West Fraser Timber Co., Ltd 6-K, filed May 6, 2021
West Fraser Timber Co., Ltd (WFG)
About this 6-K
West Fraser Timber Co., Ltd filed this 6-K on May 6, 2021.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of May 2021
Commission File No. 001-39974
WEST FRASER TIMBER CO. LTD.
(Translation of registrant’s name into English)
501- 858 Beatty Street
Vancouver, British Columbia
Canada V6B 1C1
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F
Form 20-F ☐ Form 40-F ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1) ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7) ☐
SUBMITTED HEREWITH
| Exhibits |
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| 99.1 | Condensed Consolidated Interim Financial Statements for the three months ended March 31, 2021 and 2020 | |
| 99.2 | Management’s Discussion and Analysis for the three months ended March 31, 2021 | |
| 99.3 | CEO Certification of Interim Filings | |
| 99.4 | CFO Certification of Interim Filings | |
| 99.5 | News release dated May 6, 2021 re: West Fraser Announces 2021 First Quarter Results | |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 6, 2021
| WEST FRASER TIMBER CO. LTD. |
| /s/ Christopher A. Virostek |
| Christopher A. Virostek Vice-President, Finance and Chief Financial Officer |
Exhibit 99.1
West Fraser Timber Co. Ltd.
Condensed Consolidated Balance Sheets
(in millions of United States dollars, except where indicated - unaudited)
| March 31 2021 |
Currency remeasurement December 31 2020 |
Currency remeasurement January 1 2020 |
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| Assets |
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| Current assets |
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| Cash and short-term investments |
$ | 1,400 | $ | 461 | $ | 12 | ||||||
| Receivables |
679 | 277 | 199 | |||||||||
| Income taxes receivable |
— | 8 | 104 | |||||||||
| Inventories (note 5) |
1,137 | 578 | 561 | |||||||||
| Prepaid expenses |
29 | 12 | 7 | |||||||||
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| 3,245 | 1,336 | 883 | ||||||||||
| Property, plant and equipment |
3,688 | 1,657 | 1,648 | |||||||||
| Timber licences |
378 | 372 | 380 | |||||||||
| Goodwill and other intangibles |
2,445 | 591 | 594 | |||||||||
| Export duty deposits (note 14) |
171 | 178 | 61 | |||||||||
| Other assets |
43 | 35 | 20 | |||||||||
| Deferred income tax assets |
3 | 9 | 8 | |||||||||
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| $ | 9,973 | $ | 4,178 | $ | 3,594 | |||||||
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| Liabilities |
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| Current liabilities |
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| Cheques issued in excess of funds on deposit |
$ | — | $ | — | $ | 12 | ||||||
| Operating loans (note 6) |
— | — | 288 | |||||||||
| Payables and accrued liabilities |
802 | 389 | 305 | |||||||||
| Current portion of long-term debt (note 6) |
376 | 7 | 7 | |||||||||
| Current portion of reforestation and decommissioning obligations |
36 | 34 | 32 | |||||||||
| Income taxes payable |
236 | 98 | — | |||||||||
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| 1,450 | 528 | 644 | ||||||||||
| Long-term debt (note 6) |
839 | 500 | 500 | |||||||||
| Other liabilities (note 7) |
348 | 408 | 350 | |||||||||
| Deferred income tax liabilities |
722 | 264 | 195 | |||||||||
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| 3,359 | 1,700 | 1,689 | ||||||||||
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| Shareholders’ Equity |
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| Share capital (note 9) |
3,917 | 481 | 480 | |||||||||
| Contributed surplus |
15 | — | — | |||||||||
| Accumulated other comprehensive earnings |
(239 | ) | (240 | ) | (272 | ) | ||||||
| Retained earnings |
2,921 | 2,237 | 1,697 | |||||||||
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| 6,614 | 2,478 | 1,905 | ||||||||||
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| $ | 9,973 | $ | 4,178 | $ | 3,594 | |||||||
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Number of Common shares and Class B Common shares outstanding at May 5, 2021 was 121,586,183.
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(in millions of United States dollars, except where indicated - unaudited)
| Currency January 1 to March 31 |
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| 2021 | 2020 | |||||||
| Share capital |
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| Balance - beginning of period |
$ | 481 | $ | 480 | ||||
| Issuance of Common shares (note 9) |
3,487 | — | ||||||
| Repurchase of Common shares for cancellation (note 9) |
(51 | ) | — | |||||
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| Balance - end of period |
$ | 3,917 | $ | 480 | ||||
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| Contributed surplus |
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| Balance - beginning of period |
$ | — | $ | — | ||||
| Equity settled share option plan acquired (note 3) |
14 | — | ||||||
| Share based compensation for equity settled plan |
1 | — | ||||||
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| Balance - end of period |
$ | 15 | $ | — | ||||
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| Accumulated other comprehensive earnings |
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| Balance - beginning of period |
$ | (240 | ) | $ | (272 | ) | ||
| Translation gain on foreign operations |
1 | — | ||||||
| Translation effect on change in reporting currency |
— | (119 | ) | |||||
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| Balance - end of period |
$ | (239 | ) | $ | (391 | ) | ||
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| Retained earnings |
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| Balance - beginning of period |
$ | 2,237 | $ | 1,697 | ||||
| Actuarial gain on post-retirement benefits, net of tax |
89 | 67 | ||||||
| Repurchase of Common shares for cancellation (note 9) |
(51 | ) | — | |||||
| Earnings for the period |
665 | 9 | ||||||
| Dividends declared |
(19 | ) | (9 | ) | ||||
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| Balance - end of period |
$ | 2,921 | $ | 1,764 | ||||
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| Shareholders’ Equity |
$ | 6,614 | $ | 1,853 | ||||
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West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
(in millions of United States dollars, except where indicated - unaudited)
| Currency January 1 to March 31 |
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| 2021 | 2020 | |||||||
| Sales |
$ | 2,343 | $ | 890 | ||||
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| Costs and expenses |
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| Cost of products sold |
1,039 | 630 | ||||||
| Freight and other distribution costs |
181 | 125 | ||||||
| Export duties (note 14) |
37 | 26 | ||||||
| Amortization |
122 | 52 | ||||||
| Selling, general and administration |
78 | 41 | ||||||
| Equity-based compensation |
7 | 7 | ||||||
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| 1,464 | 881 | |||||||
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| Operating earnings |
879 | 9 | ||||||
| Finance expense |
(13 | ) | (12 | ) | ||||
| Other (note 10) |
4 | 9 | ||||||
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| Earnings before tax |
870 | 6 | ||||||
| Tax (provision) recovery (note 11) |
(205 | ) | 3 | |||||
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| Earnings |
$ | 665 | $ | 9 | ||||
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| Earnings per share (dollars) (note 12) |
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| Basic |
$ | 6.96 | $ | 0.13 | ||||
| Diluted |
$ | 6.96 | $ | (0.09 | ) | |||
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| Comprehensive earnings |
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| Earnings |
$ | 665 | $ | 9 | ||||
| Other comprehensive earnings |
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| Translation gain on foreign operations |
1 | — | ||||||
| Translation effect on change in reporting currency |
— | (119 | ) | |||||
| Actuarial gain on post-retirement benefits, net of tax |
89 | 67 | ||||||
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| Comprehensive earnings |
$ | 755 | $ | (43 | ) | |||
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West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Cash Flows
(in millions of United States dollars, except where indicated - unaudited)
| Currency remeasurement January 1 to March 31 |
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| Cash provided by (used in) |
2021 | 2020 | ||||||
| Operating activities |
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| Earnings |
$ | 665 | $ | 9 | ||||
| Adjustments |
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| Amortization |
122 | 52 | ||||||
| Finance expense |
13 | 12 | ||||||
| Foreign exchange loss (gain) |
6 | (10 | ) | |||||
| Export duty deposits |
8 | (6 | ) | |||||
| Post-retirement expense |
25 | 19 | ||||||
| Contributions to post-retirement benefit plans |
(13 | ) | (10 | ) | ||||
| Tax provision (recovery) |
205 | (3 | ) | |||||
| Income taxes paid |
(246 | ) | (1 | ) | ||||
| Reforestation and decommissioning obligations |
13 | 18 | ||||||
| Other |
(13 | ) | 4 | |||||
| Changes in non-cash working capital |
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| Receivables |
(172 | ) | (49 | ) | ||||
| Inventories |
(221 | ) | (145 | ) | ||||
| Prepaid expenses |
(4 | ) | (3 | ) | ||||
| Payables and accrued liabilities |
74 | 22 | ||||||
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| 462 | (91 | ) | ||||||
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| Financing activities |
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| Repayment of long-term debt |
(2 | ) | — | |||||
| Proceeds from operating loans |
— | 219 | ||||||
| Financing fees paid |
(3 | ) | — | |||||
| Finance expense paid |
(3 | ) | (7 | ) | ||||
| Repurchase of Common shares for cancellation |
(93 | ) | — | |||||
| Issuance of Common shares |
5 | — | ||||||
| Dividends paid |
(11 | ) | (10 | ) | ||||
| Other |
(2 | ) | — | |||||
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| (109 | ) | 202 | ||||||
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| Investing activities |
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| Acquired cash and short-term investments (note 3) |
642 | — | ||||||
| Additions to capital assets |
(62 | ) | (45 | ) | ||||
| Government assistance |
3 | — | ||||||
| Other |
(1 | ) | 4 | |||||
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| 582 | (41 | ) | ||||||
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| Change in cash |
935 | 70 | ||||||
| Foreign exchange effect on cash |
4 | (4 | ) | |||||
| Cash - beginning of period |
461 | — | ||||||
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| Cash - end of period |
$ | 1,400 | $ | 66 | ||||
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- 4 -
West Fraser Timber Co. Ltd.
