west fraser · 4/24/2017 · our pulp & paper segment generated operating earnings of $31...
TRANSCRIPT
WEST FRASER1st Quarter 2017For the period January 1 to March 31, 2017
First Quarter Highlights
• Sales improved by 7% compared to the previous quarter.
• Earnings up 56% from previous quarter.
• Improved product pricing across operating segments.
• Strong operating metrics despite some weather-related challenges.
• Quarter ending net debt to capital ratio of 16%.
Results Compared to Previous Periods
($ millions except earnings per share (“EPS”)) Q1-17 Q4-16 Q1-16
Sales 1,189 1,107 1,077
Adjusted EBITDA1 245 193 130
Operating earnings 183 127 79
Earnings 123 79 42
Basic EPS ($) 1.58 1.01 0.51
Adjusted earnings1 134 101 49
Adjusted basic EPS ($)1 1.71 1.28 0.60
1. In this Report, reference is made to Adjusted EBITDA, Adjusted earnings and Adjusted basic EPS (collectively “these measures”). We believe that, in addition to earnings, these measures are useful performance indicators. None of these measures is a generally accepted earnings measure under International Financial Reporting Standards (“IFRS”) and none has a standardized meaning prescribed by IFRS. Investors are cautioned that these measures should not be considered as an alternative to earnings, EPS or cash flow, as determined in accordance with IFRS. As there is no standardized method of calculating any of these measures, our method of calculating each of them may differ from the methods used by other entities and, accordingly, our use of any of these measures may not be directly comparable to similarly titled measures used by other entities. Refer to the tables in the section titled “Non-IFRS Measures” in our first quarter 2017 Management’s Discussion & Analysis for details of these adjustments.
Operational Results
Our lumber segment generated operating earnings of $152 million (Q4-16 – $107 million) and Adjusted EBITDA of $191 million (Q4-16 –
$144 million). Improved product pricing was the primary driver of improved results. SPF shipments were lower than production due in part
to weather-related transportation delays.
Our panels segment, which includes plywood, LVL and MDF, generated operating earnings in the quarter of $12 million (Q4-16 – $17 million)
and Adjusted EBITDA of $15 million (Q4-16 – $20 million). Improved product pricing was offset by increased costs associated with our
WestPine MDF plant restart.
Our pulp & paper segment generated operating earnings of $31 million (Q4-16 – $20 million) and Adjusted EBITDA of $40 million (Q4-16 –
$30 million). Higher pulp prices, higher BCTMP shipments and lower NBSK production costs were the primary drivers of improved results.
Both Hinton Pulp and Slave Lake Pulp set quarterly production records.
Outlook
We will continue to focus on operational improvements which, together with warmer weather in Canada, should contribute to improved lumber
production and shipments. Our two NBSK pulp mills will undergo major scheduled maintenance during the balance of 2017 which will reduce
normal NBSK pulp production by approximately 25,000 tonnes. Our WestPine MDF mill is expected to gradually work through start-up issues over
the balance of the year but we do not expect to achieve targeted production levels until late in 2017.
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Report to Shareholders
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The most challenging immediate issue facing the Company is the current softwood lumber dispute. We are expecting the U.S. Department of
Commerce to announce preliminary countervail duty rates very shortly, to be implemented in May 2017, and potentially to be applied retroactively over
a 90-day period. West Fraser will receive its own duty rate. Anti-dumping duty rates are expected to be announced in late June and implemented
in July 2017 and could potentially be applied retroactively over a 90-day period. Ted Seraphim, our President and CEO, said: “It is regrettable that
our American neighbours have chosen to renew this long-standing dispute which creates so much uncertainty for lumber market participants and
threatens to undermine some of the tremendous work our two countries have undertaken to grow the markets for North American lumber. However,
we are fully cooperating with the U.S. investigation as we continue to believe that the allegations of subsidy and dumping are groundless.”
Mr. Seraphim also added: “I want to thank all of our employees for their tremendous effort and dedication to continuously improving our safety
awareness and at the same time focusing on achieving operational excellence. Our focus is not on any one quarter but on long-term results and we
are certainly making progress towards achieving our goals.”
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 and are included under the heading “Outlook”, 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 2016 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.
On behalf of the Board of Directors,
Ted Seraphim
President and Chief Executive Officer
April 24, 2017
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Introduction and InterpretationThis discussion and analysis by West Fraser’s management (“MD&A”) of the Company’s financial performance during the first quarter of 2017
should be read in conjunction with the unaudited condensed consolidated interim financial statements and accompanying notes (“Financial
Statements”) included in this quarterly report and the 2016 annual MD&A included in the Company’s 2016 Annual Report. Dollar amounts are
expressed in Canadian currency, unless otherwise indicated.
The financial information contained in this MD&A has been prepared in accordance with International Financial Reporting Standards (“IFRS”) except
as otherwise disclosed.
