.sedar.com under the Company's profile.

The Company

West Fraser is a diversified wood products company producing lumber, LVL, MDF, plywood, pulp, newsprint, wood chips, other residuals 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.  Forward-looking statements are included under the heading "Recent Developments" and "Outlook".  Actual outcomes and results will depend on a number of factors that could affect the ability of the Company to execute its business plans, including those matters described in the 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 Tuesday, October 22, 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, other residuals 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.      

During the nine months ended September 30, 2019, we recorded a $3 million amortization expense on the right-of-use assets and we made a $2 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 may not proportionately reflect operating results for a full year.

5. Inventories

Inventories at September 30, 2019 were written down by $46 million (June 30, 2019 - $47 million; December 31, 2018 - $30 million; September 30, 2018 - $14 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 $850 million committed revolving credit facility which matures August 2024, 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 $90 million dedicated to letters of credit, of which US$15 million is dedicated to our U.S. operations.

At September 30, 2019, $312 million (net of deferred financing costs of $3 million) was drawn under our revolving credit facility.  Letters of credit in the amount of $62 million were also supported by our facilities.

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 a US$100 million floating to fixed interest rate swap agreement.  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.  For the nine months ended September 30, 2019, a $4 million loss associated with the agreement was recorded in other income.

The fair value of the long-term debt at September 30, 2019 was $688 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.

On June 17, 2019, we announced our intention to permanently close our Chasm, British Columbia lumber mill.  This resulted in the curtailment of the defined benefit pension plan for the Chasm hourly employees.  Included in restructuring and impairment charges is a $4 million curtailment gain related to the reduction in the post-retirement obligation.

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 nine months ended September 30, 2019, we recognized in other comprehensive earnings a $82 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 gain (loss) on post-retirement benefits, included in other comprehensive earnings, is as follows:

9. Share Capital

On September 17, 2019 our Board of Directors authorized the renewal of our normal course issuer bid ("NCIB") program to repurchase for cancellation up to 3,318,823 Common shares, representing approximately 5% of the issued and outstanding Common shares.  The NCIB will expire on September 19, 2020.  Our previous NCIB expired on September 18, 2019.

During the nine months ended September 30, 2019, we repurchased 1,178,400 Common shares under our normal course issuer bid at an average price of $68.30 per share for a cost of approximately $81 million.

10. Restructuring and impairment charges

On June 17, 2019, we announced the permanent closure of our Chasm, British Columbia lumber mill.  During the nine months ended September 30, 2019, we recognized charges of $25 million for the restructuring and impairment costs as follows:

A reconciliation of restructuring charges included in payables and accrued liabilities is as follows:

11. Other

12. 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:

13. 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.

14. Segmented information

The geographic distribution of external sales is as follows¹:

15. 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 annual audited consolidated financial statements.

During the nine months ended September 30, 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 USDOC, is 5.05% which is lower than the ADD deposit rate of 5.57%.  

For the lumber segment, during the nine months ended September 30, 2019, we incurred duty deposits of $99 million related to CVD (September 30, 2018 - $145 million) and $30 million related to ADD (September 30, 2018 - $46 million) which were recorded as follows:

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

As at September 30, 2019, export duties paid and payable on deposit with the USDOC are US$253 million for CVD and US$91 million for ADD for a total of US$344 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.

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