Notes to Condensed Consolidated Interim Financial Statements
(figures are in millions of United States 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 with more than 60 facilities in Canada, the United States (“U.S.”), the United Kingdom (“U.K.”), and Europe. From responsibly sourced and sustainably managed forest resources, the Company produces lumber, engineered wood products (OSB, LVL, MDF, plywood, and particleboard), pulp, newsprint, wood chips, other residuals and renewable energy. West Fraser’s products are used in home construction, repair and remodelling, industrial applications, papers, tissue, and box materials. 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 (“TSX”) and on the New York Stock Exchange (“NYSE”) under the symbol WFG.
| 2. | Basis of presentation and statement of compliance |
These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 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, 2020, audited annual consolidated financial statements, except for the change in functional and reporting currency and the business combination as discussed below. These condensed consolidated interim financial statements should be read in conjunction with our 2020 audited annual consolidated financial statements, which are presented in Canadian dollars.
Change in functional and reporting currency
Determination of functional currency may involve certain judgments to determine the primary economic environment, and we reconsider the functional currency of our entities if there is a change in events and conditions which determine the primary economic environment. We have determined that as a result of the acquisition of Norbord Inc. (the “Acquisition”), the functional currency of our Canadian operations has changed from Canadian dollars (“CAD”) to United States dollars (“USD”). We considered a variety of factors when making this decision. The most significant being an increase in the level of sales made in U.S. dollars, a significant portion of operating expenses are incurred in U.S. dollars, and increased levels of U.S. dollar financing from the Acquisition.
Concurrent with the change in functional currency, we also changed our reporting currency from Canadian dollars to U.S. dollars. This change in reporting currency is to better reflect our business activities, following the increased presence in the U.S. as a result of the Acquisition and in connection with the listing of West Fraser’s common shares on the NYSE on February 1, 2021.
A change in functional currency is applied prospectively and must be based on a change in economic facts, events and conditions. In contrast, a change in reporting currency requires retroactive restatement. Both changes have specific transition rules under IAS 21, The Effects of Changes in Foreign Exchange Rates.
As at and for the year ended December 31, 2020 and all prior periods, the functional and reporting currency of the Company was the Canadian dollar as described in our audited annual consolidated financial statements. The currency remeasurement of our results applied the IAS 21 transitional rules.
To prepare our December 31, 2020 and January 1, 2020 consolidated balance sheets, all assets and liabilities were translated into U.S. dollars at the closing exchange rate on December 31, 2020 and December 31, 2019, as listed below. Equity items were retroactively restated at historical exchange rates to give effect to the change in reporting currency. The accounting policy used to translate the equity items prior to 2020, was to use the annual average exchange rate for each equity transaction that occurred in the year. For 2020, equity items were translated quarterly using the average exchange rate for each quarter.
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To prepare our 2020 consolidated statement of earnings, all revenues and expenses were translated into U.S. dollars at the average exchange rate for each quarter, with no adjustments to the measurement of or accounting for previously reported results. To prepare our 2020 consolidated statement of cash flow, all items were translated into U.S. dollars at the average exchange rate for each quarter, with no adjustments to the measurement of or accounting for previously reported results.
The exchange rates used to reflect the change in reporting currency were as follows:
| Canadian - USD exchange rate |
Q1-20 | Q2-20 | Q3-20 | Q4-20 | Q4-19 | |||||||||||||||
| Closing rate |
0.7049 | n/a | n/a | 0.7854 | 0.7699 | |||||||||||||||
| Average rate |
0.7443 | 0.7221 | 0.7508 | 0.7676 | n/a | |||||||||||||||
Foreign currency translation effective from February 1, 2021
Assets and liabilities of foreign operations having a functional currency other than the US dollar are translated at the rate of exchange prevailing at the reporting date, and revenues and expenses at average rates during the period. Gains or losses on translation are included as a component of shareholders’ equity in other comprehensive earnings.
Foreign currency-denominated (non-U.S. currencies) monetary assets and liabilities are translated using the rate of exchange prevailing at the reporting date. Gains or losses on translation of these items are included in earnings and reported other income or expense.
Foreign currency fluctuation effective from February 1, 2021
Our Canadian operations incur a portion of their operating expenses in Canadian dollars. Therefore, an increase in the value of the Canadian dollar relative to the U.S. dollar increases the value of expenses in U.S. dollar terms incurred by our Canadian operations, which reduces operating margin and the cash flow available to fund operations.
The impact on USD equivalent of net CAD revenues and expenses for a $0.01 change results in a pre-tax earnings adjustment of $18 million.
| 3. | Norbord acquisition |
Business combinations are accounted for using the acquisition method. We measure goodwill at the acquisition date as the fair value of the consideration transferred less the fair value of the identifiable assets acquired and liabilities assumed. Customer lists acquired in a business combination that qualify for separate recognition are recognized as intangible assets at their fair value and amortized straight-line over 10-years. Transaction costs in connection with business combinations are expensed as incurred. The determination of the fair value of the assets acquired and liabilities assumed requires management to use estimates that contain uncertainty and critical judgments including the remaining estimated useful life of non-monetary assets. We have engaged a valuations expert to prepare the fair value for Norbord’s working capital, property, plant and equipment, and intangible assets. This work is expected to be complete by the end of the year.
On February 1, 2021, we acquired all of the outstanding shares of Norbord Inc. (“Norbord”). According to the terms of the Acquisition, Norbord shareholders received 0.675 of a West Fraser shares for each Norbord share held. The result was the issuance of 54,484,188 Common shares of West Fraser at a price of US$63.90 per share (CAD$81.94 per share) for $3,482 million. The price per share is based on the West Fraser Common shares’ closing price as listed on the TSX on January 29, 2021, and a CAD/USD exchange rate of 0.7798.
- 6 -
Included in the Acquisition are five OSB mills in Canada, seven OSB mills in the U.S., one OSB mill, one MDF plant and two particleboard plants in the U.K., one OSB mill in Belgium, and their related corporate offices.
We have incorporated the North American operations of Norbord into our Panels segment and renamed that segment North America (“NA”) Engineered Wood Products (“EWP”). This segment includes the results from North American operations for OSB, plywood, MDF, and LVL. In addition, we have identified a Europe EWP segment, which includes the results from the U.K. and Belgium operations for OSB, MDF and particleboard. The EWP segments have been separated due to differences in the operating region, customer base, profit margins and sales volumes.
The Acquisition has been accounted for as an acquisition of a business in accordance with IFRS 3, Business Combinations. We have allocated the purchase price based on our preliminary estimated fair value of the assets acquired and the liabilities assumed as follows:
| West Fraser purchase consideration: |
Preliminary March 31, 2021 |
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| Fair value of 54 million West Fraser shares issued |
$ | 3,482 | ||
| Fair value of equity-based compensation instruments |
24 | |||
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| $ | 3,506 | |||
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| Fair value of net assets acquired: |
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| Cash and short-term investments |
$ | 642 | ||
| Accounts receivable |
232 | |||
| Inventories |
339 | |||
| Prepaid expenses |
12 | |||
| Property, plant and equipment |
2,084 | |||
| Timber |
10 | |||
| Other non-current assets |
6 | |||
| Other intangibles |
17 | |||
| Customer list intangible |
470 | |||
| Goodwill |
1,374 | |||
| Deferred income tax assets |
3 | |||
| Payables and accrued liabilities |
(300 | ) | ||
| Income tax payable |
(144 | ) | ||
| Current portion of reforestation and decommissioning obligations |
(2 | ) | ||
| Long-term debt |
(720 | ) | ||
| Other non-current liabilities |
(37 | ) | ||
| Deferred income tax liabilities |
(480 | ) | ||
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| $ | 3,506 | |||
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Factors contributing to goodwill include the Norbord workforce, assets that are geographically complementary to our existing facilities and offer close access to large markets and timber baskets. The Acquisition also provides increased scale and geographic diversification of manufacturing and markets. The goodwill of $1,374 million is not deductible for tax purposes.
The following tables represent Norbord’s actual results included in our statement of earnings and the proforma results of operations for the three months ended March 31, 2021 assuming the Acquisition occurred on January 1, 2021 and including purchase price accounting for the Acquisition.
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Norbord Results
| ($ millions except as otherwise indicated) |
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| Norbord results for February 1 to March 31, 20211 |
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| Sales |
707 | |||
| Operating earnings |
218 | 2 | ||
| Earnings |
160 | 2 | ||
| 1. | Represents the results of the Norbord operations since the acquisition date that are included in our Q1-21 results. |
| 2. | Includes purchase price accounting impact of $93 million expense for the one-time inventory adjustment in cost of products sold and $41 million expense for amortization. Earnings was further impacted by a $3 million recovery for finance expense and the related tax impact on these items. |
Proforma Q1-21 Results
| ($ millions except as otherwise indicated) |
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| West Fraser Actual Results Q1-21 |
Norbord Proforma Results1 Jan-21 |
West
Fraser Proforma Results1 Q1-21 |
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| Sales |
2,343 | 277 | 2,620 | |||||||||
| Operating earnings |
879 | 2 | 115 | 3 | 994 | 4 | ||||||
| Earnings |
665 | 2 | 86 | 3 | 751 | 4 | ||||||
| 1. | These unaudited proforma results have been provided as required per IFRS 3 - Business Combinations. West Fraser proforma Q1-21 presents West Fraser’s results as if the Acquisition was completed on January 1, 2021. |
| 2. | Operating earnings includes purchase price accounting impact of $93 million expense for the one-time inventory adjustment in cost of products sold; $41 million expense for amortization. Earnings was further impacted by a $3 million recovery for finance expense and the related tax impact on these items. |
| 3. | Operating earnings includes purchase price accounting impact of $18 million expense for amortization. Earnings was further impacted by a $1 million recovery for finance expense and the related tax impact on these items. |
| 4. | Includes purchase price accounting per footnote 2 and 3. |
Balances that required significant fair value adjustments for purchase price accounting included inventory, property, plant and equipment, timber, and customer list intangibles. Goodwill and deferred income tax liabilities were also significant.