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 are subject to various risks and uncertainties. Forward-looking statements are included under
the headings “Business Outlook” and “Operating Activities” (concerning reduction of inventories). Actual outcomes and results of these statements
will depend on a number of factors including those matters described under “Risks and Uncertainties” in the 2016 annual MD&A, and may differ
materially from those anticipated or projected. Accordingly, readers should exercise caution in relying upon forward-looking statements and we
undertake no obligation to publicly revise them to reflect subsequent events or circumstances except as required by applicable securities laws.
Throughout this MD&A reference is made to Adjusted EBITDA, Adjusted earnings and Adjusted basic earnings per share and net debt to total capital
ratio (collectively “these measures”), calculated as shown under the heading “Non-IFRS Measures” in this report. We believe that, in addition to
earnings, these measures are useful performance indicators. None of these measures is a generally accepted earnings measure under IFRS and
none has a standardized meaning prescribed by IFRS. Investors are cautioned that these measures should not be considered as an alternative to
earnings, earnings per share or cash flow, as determined in accordance with IFRS. As there is no standardized method of calculating any of these
measures, our method of calculating each of them may differ from the methods used by other entities and, accordingly, our use of any of these
measures may not be directly comparable to similarly titled measures used by other entities.
This MD&A uses the following terms that are defined in the Company’s 2016 Annual Report: “SPF” (spruce-pine-fir lumber), “SYP” (southern yellow
pine lumber), “MDF” (medium density fibreboard), “LVL” (laminated veneer lumber), “BCTMP” (bleached chemithermomechanical pulp) and “NBSK”
(northern bleached softwood kraft pulp).
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 April 24, 2017 unless otherwise indicated.
Summary Information
($millions except as otherwise indicated) Q1-17 Q4-16 Q1-16
Sales 1,189 1,107 1,077
Adjusted EBITDA 245 193 130
Equity-based compensation (11 ) (16 ) (2 )
Amortization (51 ) (50 ) (49 )
Operating earnings 183 127 79
Finance expense (7 ) (7 ) (8 )
Other — (1 ) (16 )
Tax provision (53 ) (40 ) (13 )
Earnings 123 79 42
CAD$1.00 converted to US$ – average 0.756 0.749 0.729
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Management’s Discussion & Analysis
Selected Quarterly Information
($millions, except earnings per share (“EPS”) amounts which are in $)
Q1-17 Q4-16 Q3-16 Q2-16 Q1-16 Q4-15 Q3-15 Q2-15
Sales 1,189 1,107 1,155 1,111 1,077 1,013 1,044 1,029
Earnings 123 79 107 98 42 (15 ) 56 14
Basic EPS 1.58 1.01 1.35 1.22 0.51 (0.18 ) 0.67 0.17
Diluted EPS 1.58 1.01 1.35 0.86 0.50 (0.18 ) 0.05 0.17
Adjusted Earnings and Adjusted Basic Earnings Per Share($millions except EPS amounts which are in $) Q1-17 Q4-16 Q1-16
Earnings 123 79 42
Add:
Equity-based compensation 11 16 2
Exchange (gain) loss on long-term financing (1 ) 4 (9 )
Loss on power agreements — 8 19
Insurance gain on disposal of equipment — (3 ) —
Net tax effect on the above adjustments 1 (3 ) (5 )
Adjusted earnings 134 101 49
Adjusted basic EPS1 1.71 1.28 0.60
1. Adjusted basic EPS is calculated by dividing Adjusted earnings by the basic weighted average shares outstanding.
Discussion & Analysis of Non-Operational ItemsEarnings in the current quarter improved by 56% compared to the previous quarter and were significantly higher than in the first quarter of 2016.
For a description of operational results see “Discussion & Analysis by Product Segment” which follows this section. Our results include several
non-operational items which are identified as adjustments in the table above this section and shown under the heading “Non-IFRS Measures” in
this MD&A. After taking into account these adjustments, our Adjusted earnings improved by 33% compared to the previous quarter and by 173%
compared to the first quarter of 2016.
Our equity-based compensation includes our share purchase option, phantom share unit, and directors’ deferred share unit plans (the “Plans”),
all of which have been partially hedged by an equity derivative contract. The Plans are fair valued at each balance sheet date and the resulting
expense or recovery is recorded over the related vesting period. Our fair valuation models consider various factors related to the Plans with the most
significant being the change in the market value of our shares from the beginning to the end of the particular period. In the fourth quarter of 2016,
we entered into an equity derivative contract that had the effect of hedging 1,000,000 equity-based securities at a share price of $46.02. The hedge
is marked-to-market at each balance sheet date and the resulting gain or loss is included in equity-based compensation. The Adjusted earnings table
above includes an equity-based compensation expense of $11 million in the current quarter compared to $16 million in the previous quarter and $2
million in the first quarter of 2016. The expense or recovery does not necessarily represent the actual value which will ultimately be received by the
holders of share purchase options and units.
