VANCOUVER, BRITISH COLUMBIA--(Marketwire - Oct. 27, 2008) - West Fraser Timber Co. Ltd. (TSX:WFT) today reported a loss of $2 million or $0.05 per share on sales of $848 million in the third quarter of 2008. For the first nine months of 2008, the Company reported a loss of $68 million or $1.58 per share, on sales of $2,443 million.
These results compare with previous periods as follows:
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($ million except earnings 2008 2007
per share ("EPS")) YTD Q3 Q2 YTD Q3
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Sales 2,443 848 823 2,534 827
EBITDA(1) 118 78 71 96 27
Operating earnings (loss) (90) 8 5 (98) (40)
Earnings (loss) (68) (2) 3 (31) (12)
EPS ($) (1.58) (0.05) 0.08 (0.73) (0.28)
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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 complementary measure of cash available prior to debt service,
capital expenditures and income taxes. However, EBITDA is not a generally
accepted earnings measure under Canadian generally accepted accounting
principles ("GAAP") and does not have a standardized meaning prescribed by
Canadian GAAP. Investors are cautioned that EBITDA should not be considered
as an alternative to earnings or cash flow as determined in accordance with
Canadian GAAP. 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.
Hank Ketcham, West Fraser's Chairman, President and CEO stated: "Our results continue to reflect very challenging times. We continue to focus on cost control, efficiencies and cash preservation in response to this very severe downturn."
Operational Results
The Company's lumber operations produced EBITDA for the quarter of $29 million and negative $3 million for the first nine months, compared to EBITDA of negative $27 million for the same quarter of 2007 and negative $37 million for the first nine months of 2007, reflecting a decline in log costs and less significant net inventory adjustments in the later periods.
Pulp & paper operations generated EBITDA of $45 million compared to $24 million for the previous quarter as a result of price improvements and the timing of certain maintenance shutdowns.
Panel operations generated EBITDA for the quarter of $5 million compared to $7 million in the previous quarter and $19 million in the third quarter of 2007 as the Canadian plywood market weakened and MDF and LVL facilities continued to operate on a reduced-shift basis.
Outlook
The financial and credit crisis accelerated late in the current quarter which has increased uncertainty with respect to West Fraser's key markets. Prices for most of the Company's products are either under downward pressure or are at historically low levels.
"The nature and length of this downturn is unprecedented for our industry. Given the current state of the U.S. financial and credit markets, we do not see any significant improvement in the near term," said Mr. Ketcham.
The Company
West Fraser is an integrated wood products company producing lumber, LVL, MDF, plywood, pulp, linerboard, kraft paper and newsprint. The Company has approximately 9,000 employees and 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 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. 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 2007 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.
Conference Call
Investors are invited to listen to the quarterly conference call on Tuesday, October 28, 2008 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time) by dialing 1-800-952-4972 (toll-free North America). The call may also be accessed through West Fraser's website at www.westfraser.com.
MANAGEMENT'S DISCUSSION & ANALYSIS(1)
This discussion and analysis by West Fraser's management ("MD&A") of West Fraser's financial performance during the third quarter of 2008 should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes included in this quarterly report and the 2007 annual MD&A included in the Company's 2007 Annual Report. Dollar amounts are expressed in Canadian currency, unless otherwise indicated.
The information in this interim MD&A is as at October 27, 2008, unless otherwise indicated.
Matters Affecting Comparisons
This interim MD&A for the third quarter of 2008 (the "current quarter") includes certain comparisons of the results for each of the nine-month periods ended September 30 of 2008 and 2007, respectively. On March 31, 2007, the Company acquired 13 sawmills in the southern United States (the "U.S. Acquisition"). West Fraser's first quarter 2007 earnings do not include the results of those operations although they are reflected in later reporting periods and this should be taken into account when considering the year-to-date comparisons.
(1) This interim 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. 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 2007 annual MD&A 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.