Acquisition costs of $16 million have been expensed in selling, general and administration.
| 4. | Seasonality of operations |
Our operating results are subject to seasonal fluctuations that may impact quarter-to-quarter comparisons. Consequently, interim operating results may not proportionately reflect operating results for a full year.
Market demand varies seasonally, as homebuilding activity and repair-and-remodelling work are generally stronger in the spring and summer months. Extreme weather conditions, including wildfires in Western Canada and hurricanes in the U.S. South may periodically affect operations, including logging, manufacturing and transportation. Log inventory is typically built up in the Northern regions of North America and Europe during the winter to sustain our lumber and EWP production during the second quarter when logging is curtailed due to wet and inaccessible land conditions. This inventory is generally consumed in the spring and summer months.
- 8 -
| 5. | Inventories |
At March 31, 2021, no inventory valuation reserve was recognized (December 31, 2020 - $2 million; March 31, 2020 - $16 million; January 1, 2020 - $30 million) to reflect net realizable value being lower than cost.
| March 31, 2021 | Currency remeasurement December 31, 2020 |
Currency remeasurement January 1, 2020 |
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| Manufactured products |
$ | 426 | $ | 270 | $ | 262 | ||||||
| Logs and other raw materials |
502 | 189 | 174 | |||||||||
| Processing materials and supplies |
209 | 119 | 125 | |||||||||
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| $ | 1,137 | $ | 578 | $ | 561 | |||||||
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| 6. | Operating loans and long-term debt |
Operating loans
Our revolving lines of credit consist of a $676 million (CAD$850 million) committed revolving credit facility which matures August 2024, a $450 million committed revolving credit facility which matures April 2024, a $25 million demand line of credit dedicated to our U.S. operations and a $6 million (CAD$8 million) demand line of credit dedicated to our jointly -owned newsprint operation.
At March 31, 2021, our revolving credit facilities were undrawn and the associated deferred financing costs of $5 million were recorded in other assets.
Interest on the facilities is payable at floating rates based on Prime, Base Rate Advances, Bankers’ Acceptances or LIBOR Advances at our option.
In addition, we have credit facilities totalling $111 million dedicated to letters of credit, of which $96 million (CAD$120 million) is committed to our Canadian operations. On March 31, 2021, our letter of credit facilities supported $56 million of open letters of credit.
All debt is unsecured except the $6 million (CAD$8 million) joint operation demand line of credit, which is secured by that joint operation’s current assets.
Long-term debt
| March 31, 2021 |
Currency remeasurement December 31, 2020 |
Currency remeasurement January 1, 2020 |
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| $350 million senior notes due July 2027; interest at 5.75% |
$ | 376 | $ | — | $ | — | ||||||
| $315 million senior notes due April 2023; interest at 6.25% |
340 | — | — | |||||||||
| Senior notes due October 2024; interest at 4.35% |
300 | 300 | 300 | |||||||||
| Term loan due August 2024; floating interest rate |
200 | 200 | 200 | |||||||||
| Note payable due March 2021; interest at 2% |
— | 7 | 7 | |||||||||
| Notes payable |
1 | 2 | 3 | |||||||||
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| 1,217 | 509 | 510 | ||||||||||
| Less: deferred financing costs |
(2 | ) | (2 | ) | (3 | ) | ||||||
| Less: current portion |
(376 | ) | (7 | ) | (7 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| $ | 839 | $ | 500 | $ | 500 | |||||||
|
|
|
|
|
|
|
|||||||
- 9 -
As part of the Acquisition, we assumed Norbord’s $315 million senior notes due April 2023 (the “2023 Notes”), bearing interest at 6.25% and $350 million senior notes due July 2027 (the “2027 Notes”), bearing interest at 5.75%. The purchase price fair value adjustment resulted in an increase of $28 million for the 2023 Notes and $26 million for the 2027 Notes. These adjustments are amortized into income over the remaining life of the debt, of which $3 million went through earnings by March 31, 2021.
On March 2, 2021, we made a mandatory change of control offer for 2023 Notes and 2027 Notes, which expired on April 1, 2021. As a result of the change of control offer, $1 million of the 2023 Notes and $1 million of the 2027 Notes were redeemed and were repaid in the second quarter of 2021. On April 6, 2021, we elected to redeem the remaining 2027 Notes, which redemption occurred on May 6, 2021. On May 6, 2021, we elected to redeem all of Norbord’s outstanding 2023 Notes on June 7, 2021. After the completion of the redemption of the 2023 Notes and the 2027 notes, the principal value of long-term debt will be reduced by $665 million from the date of the Acquisition.
The fair value of the long-term debt at March 31, 2021, was $1,230 million (December 31, 2020 - $524 million) based on rates available to us at the balance sheet date for long-term debt with similar terms and remaining maturities.
Interest rate swap contracts
At March 31, 2021, the Company had interest rate swap contracts to pay fixed interest rates (weighted average interest rate of 1.14%) and receive variable interest rates equal to 3-month LIBOR on $200 million notional principal amount of indebtedness. These agreements terminate in August 2024.
The agreements are accounted for as a derivative, and the gain or loss related to changes in the fair value is included in other income. For the three months ended March 31, 2021, a $3 million gain was recorded.
| 7. | Other liabilities |
| March 31, 2021 | Currency remeasurement December 31, 2020 |
Currency remeasurement January 1, 2020 |
||||||||||
| Post-retirement (note 8) |
$ | 207 | $ | 295 | $ | 242 | ||||||
| Long-term portion of reforestation |
75 | 58 | 57 | |||||||||
| Long-term portion of decommissioning |
23 | 25 | 24 | |||||||||
| Other |
43 | 30 | 27 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 348 | $ | 408 | $ | 350 | |||||||
|
|
|
|
|
|
|
|||||||
| 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 the commencement of retirement. We also provide group life insurance, medical and extended health benefits to certain employee groups.
- 10 -
The status of the defined benefit pension plans and other retirement benefit plans, in aggregate, is as follows:
| March 31, 2021 | Currency remeasurement December 31, 2020 |
Currency remeasurement January 1, 2020 |
||||||||||
| Projected benefit obligations |
$ | (1,520 | ) | $ | (1,471 | ) | $ | (1,305 | ) | |||
| Fair value of plan assets |
1,322 | 1,181 | 1,067 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | (198 | ) | $ | (290 | ) | $ | (238 | ) | ||||
| Represented by |
||||||||||||
| Post-retirement assets |
$ | 9 | $ | 5 | $ | 4 | ||||||
| Post-retirement liabilities |
(207 | ) | (295 | ) | (242 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| $ | (198 | ) | $ | (290 | ) | $ | (238 | ) | ||||
|
|
|
|
|
|
|
|||||||
The significant actuarial assumptions used to determine our balance sheet date post-retirement assets and liabilities are as follows:
| March 31, 2021 | December 31, 2020 | |||||||
| Discount rate |
3.24 | % | 2.69 | % | ||||
| Future compensation rate increase |
3.62 | % | 3.65 | % | ||||
For the three months ended March 31, 2021, we recognized in other comprehensive earnings a before tax gain of $118 million to reflect the changes in the valuation of the post-retirement benefit plans. The gain reflects the increase in the discount rate used to calculate plan liabilities from the beginning of the year, partially offset by a negative return on plan assets.
The actuarial gain on post-retirement benefits, included in other comprehensive earnings, is as follows:
| January 1 to March 31 | ||||||||
| 2021 | Currency remeasurement 2020 |
|||||||
| Actuarial gain |
$ | 118 | $ | 91 | ||||
| Tax provision |
(29 | ) | (24 | ) | ||||
|
|
|
|
|
|||||
| $ | 89 | $ | 67 | |||||
|
|
|
|
|
|||||
| 9. | Share Capital |
Authorized
400,000,000 Common shares, without par value
20,000,000 Class B Common shares, without par value
10,000,000 Preferred shares, issuable in series, without par value
Issued
| March 31, 2021 | December 31, 2020 | |||||||||||||||
| Number | Amount | Number | Currency remeasurement Amount |
|||||||||||||
| Common |
119,400,329 | $ | 3,917 | 66,397,144 | $ | 481 | ||||||||||
| Class B Common |
2,281,478 | — | 2,281,478 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Common |
121,681,807 | $ | 3,917 | 68,678,622 | $ | 481 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
As part of the Acquisition, we issued 54,484,188 of West Fraser Common shares at a price of US$63.90 per share (CAD$81.94 per share) for $3,482 million. The price per share is based on the West Fraser Common shares’ closing price as listed on the TSX on January 29, 2021, and a CAD/USD exchange rate of 0.7798.
- 11 -
During the quarter, we issued 77,600 Common shares of the Company under our share option plans and 2,316 under our employee share purchase plan. On April 20, 2021, our board of directors approved a change to the assumed Norbord option plan to allow holders the right to elect to receive a cash payment in lieu of exercising an option to purchase Common shares. No other changes were made to the plan.
On February 17, 2021, we renewed our normal course issuer bid (“NCIB”) allowing us to acquire an additional 6,044,000 Common shares for cancellation until the expiry of the bid on February 16, 2022. This represents approximately 5% of the Company’s issued and outstanding Common shares. During the quarter, we have repurchased 1,560,919 at an average price of US$65.28 (CAD$82.86) per share under this NCIB.
| 10. | Other |
| January 1 to March 31 | ||||||||
| 2021 | Currency remeasurement 2020 |
|||||||
| Foreign exchange (loss) gain |
$ | (6 | ) | $ | 14 | |||
| Gain (loss) on interest rate swap contracts |
3 | (4 | ) | |||||
| Other |
7 | (1 | ) | |||||
|
|
|
|
|
|||||
| $ | 4 | $ | 9 | |||||
|
|
|
|
|
|||||
| 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:
| January 1 to March 31 | ||||||||
| 2021 | Currency remeasurement 2020 |
|||||||
| Income tax expense at statutory rate of 27% |
$ | (235 | ) | $ | (2 | ) | ||
| Rate differential between jurisdictions |
28 | — | ||||||
| Non-taxable amounts |
(2 | ) | 5 | |||||
| Other |
4 | — | ||||||
|
|
|
|
|
|||||
| Tax (provision) recovery |
$ | (205 | ) | $ | 3 | |||
|
|
|
|
|
|||||
| 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 cash-settled share option expense (recovery) charged to earnings and after deducting a notional charge for cash-settled share options assuming the use of the equity-settled method, as set out below. No earnings adjustment is required for our equity-settled share option plan. 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.