Any change in the value of the Canadian dollar relative to the value of the U.S. dollar results in the revaluation of our U.S. dollar-denominated assets
and liabilities. The result of these revaluations is included in other income. The Canadian dollar was stronger against the U.S. dollar at the end of the
current quarter compared to the previous quarter resulting in a foreign exchange gain of $1 million on long-term financing and a $1 million loss on
working capital (Q4-16 – $4 million loss and $4 million gain; Q1-16 – $9 million gain and $10 million loss, respectively).
In March 2016 we negotiated the termination of our three-year power strip and began the process of terminating our Power Purchase Agreement.
These agreements had provided us with a portion of the electricity generated from two power plants in Alberta at substantially predetermined prices.
We recorded a loss related to the power agreements of $19 million in the first quarter of 2016 and $8 million in the fourth quarter of 2016.
Our WestPine MDF facility experienced a fire during the first quarter of 2016 resulting in production being suspended while the mill was repaired.
The fourth quarter gain on disposal of $3 million from insurance proceeds is included in Adjusted earnings in the table above.
The results of the current quarter include a provision for income tax of $53 million compared to $40 million in the previous quarter and to $13 million
for the first quarter of 2016. The effective tax rate was 30% in the current quarter compared to 34% in the previous quarter and 24% in the first
quarter of 2016. Note 9 to the Financial Statements provides a reconciliation of income taxes calculated at the statutory rate to the income tax expense.
The funded position of our defined benefit pension plans and other retirement benefit plans is estimated at the end of each quarter. The funded
position, as shown in Note 6 of the Financial Statements, is determined by subtracting the value of plan assets from the value of plan obligations.
The rate of return on assets was higher than the discount rate which resulted in an after-tax actuarial gain of $11 million. This amount is included
in other comprehensive earnings.
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DISCUSSION & ANALYSIS BY PRODUCT SEGMENTLumber Segment
Q1-17 Q4-16 Q1-16
SPF (MMfbm)
Production 971 897 963
Shipments 905 944 952
SYP (MMfbm)
Production 554 499 547
Shipments 515 489 529
Sales ($millions)
Lumber 722 680 645
Wood chips and other residuals 77 74 84
Logs and other 37 24 29
836 778 758
Adjusted EBITDA ($millions) 191 144 100
Amortization ($millions) (39 ) (37 ) (37 )
Operating earnings ($millions) 152 107 63
Adjusted EBITDA margin (%) 23 19 13
Benchmark prices (per Mfbm)
SPF #2 & Better 2 x 41 – US$ 348 315 271
SPF #3 Utility1 – US$ 288 261 208
SYP #2 West 2 x 42 – US$ 456 432 387
SPF #2 & Better 2 x 4 – CAD$3 461 420 372
SPF #3 Utility – CAD$3 381 348 285
SYP #2 West 2 x 4 – CAD$3 604 576 531
1. Source: Random Lengths – Net FOB mill.2. Source: Random Lengths – Net FOB mill Westside.3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price.
Operating earnings increased in the quarter compared to the previous quarter primarily due to improved pricing. Production was higher than the
previous quarter as fourth quarter production was negatively affected by cold weather and had fewer operating days than the current quarter.
Operating earnings were higher in the quarter compared to the first quarter of 2016 as lumber prices were higher. The increase was partially offset
by a stronger Canadian dollar and higher Canadian log costs. The primary reason for the increase in Canadian log costs is due to higher British
Columbia stumpage rates associated with the logging of live timber (greenwood) as we continue to transition away from beetle-killed timber.
SPF shipments were lower in the quarter compared to the previous quarter and the first quarter of 2016 due in part to adverse weather conditions
resulting in transportation delays.
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2017 Management’s Discussion & Analysis (continued)
Panels Segment Q1-17 Q4-16 Q1-16
Plywood (MMsf 3/8” basis)
Production 209 207 202
Shipments 206 207 197
MDF (MMsf 3/4” basis)
Production 33 35 52
Shipments 35 34 58
LVL (Mcf)
Production 674 584 570
Shipments 665 556 562
Sales ($millions)
Finished products 122 119 132
Wood chips and other residuals 4 4 4
Logs and other 2 1 2
128 124 138
Adjusted EBITDA ($millions) 15 20 15
Amortization ($millions) (3 ) (3 ) (3 )
Operating earnings ($millions) 12 17 12
Adjusted EBITDA margin (%) 12 16 11
Benchmark price
Plywood (per Msf 3/8” basis)1 – CAD$ 433 421 405
1. Source: Crow’s Market Report – Delivered Toronto.
Our panels segment is comprised of our plywood, MDF and LVL operations.
Operating earnings decreased in the quarter compared to the previous quarter. The impact of increased plywood prices was offset by increased
costs as there was lower business interruption insurance recorded related to our WestPine MDF plant, which is currently in the start-up phase.
Operating earnings were unchanged compared to the first quarter of 2016 as increased plywood prices were offset by lower LVL and MDF prices.
In addition, results were affected by our WestPine MDF plant which was operating in the first quarter of 2016 until March 9, 2016.
Although we continue to operate our LVL mill on a curtailed basis, we have increased production during the quarter in response to improving
demand. LVL is primarily used in new single family homes.