Throughout this interim MD&A, 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 complementary measure of cash available prior to debt service, capital expenditures and income taxes. However, EBITDA is not a generally accepted earnings measure under Canadian generally accepted accounting principles ("GAAP") and does not have a standardized meaning prescribed by Canadian GAAP. Investors are cautioned that EBITDA should not be considered as an alternative to earnings or cash flow as determined in accordance with Canadian GAAP. 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.
Production, Shipments and Financial Comparisons
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Q3-08 Q2-08 YTD-08 Q3-07 YTD-07
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Production
Lumber - MMfbm
SPF 867 867 2,595 881 2,686
SYP 384 409 1,249 500 1,083
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1,251 1,276 3,844 1,381 3,769
Plywood - MMsf (3/8" basis) 207 207 612 193 576
MDF - MMsf (3/4" basis) 60 58 179 68 206
LVL - Mcf 239 274 839 520 1,899
BCTMP - Mtonnes 157 148 455 148 429
NBSK - Mtonnes 118 109 348 120 335
Linerboard and Kraft Paper - Mtonnes 120 95 331 110 304
Newsprint - Mtonnes 31 31 94 31 93
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Shipments
Lumber - MMfbm
SPF 861 875 2,580 836 2,672
SYP 398 434 1,267 511 1,143
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1,259 1,309 3,847 1,347 3,815
Plywood - MMsf (3/8" basis) 211 209 613 185 570
MDF - MMsf (3/4" basis) 53 60 174 63 214
LVL - Mcf 435 334 1,113 507 1,775
BCTMP - Mtonnes 108 162 428 132 440
NBSK - Mtonnes 125 135 371 107 323
Linerboard and Kraft Paper - Mtonnes 115 94 327 90 297
Newsprint - Mtonnes 31 31 94 31 91
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Financial Comparisons - $ millions
Sales 848 823 2,443 827 2,534
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EBITDA 78 71 118 27 96
Amortization (70) (66) (208) (67) (194)
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Operating earnings 8 5 (90) (40) (98)
Interest expense - net (8) (9) (27) (8) (20)
Exchange gain (loss) on long-term debt (13) 2 (22) 21 51
Other income (expense) 10 3 21 (3) (7)
Income tax recovery 1 2 50 18 43
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Earnings (2) 3 (68) (12) (31)
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Cdn. $1.00 converted to U.S. -
average 0.961 0.990 0.982 0.954 0.904
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Selected Quarterly Information
($ millions, except earnings per share ("EPS") amounts which are in $)
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Q3-08 Q2-08 Q1-08 Q4-07 Q3-07 Q2-07 Q1-07 Q4-06
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Sales 848 823 772 782 827 948 759 727
Earnings (2) 3 (68) (3) (12) (14) (5) 296
Basic EPS (0.05) 0.08 (1.60) (0.07) (0.28) (0.33) (0.12) 6.93
Diluted EPS (0.05) 0.08 (1.60) (0.07) (0.28) (0.33) (0.12) 6.87
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Discussion & Analysis
The Company's earnings continue to be adversely affected by the continuing severe downturn in the U.S. housing market. Operating results did benefit from certain product price improvements compared to the previous quarter, notably SPF lumber, linerboard and newsprint. The Canadian dollar retreated from a high in mid-July of nearly US$1.00 to a low of less than US$0.93 in mid-September. A weaker Canadian dollar is a positive factor for the Company's Canadian operations. Late in the current quarter the SPF lumber benchmark price weakened and pulp shipments declined. The current financial crisis accelerated late in the current quarter and added to the uncertainty and negative outlook for North American and world economies.
Operating earnings for the current quarter improved compared to the same quarter of 2007 reflecting higher prices for linerboard, pulp and newsprint and lower log costs. Plywood prices were substantially lower reflecting a weaker Canadian housing market. The net impact on operating earnings of inventory write-downs to net realizable value was a reduction of $5 million in the current quarter compared to a reduction of $38 million in the third quarter of 2007.