- 12 -
| January 1 to March 31 | ||||||||
| 2021 | Currency remeasurement 2020 |
|||||||
| Earnings |
||||||||
| Basic |
$ | 665 | $ | 9 | ||||
| Share option expense (recovery) |
9 | (13 | ) | |||||
| Equity-settled share option adjustment |
(3 | ) | (2 | ) | ||||
|
|
|
|
|
|||||
| Diluted |
$ | 671 | $ | (6 | ) | |||
|
|
|
|
|
|||||
| Weighted average number of shares (thousands) |
||||||||
| Basic |
95,670 | 68,665 | ||||||
| Share options |
536 | 132 | ||||||
|
|
|
|
|
|||||
| Diluted |
96,206 | 68,797 | ||||||
|
|
|
|
|
|||||
| Earnings per share (dollars) |
||||||||
| Basic |
$ | 6.96 | $ | 0.13 | ||||
| Diluted |
$ | 6.96 | $ | (0.09 | ) | |||
- 13 -
13. Segmented information
| Lumber | NA EWP | Pulp & Paper | Europe EWP | Corporate & Other |
Total | |||||||||||||||||||
| January 1, 2021 to March 31, 2021 |
||||||||||||||||||||||||
| Sales |
||||||||||||||||||||||||
| To external customers |
$ | 1,275 | $ | 779 | $ | 177 | $ | 112 | $ | — | $ | 2,343 | ||||||||||||
| To other segments |
25 | 2 | — | — | (27 | ) | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 1,300 | $ | 781 | $ | 177 | $ | 112 | $ | (27 | ) | $ | 2,343 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cost of products sold |
(490 | ) | (364 | ) | (125 | ) | (87 | ) | 27 | (1,039 | ) | |||||||||||||
| Freight and other distribution costs |
(91 | ) | (48 | ) | (33 | ) | (9 | ) | — | (181 | ) | |||||||||||||
| Export duties, net |
(37 | ) | — | — | — | — | (37 | ) | ||||||||||||||||
| Amortization |
(39 | ) | (54 | ) | (9 | ) | (17 | ) | (3 | ) | (122 | ) | ||||||||||||
| Selling, general and administration |
(36 | ) | (16 | ) | (8 | ) | (5 | ) | (13 | ) | (78 | ) | ||||||||||||
| Equity-based compensation |
— | — | — | — | (7 | ) | (7 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Operating earnings |
$ | 607 | $ | 299 | $ | 2 | $ | (6 | ) | $ | (23 | ) | $ | 879 | ||||||||||
| Finance expense, net |
(5 | ) | (1 | ) | (2 | ) | — | (5 | ) | (13 | ) | |||||||||||||
| Other |
7 | — | 1 | — | (4 | ) | 4 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Earnings before tax |
$ | 609 | $ | 298 | $ | 1 | $ | (6 | ) | $ | (32 | ) | $ | 870 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Currency remeasurement |
||||||||||||||||||||||||
| January 1, 2020 to March 31, 2020 |
||||||||||||||||||||||||
| Sales |
||||||||||||||||||||||||
| To external customers |
$ | 622 | $ | 103 | $ | 165 | $ | — | $ | — | $ | 890 | ||||||||||||
| To other segments |
21 | 1 | — | — | (22 | ) | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 643 | $ | 104 | $ | 165 | $ | — | $ | (22 | ) | $ | 890 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cost of products sold |
(453 | ) | (82 | ) | (117 | ) | — | 22 | (630 | ) | ||||||||||||||
| Freight and other distribution costs |
(82 | ) | (11 | ) | (32 | ) | — | — | (125 | ) | ||||||||||||||
| Export duties, net |
(26 | ) | — | — | — | — | (26 | ) | ||||||||||||||||
| Amortization |
(39 | ) | (3 | ) | (8 | ) | — | (2 | ) | (52 | ) | |||||||||||||
| Selling, general and administration |
(29 | ) | (5 | ) | (8 | ) | — | 1 | (41 | ) | ||||||||||||||
| Equity-based compensation |
— | — | — | — | (7 | ) | (7 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Operating earnings |
$ | 14 | $ | 3 | $ | — | $ | — | $ | (8 | ) | $ | 9 | |||||||||||
| Finance expense, net |
(9 | ) | (1 | ) | (2 | ) | — | — | (12 | ) | ||||||||||||||
| Other |
12 | — | 3 | — | (6 | ) | 9 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Earnings before tax |
$ | 17 | $ | 2 | $ | 1 | $ | — | $ | (14 | ) | $ | 6 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The geographic distribution of external sales is as follows1:
| January 1 to March 31 | ||||||||
| 2021 | Currency remeasurement 2020 |
|||||||
| Canada |
$ | 407 | $ | 176 | ||||
| U.S. |
1,636 | 559 | ||||||
| China |
118 | 104 | ||||||
| Other Asia |
64 | 44 | ||||||
| Other |
118 | 7 | ||||||
|
|
|
|
|
|||||
| $ | 2,343 | $ | 890 | |||||
|
|
|
|
|
|||||
| 1. | Sales distribution is based on the location of product delivery. |
- 14 -
| 14. | Countervailing and antidumping duty dispute |
Additional details can be found in Note 25 - Countervailing (“CVD”) and antidumping (“ADD”) duty dispute of our 2020 annual audited consolidated financial statements.
Developments in CVD and ADD rates
On April 24, 2017, the United States Department of Commerce (“USDOC”) issued its preliminary determination in the CVD investigation, and on June 26, 2017, the USDOC issued its preliminary determination in the ADD investigation. On December 4, 2017, the duty rates were revised. On November 24, 2020, the USDOC finalized these rates based on its first Administrative Review (“AR”) of the first Period of Investigation (“POI”) as listed below.
Effective November 30, 2020 for ADD and December 1, 2020 for CVD, shipments from Canada to the U.S. were subject to the new cash deposit rate of 7.57% for CVD and 1.40% for ADD.
The respective Cash Deposit Rates, the AR1 Final Rate, and the West Fraser Estimated ADD Rate for each period are as follows:
| Effective dates for CVD |
Cash Deposit Rate |
AR1 Final
Rate3 (24-Nov-20) |
||||||
| AR1 POI |
||||||||
| April 28, 2017 - August 24, 20171 |
24.12 | % | 6.76 | % | ||||
| August 25, 2017 - December 27, 20171 |
— | — | ||||||
| December 28, 2017 - December 31, 20172 |
17.99 | % | 6.76 | % | ||||
| January 1, 2018 - December 31, 2018 |
17.99 | % | 7.57 | % | ||||
| AR2 POI |
||||||||
| January 1, 2019 - December 31, 2019 |
17.99 | % | n/a | 5 | ||||
| AR3 POI |
||||||||
| January 1, 2020 - November 30, 2020 |
17.99 | % | n/a | 6 | ||||
| December 1, 2020 - December 31, 20204 |
7.57 | % | n/a | 6 | ||||
| AR4 POI |
||||||||
| January 1, 2021 – March 31, 2021 |
7.57 | % | n/a | 7 | ||||
| 1. | On April 24, 2017, the USDOC issued its preliminary rate in the CVD investigation. The requirement that we make cash deposits for CVD was suspended on August 24, 2017, until the USDOC published the revised rate. |
| 2. | On December 4, 2017, the USDOC revised our CVD Cash Deposit Rate effective December 28, 2017. |
| 3. | On February 3, 2020, the USDOC issued a preliminary CVD rate and, on November 24, 2020, a final CVD rate for the AR1 POI. This table only reflects the final rate. |
| 4. | Effective December 1, 2020, shipments from Canada to the U.S. were subject to the new Cash Deposit rate of 7.57% for CVD. |
| 5. | The CVD rate for the AR2 POI will be adjusted when AR2 is complete and the USDOC finalizes the rate, which is not expected until 2021. |
| 6. | The CVD rate for the AR3 POI will be adjusted when AR3 is complete and the USDOC finalizes the rate, which is not expected until 2022. |
| 7. | The CVD rate for the AR4 POI will be adjusted when AR4 is complete and the USDOC finalizes the rate, which is not expected until 2023. |
- 15 -
| Effective dates for ADD |
Cash Deposit Rate |
AR1
Final Rate3 (24-Nov-20) |
West Fraser Estimated Rate |
|||||||||
| AR1 POI |
||||||||||||
| June 30, 2017 - December 3, 20171 |
6.76 | % | 1.40 | % | 1.46 | % | ||||||
| December 4, 2017 - December 31, 20172 |
5.57 | % | 1.40 | % | 1.46 | % | ||||||
| January 1, 2018 - December 31, 2018 |
5.57 | % | 1.40 | % | 1.46 | % | ||||||
| AR2 POI |
||||||||||||
| January 1, 2019 - December 31, 2019 |
5.57 | % | n/a | 5 | 4.65 | % | ||||||
| AR3 POI |
||||||||||||
| January 1, 2020 - November 29, 2020 |
5.57 | % | n/a | 6 | 3.40 | % | ||||||
| November 30, 2020 – December 31, 20204 |
1.40 | % | n/a | 6 | 3.40 | % | ||||||
| AR4 POI |
||||||||||||
| January 1, 2021 – March 31, 2021 |
1.40 | % | n/a | 7 | 3.77 | % | ||||||
| 1. | On June 26, 2017, the USDOC issued its preliminary rate in the ADD investigation effective June 30, 2017. |
| 2. | On December 4, 2017, the USDOC revised our ADD Cash Deposit Rate effective December 4, 2017. |
| 3. | On February 3, 2020, the USDOC issued a preliminary ADD Rate and, on November 24, 2020, a final CVD rate for the AR1 POI. This table only reflects the final rate. |
| 4. | Effective November 30, 2020, shipments from Canada to the U.S. were subject to the new Cash Deposit Rate of 1.40% for ADD. |
| 5. | The ADD rate for the AR2 POI will be adjusted when AR2 is complete and the USDOC finalizes the rate, which is not expected until 2021. |
| 6. | The ADD rate for the AR3 POI will be adjusted when AR3 is complete and the USDOC finalizes the rate, which is not expected until 2022. |
| 7. | The ADD rate for the AR4 POI will be adjusted when AR4 is complete and the USDOC finalizes the rate, which is not expected until 2023. |
Impact on earnings
The following table reconciles our cash deposits paid during the period to the amount recorded in our earnings statement.