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Pulp & Paper Segment Q1-17 Q4-16 Q1-16
BCTMP (Mtonnes)
Production 169 172 163
Shipments 186 149 168
NBSK (Mtonnes)
Production 139 133 126
Shipments 138 139 118
Newsprint (Mtonnes)
Production 31 33 33
Shipments 31 32 34
Sales ($millions) 253 231 212
Adjusted EBITDA ($millions) 40 30 14
Amortization ($millions) (9 ) (10 ) (9 )
Operating earnings ($millions) 31 20 5
Adjusted EBITDA margin (%) 16 13 7
Benchmark price (per tonne)
NBSK U.S. – US$1,3 1,033 992 943
NBSK China – US$2,3 645 595 590
Newsprint – US$4 575 575 538
NBSK U.S. - CAD$5 1,367 1,324 1,294
NBSK China – CAD$5 854 794 810
Newsprint – CAD$5 761 767 738
1. Source: Resource Information Systems, Inc. – U.S. list price delivered U.S.2. Source: Resource Information Systems, Inc. – China list price delivered China3. The differences between the U.S. and China NBSK list prices are largely attributable to the customary sales practice of applying material discounts from the U.S. list price for North American sales compared to relatively small discounts from the China list price for sales into China.4. Source: Resource Information Systems, Inc. – delivered 48.8 gram newsprint.5. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price.
The pulp & paper segment is comprised of our NBSK, BCTMP and newsprint businesses.
Operating earnings increased in the current quarter compared to the previous quarter due primarily to increased pulp prices and BCTMP shipment
volumes. Transportation delays in the prior quarter resulted in some BCTMP shipments being carried over to the current quarter. NBSK conversion
costs improved in the current quarter as fourth quarter costs were negatively affected by higher chemical, natural gas, and maintenance costs.
Operating earnings increased in the quarter compared to the first quarter of 2016, due to improved pulp prices and production and shipment
volumes. Maintenance costs were higher in the first quarter of 2016, the result of a minor maintenance shutdown at our Hinton mill. The effect of
reduced newsprint production and shipments was partially offset by improved pricing.
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2017 Management’s Discussion & Analysis (continued)
BUSINESS OUTLOOK
Operations
Our lumber production in the first quarter of 2017 exceeded production in the same quarter of 2016 by 15 MMfbm. Severe winter weather in
Canada adversely affected production in the quarter although we continue to project that we will exceed 2016 annual lumber production in 2017
by approximately 250 MMfbm. Log costs are expected to continue to escalate in Canada for the balance of 2017. U.S. log costs are expected to
be relatively flat over the same period.
Our WestPine MDF plant is currently in the start-up phase and we expect it to reach targeted production levels by the end of 2017.
Our jointly-owned Cariboo pulp mill will undergo a 12-day scheduled maintenance shutdown in May which will reduce normal annual production by
approximately 6,000 tonnes. Our Hinton pulp mill will undergo a 16-day scheduled maintenance shutdown in September which will reduce normal
annual production by approximately 19,000 tonnes.
Markets
The ongoing softwood lumber investigations by the U.S. Department of Commerce and the threat of the imposition of duties, including retroactive
duties, on softwood lumber exports to the U.S. have exposed Canadian lumber producers to significant economic uncertainty and risk. The result
has been greater volatility and unpredictability in lumber markets, particularly the U.S. lumber market, as Canadian producers have attempted to
mitigate the uncertainty associated with duties that could be assessed on a retroactive basis and to sales of softwood lumber concluded before
such duties are announced. As preliminary duties are determined and announced and the issue of retroactive application is clarified we expect
the lumber markets to revert to more normal volatility. We also expect U.S. demand for softwood lumber to continue to improve as U.S. new home
construction gradually returns to normal levels. Unfortunately, there is a possibility that a significant disruption of the flow of lumber from Canada
to the U.S. could prove to be an impediment to U.S. housing recovery and the continued growth of the U.S. economy in general.
Cash Flows
We ended the quarter with a net debt to total capital ratio of 16% despite borrowings for our significant spring breakup Canadian log inventories.
We continue to project cash flows sufficient to support our $300 million capital investment plan for 2017 as well as to maintain our current dividend
and investment grade rating. We expect to be required to begin depositing cash on account of U.S.-imposed softwood lumber export duties in early
May and there is also the possibility that retroactive duties could be applied which creates greater uncertainty for our cash flows going forward. Our
strategy has been to ensure that we have a very strong financial position going into the current dispute in order that we not only have the ability to
withstand punitive (and unwarranted) duties but also to be able to take advantage of any growth opportunities that may arise. Our Normal Course
Issuer Bid remains in effect and we will continue to consider share repurchases if circumstances are supportive of such actions.
CAPITAL STRUCTURE AND LIQUIDITYOur capital structure consists of Common share equity and long-term debt. Our operating facilities include a $500 million committed revolving
credit facility, 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 $59 million dedicated to letters of credits of which
US$7 million is committed to our U.S. operations. These facilities are available to meet our funding requirements.