Operating earnings for the first nine months of 2008 were generally comparable to those for the same period of 2007. Results were adversely affected by a stronger Canadian dollar in the later period, but this was substantially offset by the benefit of lower log costs and improved pulp, linerboard and newsprint prices. SPF lumber and plywood prices have generally averaged lower in 2008 compared to 2007. The first quarter of 2007 did not include the results of the operations acquired under the U.S. Acquisition, which was completed at the end of that quarter. The net impact on operating earnings of inventory write-downs to net realizable value was an increase of $7 million for the first nine months of 2008 and a reduction of $27 million for the first nine months of 2007.
Other Particulars
Other income includes gains on asset sales totalling $4 million for the current quarter and $8 million for the first nine months of 2008. For the corresponding periods of 2007, gains on asset sales totalled $4 million for the third quarter and $5 million for the first nine months. In addition, a $10 million gain from the termination of certain pulp supply contracts was recorded in the first quarter of 2007.
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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Q3-08 Q2-08 YTD-08 Q3-07 YTD-07
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Exchange gain (loss) on long-term
debt (13) 2 (22) 21 51
Other(1) 4 (1) 9 (10) (30)
Foreign exchange translation gain
(loss) on investments in
self-sustaining foreign operations 18 (3) 30 (31) (90)
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(1) Represents the translation of other foreign currency-denominated items
(included in other income (expense)).
Comparisons to Second Quarter of 2008
It is difficult to make a meaningful comparison of the results for the current quarter with those for the previous quarter because of the timing and significance of inventory adjustments which occurred in the first half of 2008. These adjustments were discussed in the MD&A for the previous quarter. However, the following key variances should be noted:
- SYP lumber production and shipments declined in the current quarter compared to the previous quarter as some U.S. operations curtailed operations due to log shortages caused by pricing and weather. This adversely affected the results of West Fraser's U.S. operations.
- The Company's pulp & paper results improved in the current quarter compared to the previous quarter as linerboard and newsprint prices strengthened and production and shipments of linerboard improved in the current quarter following a maintenance shutdown of the Kitimat facility in the previous quarter.
- The Canadian dollar weakened against the U.S. dollar in the later period which benefited the Company's Canadian operations.
Discussion & Analysis by Product Segment
Lumber Segment
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Q3-08 Q2-08 YTD-08 Q3-07 YTD-07
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Sales - $ millions 458 423 1,260 481 1,400
EBITDA - $ millions 29 39 (3) (27) (37)
EBITDA margin - % 6 9 - - -
Operating earnings - $ millions (5) 8 (105) (60) (125)
Benchmark prices (US$ per Mfbm)
SPF #2 & Better 2 x 4(1) 262 233 233 260 257
SYP #2 West 2 x 4(2) 309 307 304 280 275
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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.
The benchmark SPF price improved during the current quarter as industry production curtailments related to temporary summer shutdowns produced a more balanced market. However, as these curtailments ended late in the current quarter and demand declined, SPF lumber prices fell sharply. The benchmark SYP price remained more stable through the current quarter, aided mainly by production curtailments rather than increased demand. However, prices for wide-dimension SYP lumber weakened late in the quarter which adversely affected the results of the Company's U.S. operations.
West Fraser continues to focus on expanding its offshore lumber sales in light of the continuing weakness of North American markets and the financial constraints imposed by the Softwood Lumber Agreement. For the first nine months of 2008 sales to China and Japan have increased compared to the same period of 2007.
SYP lumber production and shipments declined in the current quarter compared to the same quarter of 2007, reflecting ongoing curtailments of certain U.S. operations which currently represent, on an annualized basis, approximately 330 MMfbm of U.S. lumber production.
Operating earnings for the current quarter for the lumber segment improved compared to the same quarter of 2007, reflecting a decline in log costs and less significant net inventory adjustments in the later period. Year-to-date losses reflect the continuing weakness of the U.S. housing market, although lower log costs and less significant net inventory adjustments in the later period resulted in an improvement from the same period of 2007, despite a stronger average Canadian dollar in the later period.