| January 1 to March 31 | ||||||||
| 2021 | Currency remeasurement 2020 |
|||||||
| Cash deposits1 |
$ | (29 | ) | $ | (32 | ) | ||
| Adjust to West Fraser Estimated ADD rate2 |
(8 | ) | 6 | |||||
|
|
|
|
|
|||||
| Duty recovery (expense)3 |
$ | (37 | ) | $ | (26 | ) | ||
|
|
|
|
|
|||||
| Interest income on duty deposits attributable to West Fraser Estimated rate adjustments |
$ | — | $ | — | ||||
| Interest income on the AR1 duty deposits receivable4 |
1 | — | ||||||
|
|
|
|
|
|||||
| Interest income on duty deposits |
$ | 1 | $ | — | ||||
|
|
|
|
|
|||||
| 1. | Represents combined CVD and ADD cash deposit rate of 8.97% for Q1-21 and 23.56% for Q1-20. |
| 2. | Represents adjustment to West Fraser Estimated ADD rate of 3.77% for Q1-21 and 0.77% for Q1-20. |
| 3. | The total represents the combined CVD cash deposit rate and West Fraser Estimated ADD rate of 11.34% for Q1-21 and 18.76% for Q1-20. |
| 4. | Represents interest income accrued on the $95 million AR1 true-up duty deposit receivable. |
- 16 -
Impact on the balance sheet
Export duty deposits receivable is represented by:
| Export duty deposits receivable |
January 1 to March 31 2021 |
Currency remeasurement January 1 to December 31 2020 |
||||||
| Beginning balance |
$ | 178 | $ | 61 | ||||
| Export duties recognized as long-term duty deposits receivable in consolidated balance sheets |
(8 | ) | 104 | |||||
| Interest recognized on the long-term duty deposits receivable |
1 | 13 | ||||||
|
|
|
|
|
|||||
| Ending balance |
$ | 171 | $ | 178 | ||||
|
|
|
|
|
|||||
As at March 31, 2021, export duties paid and payable on deposit with the USDOC are $562 million.
AR2, AR3 and AR4
The preliminary rates for AR2 (POI January 1 to December 31, 2019) are expected in the second quarter of 2021 and rates finalized by the fourth quarter. AR3 (POI January 1 to December 31, 2020) commenced in April 2021, and the rates are expected to be finalized sometime in 2022. AR4 (POI January 1 to December 31, 2021) is expected to commence in 2022 with the results finalized in 2023. We have been selected as a mandatory respondent for AR3, which will result in West Fraser continuing to be subject to a company-specific rate.
Appeals
Our 2020 annual MD&A included in our 2020 Annual Report includes details on Softwood Lumber Dispute appeals.
Notwithstanding the deposit rates assigned under the investigations, our final liability for CVD and ADD will not be determined until each annual administrative review process is complete and related appeal processes are concluded.
- 17 -
Exhibit 99.2
Management’s Discussion and Analysis
Introduction
This discussion and analysis by management (“MD&A”) of West Fraser Timber Co. Ltd.’s (“West Fraser”, the “Company” or “we,” “us,” or “our”) financial performance for the three months ending March 31, 2021, should be read in conjunction with: (i) our unaudited condensed consolidated interim financial statements and accompanying notes for the three months ended March 31, 2021 (“Financial Statements”); (ii) our audited annual consolidated financial statements for the year ended December 31, 2020, which are presented in Canadian dollars; and (iii) our related 2020 annual MD&A (“2020 Annual MD&A”).
Unless otherwise indicated, the financial information contained in this MD&A has been prepared in accordance with International Financial Reporting Standards (“IFRS”). This MD&A uses various Non-IFRS measures, including “Adjusted EBITDA”, “available liquidity”, and “total and net debt to total capital ratio”. An advisory with respect to the use of these Non-IFRS measures is set out in the section titled “Non-IFRS Measures”.
This MD&A includes statements that are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of applicable Canadian provincial securities laws. Please refer to the cautionary note entitled “Forward-Looking Statements” for a discussion of these forward-looking statements and the risks that impact on these forward-looking statements. Readers are also referred to the “Risks and Uncertainties” discussion contained in the Company’s 2020 Annual MD&A and the “Risk Factors” in our final base shelf prospectus dated April 12, 2021 (“Base Shelf Prospectus”). This information has been filed with Canadian provincial securities regulatory authorities and the U.S. Securities and Exchange Commission (the “SEC”). You may access this information on SEDAR at www.sedar.com and on EDGAR at www.sec.gov/edgar.shtml.
Dollar amounts are expressed in the United States (“U.S.”) currency unless otherwise indicated and reflect the change in our functional and reporting currency to the U.S. dollar effective February 1, 2021. Select unaudited historical financial information in U.S. dollars is available on our website at www.westfraser.com. This historical financial information presents selected financial information derived from our historical financial statements which have been presented in Canadian dollars for financial periods through to our year ended December 31, 2020.
Where this MD&A includes information from third parties, we believe that such information (including information from industry and general publications and surveys) is generally reliable. However, we have not independently verified any such third-party information and cannot assure you of its accuracy or completeness.
This MD&A uses the following terms as described in our most recent Annual Information Form: “SPF” (spruce/pine/balsam fir lumber), “SYP” (southern yellow pine lumber), “OSB” (oriented strand board), “MDF” (medium-density fibreboard), “LVL” (laminated veneer lumber), “BCTMP” (bleached chemithermomechanical pulp), and “NBSK” (northern bleached softwood kraft pulp). Defined acronyms include: “U.K.” (United Kingdom); “U.S.” (United States); “NA” (North America); “NA EWP” (North America engineered wood products), “EWP” (engineered wood products); “ADD” (antidumping duty); “USDOC” (United States Department of Commerce); “USITC” (United States International Trade Commission); “CVD” (countervailing duty); “AR” (administrative review); “POI” (period of investigation); “NCIB” (normal course issuer bid); “TSX” (Toronto Stock Exchange); “NYSE” (New York Stock Exchange); “Acquisition” (February 1, 2021 Norbord Acquisition); “2023 Notes” (Norbord Inc.’s 6.25% senior notes due April 2023); “2027 Notes” (Norbord Inc.’s 5.75% senior notes due July 2027).
The information in this MD&A is as at May 6, 2021, unless otherwise indicated.
Our Business and Strategy
West Fraser is a diversified wood products company producing lumber, OSB, LVL, MDF, plywood, particleboard, pulp, newsprint, wood chips, other residuals and energy with facilities across Canada, in the United States and in Europe. As a result of our acquisition of Norbord on February 1, 2021, we are now a leading producer of OSB. In addition to OSB, Norbord manufactures particleboard, MDF and related value-added products. Our business is now comprised of 33 lumber mills, 14 OSB facilities, six renewable energy facilities, five pulp and paper mills, three plywood facilities, three MDF facilities, two particleboard facilities, one LVL facility, one treated wood facility, and one veneer facility. We employ approximately 11,000 people.
Our goal at West Fraser is to generate strong financial results through the business cycle, relying on our committed workforce, the quality of our assets and our well-established people and operating culture. This culture emphasizes cost control in all aspects of the business and operating in a financially conservative and prudent manner.
The North American wood products industry is cyclical and periodically faces difficult market conditions and serious challenges. Our earnings are sensitive to changes in world economic conditions, primarily those in North America, Asia and Europe and particularly to the U.S. housing market for both new construction and repair and renovation spending. Most of our revenues are from sales of commodities for which prices are sensitive to variations in supply and demand. As many of our costs are denominated in Canadian dollars, Pounds Sterling and Euros, exchange rate fluctuations of the Canadian dollar, Pound Sterling and Euro against the United States dollar are anticipated to be a significant source of earnings volatility for us.
We believe that maintaining a strong balance sheet and liquidity profile, along with our investment grade debt rating, enables us to execute a balanced capital allocation strategy. Our goal is to continually reinvest in our operations, across all market cycles, to maintain a leading cost position and prudently return capital to shareholders. We believe that maintaining a strong balance sheet also provides the financial flexibility to capitalize on growth opportunities and is a key tool in managing our business over the long term. Our earnings over the business cycle have enabled us to make significant and ongoing capital investments in our facilities with the goal of achieving, maintaining or improving an overall low-cost position.
Change in Functional and Reporting Currency
West Fraser has determined that as a result of the acquisition of Norbord Inc. (the “Acquisition”), the functional currency of our Canadian operations has changed from the Canadian dollar (“CAD”) to the United States dollar (“USD”). Management considered a variety of factors when making this decision. The most significant being an increase in the levels of sales made in U.S. dollars, a portion of operating expenses are incurred in U.S. dollars, and increased levels of U.S. dollar financing from the Acquisition.