On March 31, 2017, $110 million was outstanding under our revolving credit facility. Letters of credit in the amount of $46 million were supported
by our facilities, leaving $444 million of credit available for further use.
The outstanding Common share equity consists of 75,884,525 Common shares and 2,281,478 Class B Common shares for a total of 78,166,003
shares issued and outstanding as at April 24, 2017.
We have a Normal Course Issuer Bid in effect which allows us to acquire up to 3,834,226 Common shares for cancellation until the expiry of the
Bid on September 18, 2017. There were no shares purchased under the Bid in the current quarter. In the fourth quarter of 2016 we repurchased
391,853 Common shares for cancellation at an average price of $50.70 under this Bid.
Each Class B Common share may be, at any time, exchanged for one Common share. The rights attached to the Common shares and Class B
Common shares are equal in all other respects, including the right to dividends and the right to vote. The Common shares are listed and traded on
the Toronto Stock Exchange under the symbol WFT while our Class B Common shares are not. Certain circumstances or corporate transactions
may require the approval of the holders of our Common shares and Class B Common shares on a separate class-by-class basis.
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As of April 24, 2017 there were 2,117,886 share purchase options outstanding with exercise prices ranging from $12.36 to $73.99 per
Common share.
Our cash requirements, other than for operating purposes, are primarily for interest payments, repayment of debt, additions to property, plant,
equipment and timber, acquisitions, pension funding and payment of dividends. In normal business cycles and in years without a major acquisition
or debt repayment, cash on hand and cash provided by operations have normally been sufficient to meet these requirements.
Summary of Financial Position($millions except as otherwise indicated) Q1-17 Q4-16 Q1-16
Cash1 86 50 19
Current assets 1,240 938 1,110
Current liabilities 612 459 738
Ratio of current assets to current liabilities 2.0 2.0 1.5
Net debt2 467 376 712
Shareholders’ equity 2,365 2,241 2,041
Net debt to total capital3 16% 14% 26%
1. Cash consists of cash and short-term investments. 2. Total debt less deferred financing costs less cash plus cheques issued in excess of funds on deposit.3. Non-IFRS measure. See “Non-IFRS Measures”.
Debt RatingsAs shown in the table below, we are rated by three leading rating agencies. All three ratings are considered investment grade.
Agency Rating Outlook Dominion Bond Rating Service BBB(low ) Stable
Moody’s Baa3 Stable
Standard & Poor’s BBB- Stable
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.
Selected Cash Flow Items($millions – cash provided by (used in)) Q1-17 Q4-16 Q1-16
Operating Activities
Earnings 123 79 42
Amortization 51 50 49
Loss on power agreements, net of settlement costs — — 11
Contributions to benefit plans, net of expense 5 (2 ) 5
Change in income tax 17 32 4
Change in inventories (161 ) (39 ) (96 )
Other (82 ) 62 (38 )
(47 ) 182 (23 )
Financing Activities
Debt and operating loans 110 (48 ) 116
Finance expense paid (1 ) (9 ) (1 )
Common share repurchases — (20 ) (50 )
Dividends and other (5 ) (6 ) (6 )
104 (83 ) 59
Investing Activities
Additions to capital assets (56 ) (91 ) (49 )
Other 1 1 4
(55 ) (90 ) (45 )
Increase (decrease) in cash 2 9 (9 )
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2017 Management’s Discussion & Analysis (continued)
Operating ActivitiesCash used in operating activities during the first quarter of each year generally increases as logging activity in Canada increases during the winter
season and log inventories are built to sustain production activities during the second quarter. Following a normal cycle, cash is generated during
the second quarter as logging is curtailed and the log inventory is consumed in operations.
Investing ActivitiesCash flows used for investing activities in the quarter amounted to $55 million. Additions to capital assets totalled $56 million and represented $36
million for the lumber segment, $12 million for the panels segment, $6 million for the pulp & paper segment and $2 million for our corporate segment.
NON-IFRS MEASURESThe following summarizes the non-IFRS measures we use in this MD&A. None of these measures is a generally accepted measure under IFRS and
none has a standardized meaning prescribed by IFRS. Investors are cautioned that none of these measures should be considered as an alternative
to earnings, earnings per share or cash flow, as determined in accordance with IFRS. As there is no standardized method of calculating any of
these measures, our method of calculating each of them may differ from the methods used by other entities and, accordingly, our use of any of
these measures may not be directly comparable to similarly titled measures used by other entities.