The net effect on operating earnings of log and lumber inventory write-downs is a reduction of $6 million in the current quarter compared to a reduction of $37 million in the third quarter of 2007 and a recovery of $13 million for the first nine months of 2008 compared to a reduction of $24 million for the first nine months of 2007. The net effect on operating earnings takes into account the write-down of opening inventory processed and sold during the current period.
In the current quarter, the Company announced an agreement to sell a timber tenure located in northwest B.C. and also announced an agreement to acquire a company which holds a timber tenure and owns a sawmill in Fort St. James, B.C. These transactions, along with a previously-announced proposed acquisition of certain timber tenures located in the Kamloops region, are expected to be completed during the fourth quarter of 2008. West Fraser's efforts to expand its timber harvesting rights in B.C. are, in large measure, a response to the mountain pine beetle epidemic.
Lumber exports from Alberta to the U.S. have recently approached levels that, if exceeded, would trigger an additional 7.5% "surge" tax, based on current lumber prices. However, it appears, based on preliminary estimates, that the surge thresholds were not exceeded for any of the months during the current quarter.
During the current quarter the Company successfully concluded negotiations concerning collective agreements at several of its U.S. operations. The Company's U.S. union operations are now subject to collective agreements that will expire in either 2010 or 2011.
Panels Segment
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Q3-08 Q2-08 YTD-08 Q3-07 YTD-07
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Sales - $ millions 108 109 324 112 365
EBITDA - $ millions 5 7 18 19 46
EBITDA margin - % 4 6 6 17 13
Operating earnings - $ millions (5) (3) (10) 9 16
Benchmark price
Plywood (per Msf 3/8" basis)(1) Cdn$ 333 337 338 394 377
MDF (per Msf 3/4" basis)(2) US$ 549 537 533 464 459
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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 weaker operating earnings of the panel segment, compared to the same quarter of 2007 and on a year-to-date basis, reflect reduced demand for plywood in Canada and resulting downward pressure on prices. The Canadian housing market appears unlikely to strengthen in the near term. Results for the later periods were also adversely affected by curtailed MDF production. The Company's Alberta MDF and LVL facilities continue to operate on a reduced shift basis as sales of both products rely on U.S. housing-related demand.
Pulp & Paper Segment
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Q3-08 Q2-08 YTD-08 Q3-07 YTD-07
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Sales - $ millions 282 291 859 233 769
EBITDA - $ millions 45 24 101 26 69
EBITDA margin - % 16 8 12 11 9
Operating earnings - $ millions 20 (1) 26 1 (4)
Benchmark price
NBSK (US$ per tonne)(1) 880 880 880 837 812
Linerboard (US$ per tonne)(2) 672 612 632 597 578
Newsprint (US$ per tonne)(3) 728 672 672 572 595
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(1) Source: Resource Information Systems, Inc. - U.S. list price
delivered U.S.
(2) Source: Pulp & Paper Week - Unbleached linerboard kraft, East.
(3) Source: Resource Information Systems, Inc. - delivered 48.8 gram
newsprint.
The Company's pulp & paper operations generally ran well during the current quarter although Hinton Pulp had its scheduled maintenance shutdown. The shutdown was extended for four days to 14 days in total because of unanticipated maintenance requirements and production was reduced by approximately 3,000 tonnes as a result of the extension. Production in the current quarter at the Kitimat linerboard and kraft paper mill increased compared to the same quarter last year, when unanticipated maintenance downtime extended into the third quarter of 2007.
Operating earnings for the pulp & paper segment improved markedly compared to the same quarter in 2007 and on a year-to-date-basis as improved product prices outweighed the adverse effect of a stronger average Canadian dollar in the later periods. Late in the current quarter, pulp markets weakened and the benchmark NBSK pulp price declined.
The pulp & paper segment has been faced with input cost escalation, including energy, petroleum and chemicals.