Concurrent with the change in functional currency, we also changed our reporting currency from Canadian dollars to U.S. dollars. This change in reporting currency is to better reflect the Company’s business activities, following the increased presence in the U.S. as a result of the Acquisition and in connection with the listing of West Fraser’s common shares on the NYSE on February 1, 2021.
A change in functional currency is applied prospectively and must be based on a change in economic facts, events and conditions. In contrast, a change in reporting currency requires retroactive restatement. Both changes have specific transition rules under International Accounting Standard (“IAS”) 21, The Effects of Changes in Foreign Exchange Rates.
As at and for the year ended December 31, 2020, and all prior periods the functional and reporting currency of the Company was the Canadian dollar as described in our audited annual consolidated financial statements. The currency remeasurement of West Fraser results applied the IAS 21 transitional rules.
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To prepare our December 31, 2020 and January 1, 2020 consolidated balance sheets, all assets and liabilities were translated into U.S. dollars at the closing exchange rate on December 31, 2020 and December 31, 2019. Equity items were retroactively restated at historical exchange rates to give effect to the change in reporting currency. The accounting policy used to translate the equity items prior to 2020, was to use the annual average exchange rate for each equity transaction that occurred in the year. For 2020, equity items were translated quarterly using the average exchange rate for each quarter.
To prepare our 2020 consolidated statement of earnings, all revenues and expenses were translated into U.S. dollars at the average exchange rate for each quarter, with no adjustments to the measurement of or accounting for previously reported results. To prepare our 2020 consolidated statement of cash flow, all items were translated into U.S. dollars at the average exchange rate for each quarter, with no adjustments to the measurement of or accounting for previously reported results.
These Financial Statements should also be read in conjunction with our 2020 annual MD&A and annual audited consolidated financial statements, which are presented in Canadian dollars. Select unaudited historical financial information in U.S. dollars is available on our website at www.westfraser.com.
Norbord Acquisition
On February 1, 2021, we acquired all of the outstanding shares of Norbord Inc. (“Norbord”). According to the terms of the Acquisition, Norbord shareholders received 0.675 of a West Fraser share for each Norbord share held (the “Exchange Ratio”). The result was the issuance of 54,484,188 Common shares of West Fraser at a price of US$63.90 per share (CAD$81.94 per share) for $3,482 million. The price per share is based on the West Fraser share’s closing price as listed on the TSX on January 29, 2021, and a CAD/USD exchange rate of 0.7798.
The Acquisition includes five OSB mills in Canada, seven OSB mills in the U.S., one OSB mill, one MDF plant, and two particleboard plants in the United Kingdom (“U.K.”), one OSB mill in Belgium, and their related corporate offices.
We have incorporated the North American operations of Norbord into our Panels segment and renamed that segment North America Engineered Wood Products (“NA EWP”). This segment includes the results from North American operations for OSB, plywood, MDF, and LVL. In addition, we have identified a Europe EWP segment, which includes the results from the U.K. and Belgium operations for OSB, MDF and particleboard. The EWP segments have been separated due to differences in the operating region, customer base, profit margins and sales volumes. The EWP segments incorporate the operations and results of the Norbord operations effective from February 1, 2021.
The acquisition of Norbord by West Fraser constitutes a business combination under IFRS 3, Business Combinations, with West Fraser as the acquirer. We have applied purchase price accounting to the Acquisition resulting in a significant increase from the historical cost base of Norbord and $1,374 million of goodwill. The purchase price allocation is a preliminary estimate which is expected to be finalized by year-end. Purchase price accounting also impacted first-quarter results for the two EWP segments, as discussed in the relevant segments below. Factors contributing to goodwill include the Norbord workforce, assets that are geographically complementary to our existing facilities and offer close access to large markets and timber baskets. The Acquisition also provides increased scale and geographic diversification of manufacturing and markets. This was a rare opportunity to acquire an OSB producer with meaningful capacity, high-quality employees and facilities and a complementary strategy and culture. Note 3 to our Financial Statements provides details on the purchase price allocation.
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The following tables represent Norbord’s actual results included in our statement of earnings and the proforma results of operations for the three months ended March 31, 2021, assuming the transaction occurred on January 1, 2021, and including purchase price accounting for the Acquisition.
Norbord Results
| ($ millions except as otherwise indicated) | ||||
| Norbord Results for February 1 to March 31, 20211 |
||||
| Sales |
707 | |||
| Operating earnings |
218 | 2 | ||
| Earnings |
160 | 2 | ||
| 1. | Represents the results of the Norbord operations since the acquisition date that are included in our Q1-21 results. |
| 2. | Includes purchase price accounting impact of $93 million expense for the one-time inventory adjustment in cost of products sold and $41 million expense for amortization. Earnings was further impacted by a $3 million recovery for finance expense and the related tax impact on these items. |
Proforma Q1-21 Results
| ($ millions except as otherwise indicated) | ||||||||||||
| West Fraser Actual Results Q1-21 |
Norbord Proforma Results1 Jan-21 |
West
Fraser Proforma Results1 Q1-21 |
||||||||||
| Sales |
2,343 | 277 | 2,620 | |||||||||
| Operating earnings |
879 | 2 | 115 | 3 | 994 | 4 | ||||||
| Earnings |
665 | 2 | 86 | 3 | 751 | 4 | ||||||
| 1. | These unaudited proforma results have been provided as required per IFRS 3 - Business Combinations. West Fraser proforma Q1-21 presents West Fraser’s results as if the Acquisition was completed on January 1, 2021. |
| 2. | Operating earnings includes purchase price accounting impact of $93 million expense for the one-time inventory adjustment in cost of products sold and $41 million expense for amortization. Earnings was further impacted by a $3 million recovery for finance expense and the related tax impact on these items. |
| 3. | Operating earnings includes purchase price accounting impact of $18 million expense for amortization. Earnings was further impacted by a $1 million recovery for finance expense and the related tax impact on these items. |
| 4. | Includes purchase price accounting per footnote 2 and 3. |
Recent Developments
Markets
In North America, changes in new home construction activity levels in the U.S. are a significant driver of volatility in lumber and OSB demand, and activity continued to strengthen through most of the quarter. Canadian new home construction also improved. Construction activities coupled with elevated home improvement repair and remodelling demand led to increased pricing for most of our building products during the quarter.
According to the U.S. Census Bureau, the seasonally adjusted annualized rate of U.S. housing starts averaged 1.74 million units in March, with permits issued averaging 1.77 million units, the highest level since 2006. We believe the increased activity is supported by low mortgage rates, low availability of homes for sale, and an extended period of delayed building following the financial crisis as well as changes in home ownership trends stemming from the COVID-19 pandemic, including a movement towards working from home arrangements.
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Summary Information
| ($ millions except as otherwise indicated) | ||||||||||||
| Q1-211 | Q4-20 | Q1-20 | ||||||||||
| Earnings |
||||||||||||
| Sales |
2,343 | 1,294 | 890 | |||||||||
| Cost of products sold |
(1,039 | )2 | (686 | ) | (630 | ) | ||||||
| Freight and other distribution costs |
(181 | ) | (139 | ) | (125 | ) | ||||||
| Export duties, net |
(37 | ) | 36 | (26 | ) | |||||||
| Amortization |
(122 | ) | (54 | ) | (52 | ) | ||||||
| Selling, general and administration |
(78 | ) | (52 | ) | (41 | ) | ||||||
| Equity-based compensation |
(7 | ) | (4 | ) | (7 | ) | ||||||
|
|
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|
|
|
|
|||||||
| Operating earnings |
879 | 395 | 9 | |||||||||
| Finance expense |
(13 | ) | 3 | (12 | ) | |||||||
| Other |
4 | (13 | ) | 9 | ||||||||
| Tax recovery (expense) |
(205 | ) | (103 | ) | 3 | |||||||
|
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|
|
|
|
|||||||
| Earnings |
665 | 282 | 9 | |||||||||
|
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|
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|
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| Adjusted EBITDA3,4 |
1,008 | 2 | 453 | 68 | ||||||||
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|
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| 1. | The results of the operations of Norbord from the date of the Acquisition of February 1, 2021 are included in West Fraser’s financial results. |
| 2. | Cost of products sold was increased and Adjusted EBITDA decreased by a one-time charge of $93 million related to inventory purchase price accounting. |
| 3. | See section “Non-IFRS Measures” in this MD&A. |
| 4. | Effective January 1, 2021, and for all comparative periods, export duties are no longer excluded from the definition of Adjusted EBITDA. |
Selected Quarterly Information
| ($ millions except earnings per share (“EPS”) amounts which are in $) | ||||||||||||||||||||||||||||||||
| Q1-21 | Q4-20 | Q3-20 | Q2-20 | Q1-20 | Q4-19 | Q3-19 | Q2-19 | |||||||||||||||||||||||||
| Sales |
2,343 | 1,294 | 1,268 | 921 | 890 | 855 | 901 | 984 | ||||||||||||||||||||||||
| Earnings |
665 | 282 | 262 | 35 | 9 | (32 | ) | (34 | ) | (44 | ) | |||||||||||||||||||||
| Basic EPS |
6.96 | 4.09 | 3.82 | 0.51 | 0.13 | (0.46 | ) | (0.50 | ) | (0.64 | ) | |||||||||||||||||||||
| Diluted EPS |
6.96 | 4.09 | 3.82 | 0.51 | (0.09 | ) | (0.46 | ) | (0.55 | ) | (0.69 | ) | ||||||||||||||||||||
Discussion & Analysis of Non-Operational Items
Our equity-based compensation includes our share purchase option, phantom share unit, and deferred share unit plans (collectively, the “Plans”), all of which have been partially hedged by an equity derivative contract. The Plans include those equity-based plans assumed from Norbord as part of the Acquisition. Most of the Plans and our equity derivative contract are fair valued at each quarter-end, and the resulting expense or recovery is recorded over the vesting period. The assumed Norbord share purchase option plans were fair valued at the Acquisition date, and the resulting expense of any unvested options will be recorded into earnings over the remaining vesting period without any further fair value adjustments. For those Plans that are fair valued at each quarter-end, our models consider various factors, with the most significant being the change in the market value of our shares from the beginning to the end of the relevant period. The expense or recovery does not necessarily represent the value that the holders of options and units will ultimately receive.