Adjusted EBITDA($millions) Q1-17 Q4-16 Q1-16
Earnings 123 79 42Add:
Amortization 51 50 49
Finance expense 7 7 8
Tax provision 53 40 13
EBITDA 234 176 112Add:
Equity-based compensation 11 16 2
Other — 1 16
Adjusted EBITDA 245 193 130
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Adjusted EBITDA by Segment($millions) Q1-17 Q4-16 Q1-16Lumber
Earnings before tax 148 104 53Add:
Amortization 39 37 37 Finance expense 4 5 5EBITDA 191 146 95Add: Other — (2 ) 5Adjusted EBITDA 191 144 100
Panels
Earnings before tax 11 19 9Add:
Amortization 3 3 3 Finance expense 1 — 1EBITDA 15 22 13Add: Other — (2 ) 2Adjusted EBITDA 15 20 15
Pulp & Paper
Earnings before tax 30 16 (20 )Add:
Amortization 9 10 9 Finance expense 2 2 2EBITDA 41 28 (9 )Add: Other (1 ) 2 23Adjusted EBITDA 40 30 14
Corporate and Other Earnings before tax (13 ) (20 ) 13 Add: Amortization — — —EBITDA (13 ) (20 ) 13 Add:
Equity-based compensation 11 16 2 Other 1 3 (14 )Adjusted EBITDA (1 ) (1 ) 1
Total Adjusted EBITDA 245 193 130
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2017 Management’s Discussion & Analysis (continued)
Adjusted Earnings and Adjusted Basic Earnings Per Share($millions except EPS amounts which are in $) Q1-17 Q4-16 Q1-16
Earnings 123 79 42
Add:
Equity-based compensation 11 16 2
Exchange loss (gain) on long-term financing (1 ) 4 (9 )
Loss on power agreements — 8 19
Insurance gain on disposal of equipment — (3 ) —
Net tax effect on the above adjustments 1 (3 ) (5 )
Adjusted earnings 134 101 49
Adjusted basic EPS1 1.71 1.28 0.60
1. Adjusted basic EPS is calculated by dividing Adjusted earnings by the basic weighted average shares outstanding.
Net Debt to Total Capital Ratio($millions except as otherwise indicated) Q1-17 Q4-16 Q1-16
Net debt
Cash and short-term investments (86 ) (50 ) (19 )
Deferred financing costs1 (6 ) (6 ) (7 )
Cheques issued in excess of funds on deposit 36 15 40
Operating loan 110 — 297
Long-term debt includes current portion 413 417 401
467 376 712
Shareholders’ equity 2,365 2,241 2,041
Total capital 2,832 2,617 2,753
Net debt to total capital 16% 14% 26%
1. For our balance sheet presentation, these costs are applied to reduce the associated debt or, in instances when the operating loan is undrawn, these costs are included in other assets.
RISKS AND UNCERTAINTIESFor a review of the risks and uncertainties to which our Company is subject, see the 2016 annual MD&A which is included in our 2016 Annual Report.
SIGNIFICANT MANAGEMENT JUDGMENTS AFFECTING FINANCIAL RESULTSFor a review of significant management judgments affecting financial results and critical accounting estimates, see the 2016 annual MD&A which
is included in our 2016 Annual Report.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTINGOur management, including the President and Chief Executive Officer and the Vice-President, Finance and Chief Financial Officer, acknowledge
responsibility for the design of disclosure controls and procedures and internal controls over financial reporting.
There has been no change in our internal controls over financial reporting during the three months ended March 31, 2017 that has materially
affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
ADDITIONAL INFORMATIONAdditional information relating to our Company, including our Company’s Annual Information Form, is available on SEDAR at www.sedar.com.
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March 31 December 31 2017 2016
Assets
Current assets
Cash and short-term investments $ 86 $ 50
Receivables 393 297
Inventories (note 3) 744 581
Prepaid expenses 17 10
1,240 938
Property, plant and equipment 1,692 1,685
Timber licences 546 551
Goodwill and other intangibles 373 371
Other assets 20 20
Deferred income tax assets 17 35
$ 3,888 $ 3,600
Liabilities
Current liabilities
Cheques issued in excess of funds on deposit $ 36 $ 15
Operating loans (note 4) 108 —
Payables and accrued liabilities 398 379
Income taxes payable 27 21
Reforestation and decommissioning obligations 43 44
612 459
Long-term debt (note 4) 409 413
Other liabilities (note 5) 290 272
Deferred income tax liabilities 212 215
1,523 1,359
Shareholders’ Equity
Share capital 549 549
Accumulated other comprehensive earnings 145 150
Retained earnings 1,671 1,542
2,365 2,241
$ 3,888 $ 3,600
Number of Common shares and Class B Common shares outstanding at April 24, 2017 was 78,166,003.
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Condensed Consolidated Balance Sheets (In millions of Canadian dollars, except where indicated – unaudited)
January 1 to March 31
2017 2016
Share capital
Balance – beginning of period $ 549 $ 579
Common share repurchases — (8 )
Balance – end of period $ 549 $ 571
Accumulated other comprehensive earnings
Balance – beginning of period $ 150 $ 164
Translation loss on foreign operations (5 ) (32 )
Balance – end of period $ 145 $ 132
Retained earnings Balance – beginning of period $ 1,542 $ 1,404
Actuarial gain (loss) on post-retirement benefits 11 (60 )
Common share repurchases — (42 )
Earnings for the period 123 42
Dividends (5 ) (6 )
Balance – end of period $ 1,671 $ 1,338
Shareholders’ Equity $ 2,365 $ 2,041
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Condensed Consolidated Statements of Changes in Shareholders’ Equity(In millions of Canadian dollars, except where indicated – unaudited)
January 1 to March 31
2017 2016
Sales $ 1,189 $ 1,077
Costs and expenses Cost of products sold 740 749
Freight and other distribution costs 160 159
Amortization 51 49
Selling, general and administration 44 39
Equity-based compensation 11 2
1,006 998
Operating earnings 183 79
Finance expense (7 ) (8 )
Other (note 7) — (16 )
Earnings before tax 176 55
Tax provision (note 8) (53 ) (13 )
Earnings $ 123 $ 42
Earnings per share (dollars) (note 9)
Basic $ 1.58 $ 0.51
Diluted $ 1.58 $ 0.50
Comprehensive earnings
Earnings $ 123 $ 42
Other comprehensive earnings
Translation loss on foreign operations (5 ) (32 )
Actuarial gain (loss) on post-retirement benefits 11 (60 )
Comprehensive earnings $ 129 $ (50 )
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Condensed Consolidated Statements of Earningsand Comprehensive Earnings (In millions of Canadian dollars, except where indicated – unaudited)
January 1 to March 31
2017 2016
Cash used for operations
Earnings $ 123 $ 42
Adjustments
Amortization 51 49
Finance expense 7 8
Foreign exchange gain on long-term financing (1 ) (9 )
Loss on power agreements, net of settlement costs — 11
Post-retirement expense 19 17
Contributions to post-retirement benefit plans (14 ) (12 )
Tax provision 53 13
Income taxes paid (36 ) (9 )
Other 3 (1 )
Changes in non-cash working capital
Receivables (91 ) (36 )
Inventories (161 ) (96 )
Prepaid expenses (7 ) (5 )
Payables and accrued liabilities 7 5
(47 ) (23 )
Cash provided by financing
Proceeds from operating loans 110 116
Finance expense paid (1 ) (1 )
Dividends (5 ) (6 )
Common share repurchases — (50 )
104 59
Cash used for investing
Additions to capital assets (56 ) (49 )
Government assistance — 4
Other 1 —
(55 ) (45 )
Change in cash 2 (9 )
Foreign exchange effect on cash 13 4
Cash – beginning of period 35 (16 )
Cash – end of period $ 50 $ (21 )
Cash consists of
Cash and short-term investments $ 86 $ 19
Cheques issued in excess of funds on deposit (36 ) (40 )
$ 50 $ (21 )
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Condensed Consolidated Statements of Cash Flows(In millions of Canadian dollars, except where indicated – unaudited)
1. Nature of operationsWest 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 complianceThese 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 same accounting policies and methods of their
application as the December 31, 2016 annual financial statements. These condensed consolidated interim financial statements should be read in
conjunction with our 2016 annual consolidated financial statements.
3. InventoriesInventories at March 31, 2017 were written down by $5 million (December 31, 2016 – $5 million; March 31, 2016 – $14 million) to reflect net realizable
value being lower than cost
4. Long-term debt and operating loans
Long-term debt March 31, December 31, 2017 2016
US$300 million senior notes due October 2024; interest at 4.35% $ 399 $ 403
US$8 million note payable due October 2020; interest at 2.00% 10 10
Notes payable 4 4
413 417
Deferred financing costs (4 ) (4 )
$ 409 $ 413
The fair value of the long-term debt is $397 million (December 31, 2016 – $391 million) based on rates available to us at the balance sheet date
for long-term debt with similar terms and remaining maturities.
Operating loansOur revolving lines of credit consist of a $500 million committed revolving credit facility which matures September 30, 2020, 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 $59 million dedicated to letters of credit, of which US$7 million is dedicated to our
U.S. operations.
At March 31, 2017, our revolving credit facility was drawn by $108 million (net of deferred financing costs of $2 million). Letters of credit in the
amount of $46 million were also supported by our facilities, leaving $444 million of credit available for further use. At December 31, 2016 there were
no amounts outstanding under our revolving credit facility, as a result, the associated deferred financing costs of $2 million were reported in other
assets and our outstanding letters of credit were $48 million.
Interest on these facilities is payable at floating rates based on Prime, U.S. base, Bankers’ Acceptances or LIBOR 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.