Finance expense was higher than the previous quarter due to the additional interest incurred on the Norbord senior notes for the two months following the Acquisition and the interest income recognized in the previous quarter relating to the excess export duty deposits from the first AR (“AR1”). The section below titled “Capital Structure and Liquidity” includes details on the Norbord senior notes. Finance expense was comparable to the first quarter of 2020 despite the interest on the Norbord Notes as our revolving loan borrowings were higher in the first quarter of 2020.
Effective February 1, 2021, our Canadian operations functional currency changed from Canadian dollars to U.S. dollars. From that date forward, any change in the value of the U.S. dollar relative to the value of the Canadian dollar results in the revaluation of our Canadian dollar-denominated monetary assets and liabilities. The currency revaluations are recorded in other income.
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At the same time, we retroactively changed our reporting currency from Canadian dollars to U.S. dollars. The change of reporting currency resulted in a currency remeasurement of prior period results. Fiscal 2020’s revenues and expenses were translated into U.S. dollars at the average exchange rate, with no adjustments to the measurement of or accounting for previously reported results.
Additional details on West Fraser’s conversion to U.S. dollars can be found under the title “Change in Functional and Reporting Currency.” Other income included an exchange loss of $6 million for the current quarter, compared to a loss of $16 million in the previous quarter and a gain of $14 million in the first quarter of 2020.
As part of the Acquisition, we acquired operations in the U.K. and Belgium, so any change in the value of the British Pound or Euro relative to the value of the U.S. dollar results in the revaluation of our European EWP operations assets and liabilities. The revaluation of our European operations into U.S. dollars is reported in other comprehensive earnings.
The current quarter results include an income tax expense of $205 million, compared to $103 million in the previous quarter, and a recovery of $3 million in the first quarter of 2020. The effective tax rate was 24% in the current quarter compared to 27% in the previous quarter and 50% in the first quarter of 2020. Note 11 to the Financial Statements provides a reconciliation of income taxes calculated at the statutory rate to the income tax expense.
Discussion & Analysis by Product Segment
Lumber Segment
| ($ millions unless otherwise indicated) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| Lumber Segment Earnings |
||||||||||||
| Sales |
||||||||||||
| Lumber |
1,198 | 915 | 547 | |||||||||
| Wood chips and other residuals |
70 | 69 | 67 | |||||||||
| Logs and other |
32 | 26 | 29 | |||||||||
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|
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| 1,300 | 1,010 | 643 | ||||||||||
| Cost of products sold |
(490 | ) | (487 | ) | (453 | ) | ||||||
| Freight and other distribution costs |
(91 | ) | (97 | ) | (82 | ) | ||||||
| Export duties, net |
(37 | ) | 36 | (26 | ) | |||||||
| Amortization |
(39 | ) | (40 | ) | (39 | ) | ||||||
| Selling, general and administration |
(36 | ) | (37 | ) | (29 | ) | ||||||
|
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|
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| Operating earnings |
607 | 385 | 14 | |||||||||
| Finance expense |
(5 | ) | 6 | (9 | ) | |||||||
| Other |
7 | (8 | ) | 12 | ||||||||
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| Earnings before tax |
609 | 383 | 17 | |||||||||
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| Adjusted EBITDA1,2 |
646 | 425 | 53 | |||||||||
| SPF (MMfbm) |
||||||||||||
| Production |
838 | 810 | 793 | |||||||||
| Shipments |
748 | 840 | 699 | |||||||||
| SYP (MMfbm) |
||||||||||||
| Production |
685 | 692 | 708 | |||||||||
| Shipments |
641 | 711 | 727 | |||||||||
| 1. | See section “Non-IFRS Measures” in this MD&A. |
| 2. | Effective January 1, 2021, and for all comparative periods, export duties are no longer excluded from the definition of Adjusted EBITDA. |
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Sales and Shipments
Lumber sales increased compared to the previous quarter and first quarter of 2020 due to higher product pricing. Lower shipment volumes only partially offset this increase.
Shipment volumes during the quarter were negatively impacted by seasonal railcar shortages in Canada and a period of extreme winter conditions in the U.S. South. The weather events in the U.S. South also interrupted activity in the supply chain and it took a period of time for orders and shipments to return to levels prior to the interruptions. SPF shipments in the first quarter of 2020 were impacted by rail line blockades and lower demand at the end of the quarter due to COVID-19 related market conditions.
Lumber price increases resulted in a $420 million increase in Adjusted EBITDA compared to the previous quarter and $684 million compared to the first quarter of 2020. Lower shipment volumes decreased Adjusted EBITDA by $85 million compared to the previous quarter and $23 million compared to the first quarter of 2020.
We ship SPF to several export markets, while our SYP sales are almost entirely in the U.S. U.S. destined SPF shipments were lower in line with reduced overall SPF shipments and remained a consistent percentage of total sales. Demand for lumber in China fluctuated significantly throughout 2020, creating variations in quarterly comparisons.
SPF Sales by Destination
| (MMfbm) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| U.S. |
474 | 567 | 449 | |||||||||
| Canada |
179 | 177 | 132 | |||||||||
| China |
60 | 64 | 87 | |||||||||
| Other |
35 | 32 | 31 | |||||||||
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| 748 | 840 | 699 | ||||||||||
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Costs and Production
Manufacturing costs increased due to increased SPF log costs, and to a lesser degree, increased SYP log costs. The U.S. South also had increased expenditures related to the extreme winter conditions and increased employee costs associated with managing through COVID-19 impacts. B.C. log costs have been rising due to fibre shortages, which has increased competition for logs available through the B.C. Timber Sales log market. The portion of SPF stumpage costs tied to the price of lumber have also increased. Alberta’s stumpage system for logs is correlated to published lumber prices with a short time lag. B.C.’s stumpage system is tied to publicly auctioned timber harvesting rights and published lumber prices, but with a longer time lag. Increased costs resulted in a decrease in Adjusted EBITDA of $51 million compared to the previous quarter and $54 million compared to the first quarter of 2020.
Freight and other distribution costs generally trended with the changes in shipment volumes.
In 2020, we implemented some temporary production curtailments in response to low demand related to COVID-19. The result was a decrease of 30 MMfbm of SPF and 20 MMfbm of SYP production. There were no significant curtailments in the current or the previous quarter, although the extreme winter conditions in the U.S. South negatively impacted output for a short period at a few locations.
Selling, general, and administration costs were higher than the first quarter of 2020, primarily due to higher variable employee compensation. Variable employee compensation was similar to the previous quarter.
Export duties were significantly higher than the comparative periods, primarily due to increased lumber pricing and the $95 million duty recovery recorded in the previous quarter. Duty expense was also impacted by the changing duty rates, as described in the footnotes of the table below. The West Fraser estimated ADD rate for the current quarter is higher than the cash deposit rate primarily due to currency and product price fluctuations and shipment timing in volatile markets, leading to unexpected variations in duties. The duty recovery recognized in the previous quarter was related to the finalization of the duty rates for AR1.
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Duty impact on earnings
| ($ millions) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| Cash deposits1 |
(29 | ) | (54 | ) | (32 | ) | ||||||
| Adjust to West Fraser Estimated ADD rate2 |
(8 | ) | (5 | ) | 6 | |||||||
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| Effective duty expense for period3 |
(37 | ) | (59 | ) | (26 | ) | ||||||
| Duty recovery attributable to AR14 |
— | 95 | — | |||||||||
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| Duty recovery (expense) |
(37 | ) | 36 | (26 | ) | |||||||
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| Interest income on duty deposits attributable to West Fraser Estimated rate adjustments |
— | — | — | |||||||||
| Interest income on the AR1 duty deposits receivable5 |
1 | 11 | — | |||||||||
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| Interest income on duty deposits |
1 | 11 | — | |||||||||
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| 1. | Represents combined CVD and ADD cash deposit rate of 8.97% for Q1-21, 23.56% from October 1, 2020 to November 30, 2020, and 8.97% from December 1 to December 31, 2020, and 23.56% for Q1-20. |
| 2. | Represents adjustment to West Fraser Estimated ADD rate of 3.77% for Q1-21, 3.40% for Q4-20 and 0.77% for Q1-20. |
| 3. | The total represents the combined CVD cash deposit rate and West Fraser Estimated ADD rate of 11.34% for Q1-21, 21.39% from October 1 to November 30, 2020, 10.97% from December 1 to December 31, 2020, and 18.76% for Q1-20. |
| 4. | $95 million represents the true-up to the final AR1 duty rates for the 2017 and 2018 POI. |
| 5. | Represents interest income accrued on the $95 million duty deposit receivable. |
As a consequence of the items discussed above, the Adjusted EBITDA increased by $221 million compared to the previous quarter and by $593 million compared to the first quarter of 2020. The following table shows the Adjusted EBITDA variance for each comparative period. Starting this quarter and for all comparative periods, duties are no longer excluded from the definition of Adjusted EBITDA.
Adjusted EBITDA
| ($ millions) |
||||||||
| Q4-20 to Q1-21 | Q1-20 to Q1-21 | |||||||
| Adjusted EBITDA - comparative period |
425 | 53 | ||||||
| Price |
420 | 684 | ||||||
| Volume |
(85 | ) | (23 | ) | ||||
| Change in export duties |
22 | (11 | ) | |||||
| Export duty adjustment for AR1 |
(95 | ) | — | |||||
| Changes in costs |
(51 | ) | (54 | ) | ||||
| Other |
10 | (3 | ) | |||||
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| Adjusted EBITDA - current period |
646 | 646 | ||||||
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Discussions on finance expense are included under the section “Discussion & Analysis of Non-Operational Items” in this MD&A. The Lumber segment finance expense for the previous quarter is net of $11 million of interest income related to the AR1 duty rate’s finalization as discussed under the section “Softwood Lumber Dispute” below.