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Notes to Condensed Consolidated Interim Financial Statements(Figures are in millions of Canadian dollars, except where indicated – unaudited)
5. Other liabilities March 31, December 31, 2017 2016
Post-retirement (note 6) $ 156 $ 162
Reforestation 87 69
Decommissioning 27 25
Other 20 16
$ 290 $ 272
6. Post-retirement benefitsWe 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:
March 31, December 31, 2017 2016
Projected benefit obligations $ (1,653 ) $ (1,648 )
Fair value of plan assets 1,522 1,507
Impact of minimum funding requirement (15 ) (13 )
$ (146 ) $ (154 )
Represented by
Post-retirement assets $ 10 $ 8
Post-retirement liabilities (note 5) (156 ) (162 )
$ (146 ) $ (154 )
The significant actuarial assumptions used to determine our balance sheet date post-retirement assets and liabilities are as follows:
March 31, 2017 December 31, 2016
Discount rate 3.75% 3.75%
Future compensation rate increase 3.50% 3.50%
The actuarial gain (loss) on post-retirement benefits, included in other comprehensive earnings, is as follows:
January 1 to March 31 2017 2016
Actuarial gain (loss) $ 15 $ (81 )
Tax recovery (provision) on actuarial gain (loss) (4 ) 21
$ 11 $ (60 )
7. Other January 1 to March 31 2017 2016
Foreign exchange loss on working capital $ (1 ) $ (10 )
Foreign exchange loss on intercompany financing1 (3 ) (17 )
Foreign exchange gain on long-term debt 4 26
Loss on power agreements — (19 )
Other — 4
$ — $ (16 )
1. Relates to US$200 million of financing provided to our U.S. operations. IAS 21 requires that the exchange gain or loss be recognized through earnings as the financing is not considered part of our permanent investment in our U.S. subsidiaries. The balance sheet amounts and related financing expense are eliminated in these consolidated financial statements.
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8. Tax provisionThe 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:
January 1 to March 31 2017 2016
Income tax at statutory rate of 26% $ (46 ) $ (14 )
Non-taxable amounts (3 ) 2
Rate differentials between jurisdictions and on specified activities (5 ) (2 )
Unrecognized capital losses — 1
Other 1 —
Tax provision $ (53 ) $ (13 )
9. Earnings per shareBasic 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.
January 1 to March 31 2017 2016
Earnings
Basic $ 123 $ 42
Share option expense 10 2
Equity-settled share option adjustment (2 ) (2 )
Diluted $ 131 $ 42
Weighted average number of shares (thousands)
Basic 78,164 82,281
Share options 841 955
Diluted 79,005 83,236 Earnings per share (dollars)
Basic $ 1.58 $ 0.51
Diluted $ 1.58 $ 0.50
Notes to Condensed Consolidated Interim Financial Statements (continued)
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10. Segmented information Pulp & Corporate Lumber Panels Paper & Other TotalJanuary 1, 2017 to March 31, 2017
Sales
To external customers $ 810 $ 126 $ 253 $ — $ 1,189 To other segments 26 2 — — $ 836 $ 128 $ 253 $ —
Operating earnings before amortization $ 191 $ 15 $ 40 $ (12 ) $ 234Amortization (39 ) (3 ) (9 ) — (51 )Operating earnings 152 12 31 (12 ) 183Finance expense (4 ) (1 ) (2 ) — (7 )Other — — 1 (1 ) — Earnings before tax $ 148 $ 11 $ 30 $ (13 ) $ 176
January 1, 2016 to March 31, 2016Sales
To external customers $ 729 $ 136 $ 212 $ — $ 1,077
To other segments 29 2 — —
$ 758 $ 138 $ 212 $ —
Operating earnings before amortization $ 100 $ 15 $ 14 $ (1 ) $ 128
Amortization (37 ) (3 ) (9 ) — (49 )
Operating earnings 63 12 5 (1 ) 79
Finance expense (5 ) (1 ) (2 ) — (8 )
Other (5 ) (2 ) (23 ) 14 (16 )
Earnings before tax $ 53 $ 9 $ (20 ) $ 13 $ 55
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The geographic distribution of external sales is as follows:
January 1 to March 311
2017 2016
Canada $ 254 $ 247
United States 675 620
China 148 116
Other Asia 101 77
Other 11 17
$ 1,189 $ 1,0771. Sales distribution is based on the location of product delivery.
11. Softwood lumber disputeThe Canada – U.S. Softwood Lumber Agreement (“SLA”) expired in October 2015 and on the expiry of that agreement a one year moratorium on
trade sanctions by the U.S. came into place. The Government of Canada and the U.S. Trade Representative have been unable to reach agreement
on a new managed trade agreement.
On November 25, 2016 a coalition of U.S. lumber producers petitioned the U.S. Department of Commerce and the U.S. International Trade
Commission to investigate alleged subsidies to Canadian producers and levy countervailing and antidumping duties against Canadian imports. The
U.S. Department of Commerce has initiated its investigation and is expected to make a preliminary determination regarding countervailing duties in
April 2017, and in June 2017 for antidumping duties. If the U.S. Department of Commerce determines that “critical circumstances” apply, duties
could be applied retroactively up to 90 days prior to the preliminary determinations. We have been chosen by the U.S. Department of Commerce
as a “mandatory respondent” to both the countervailing and antidumping investigations and as a result will receive unique company specific rates.
Notes to Condensed Consolidated Interim Financial Statements (continued)
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WEST FRASER TIMBER CO. LTD.TEL: 604.895.2700
FAX: 604.681.6061
www.westfraser.com