Fluctuations in other income were mostly due to foreign exchange revaluations on our Canadian operation’s Canadian dollar monetary assets and liabilities.
Softwood Lumber Dispute
On November 25, 2016, a coalition of U.S. lumber producers petitioned the USDOC and the USITC to investigate alleged subsidies to Canadian softwood lumber producers and levy CVD and ADD duties against Canadian softwood lumber imports. The USDOC chose us as a “mandatory respondent” to both the countervailing and antidumping investigations, and as a result, we have received unique company-specific rates.
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Developments in CVD and ADD rates
On April 24, 2017, the USDOC issued its preliminary determination in the CVD investigation, and on June 26, 2017, the USDOC issued its preliminary determination in the ADD investigation. On December 4, 2017, the duty rates were revised. On November 24, 2020, the USDOC finalized these rates based on its first AR of the first POI as listed below.
Effective November 30, 2020 for ADD and December 1, 2020 for CVD, shipments from Canada to the U.S. were subject to the new cash deposit rate of 7.57% for CVD and 1.40% for ADD.
The respective Cash Deposit Rates, the AR1 Final Rate, and the West Fraser Estimated ADD Rate for each period are as follows:
| Effective dates for CVD |
Cash Deposit Rate |
AR1 Final
Rate3 (24-Nov-20) |
||||||
| AR1 POI |
||||||||
| April 28, 2017 - August 24, 20171 |
24.12 | % | 6.76 | % | ||||
| August 25, 2017 - December 27, 20171 |
— | — | ||||||
| December 28, 2017 - December 31, 20172 |
17.99 | % | 6.76 | % | ||||
| January 1, 2018 - December 31, 2018 |
17.99 | % | 7.57 | % | ||||
| AR2 POI |
||||||||
| January 1, 2019 - December 31, 2019 |
17.99 | % | n/a | 5 | ||||
| AR3 POI |
||||||||
| January 1, 2020 - November 30, 2020 |
17.99 | % | n/a | 6 | ||||
| December 1, 2020 - December 31, 20204 |
7.57 | % | n/a | 6 | ||||
| AR4 POI |
||||||||
| January 1, 2021 – March 31, 2021 |
7.57 | % | n/a | 7 | ||||
| 1. | On April 24, 2017, the USDOC issued its preliminary rate in the CVD investigation. The requirement that we make cash deposits for CVD was suspended on August 24, 2017, until the USDOC published the revised rate. |
| 2. | On December 4, 2017, the USDOC revised our CVD Cash Deposit Rate effective December 28, 2017. |
| 3. | On February 3, 2020, the USDOC issued a preliminary CVD rate and, on November 24, 2020, a final CVD rate for the AR1 POI. This table only reflects the final rate. |
| 4. | Effective December 1, 2020, shipments from Canada to the U.S. were subject to the new Cash Deposit rate of 7.57% for CVD. |
| 5. | The CVD rate for the AR2 POI will be adjusted when AR2 is complete and the USDOC finalizes the rate, which is not expected until 2021. |
| 6. | The CVD rate for the AR3 POI will be adjusted when AR3 is complete and the USDOC finalizes the rate, which is not expected until 2022. |
| 7. | The CVD rate for the AR4 POI will be adjusted when AR4 is complete and the USDOC finalizes the rate, which is not expected until 2023. |
- 9 -
| Effective dates for ADD |
Cash Deposit Rate |
AR1
Final Rate3 (24-Nov-20) |
West Fraser Estimated Rate |
|||||||||
| AR1 POI |
||||||||||||
| June 30, 2017 - December 3, 20171 |
6.76 | % | 1.40 | % | 1.46 | % | ||||||
| December 4, 2017 - December 31, 20172 |
5.57 | % | 1.40 | % | 1.46 | % | ||||||
| January 1, 2018 - December 31, 2018 |
5.57 | % | 1.40 | % | 1.46 | % | ||||||
| AR2 POI |
||||||||||||
| January 1, 2019 - December 31, 2019 |
5.57 | % | n/a | 5 | 4.65 | % | ||||||
| AR3 POI |
||||||||||||
| January 1, 2020 - November 29, 2020 |
5.57 | % | n/a | 6 | 3.40 | % | ||||||
| November 30, 2020 - December 31, 20204 |
1.40 | % | n/a | 6 | 3.40 | % | ||||||
| AR4 POI |
||||||||||||
| January 1, 2021 - March 31, 2021 |
1.40 | % | n/a | 7 | 3.77 | % | ||||||
| 1. | On June 26, 2017, the USDOC issued its preliminary rate in the ADD investigation effective June 30, 2017. |
| 2. | On December 4, 2017, the USDOC revised our ADD Cash Deposit Rate effective December 4, 2017. |
| 3. | On February 3, 2020, the USDOC issued a preliminary ADD Rate and, on November 24, 2020, a final CVD rate for the AR1 POI. This table only reflects the final rate. |
| 4. | Effective November 30, 2020, shipments from Canada to the U.S. were subject to the new Cash Deposit Rate of 1.40% for ADD. |
| 5. | The ADD rate for the AR2 POI will be adjusted when AR2 is complete and the USDOC finalizes the rate, which is not expected until 2021. |
| 6. | The ADD rate for the AR3 POI will be adjusted when AR3 is complete and the USDOC finalizes the rate, which is not expected until 2022. |
| 7. | The ADD rate for the AR4 POI will be adjusted when AR4 is complete and the USDOC finalizes the rate, which is not expected until 2023. |
Accounting policy for duties
The CVD and ADD rates apply retroactively for each POI. We record CVD as export duty expense at the cash deposit rate until an AR finalizes a new applicable rate for each POI. We record ADD as export duty expense by estimating the rate to be applied for each POI by using our actual results and the same calculation methodology as the USDOC and adjust when an AR finalizes a new applicable rate for each POI. The difference between the cash deposits and export duty expense is recorded on our balance sheet as export duty deposits receivable, along with any true-up adjustments to finalized rates.
The difference between the cash deposit amount and the amount that would have been due based on the final AR rate will incur interest based on the U.S. federally published interest rate. We record interest income on our duty deposits receivable based on this rate and will record an interest expense if the balance becomes a liability.
AR2, AR3, and AR4
The preliminary rates for AR2 (POI January 1 to December 31, 2019) are expected in the second quarter of 2021 and rates finalized by the fourth quarter. AR3 (POI January 1 to December 31, 2020) commenced in April 2021, and the rates are expected to be finalized sometime in 2022. AR4 (POI January 1 to December 31, 2021) is expected to commence in 2022 with the results finalized in 2023. We have been selected as a mandatory respondent for AR3, which will result in West Fraser continuing to be subject to a company-specific rate.
Appeals
Our 2020 annual MD&A included in our 2020 Annual Report includes details on Softwood Lumber Dispute appeals.
Notwithstanding the deposit rates assigned under the investigations, our final liability for CVD and ADD will not be determined until each annual administrative review process is complete and related appeal processes are concluded.
- 10 -
North America Engineered Wood Products (“NA EWP”) Segment
| ($ millions unless otherwise indicated) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| NA EWP Segment Earnings |
||||||||||||
| Sales |
||||||||||||
| OSB |
595 | — | — | |||||||||
| Plywood, LVL and MDF |
180 | 147 | 99 | |||||||||
| Wood chips, logs and other |
6 | 4 | 5 | |||||||||
|
|
|
|
|
|
|
|||||||
| 781 | 151 | 104 | ||||||||||
| Cost of products sold |
(364 | ) | (86 | ) | (82 | ) | ||||||
| Freight and other distribution costs |
(48 | ) | (11 | ) | (11 | ) | ||||||
| Amortization |
(54 | ) | (4 | ) | (3 | ) | ||||||
| Selling, general and administration |
(16 | ) | (6 | ) | (5 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Operating earnings |
299 | 44 | 3 | |||||||||
| Finance expense |
(1 | ) | (1 | ) | (1 | ) | ||||||
| Other |
— | (1 | ) | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Earnings before tax |
298 | 42 | 2 | |||||||||
|
|
|
|
|
|
|
|||||||
| Adjusted EBITDA1 |
353 | 48 | 6 | |||||||||
| OSB (MMsf 3/8” basis) |
||||||||||||
| Production |
1,025 | — | — | |||||||||
| Shipments |
1,010 | — | — | |||||||||
| Plywood (MMsf 3/8” basis) |
||||||||||||
| Production |
202 | 200 | 198 | |||||||||
| Shipments |
191 | 197 | 192 | |||||||||
| MDF (MMsf 3/4” basis) |
||||||||||||
| Production |
55 | 55 | 55 | |||||||||
| Shipments |
57 | 52 | 54 | |||||||||
| LVL (Mcf) |
||||||||||||
| Production |
572 | 569 | 494 | |||||||||
| Shipments |
563 | 573 | 485 | |||||||||
| 1. | See section “Non-IFRS Measures” in this MD&A. Q1-21 Adjusted EBITDA was decreased by a one-time charge of $86 million related to inventory purchase price accounting. |
Our NA EWP segment includes our North American OSB, plywood, MDF, and LVL operations. Our operations and financial results up to February 1, 2021 only reflect activities associated with West Fraser’s Panels segment without incorporating the pre-February 1, 2021 North American operations and results of Norbord. Subsequent to February 1, 2021, our operations and financial results reflect the consolidated activities and operations of West Fraser and Norbord, including incorporating the North American operations of Norbord into our NA EWP segment.
Sales and Shipments
Sales increased due to the addition of our OSB operations from the date of the Acquisition and higher plywood pricing relative to the comparative periods. The plywood, MDF and LVL price variance increased Adjusted EBITDA by $35 million compared to the previous quarter and $77 million compared to the first quarter of 2020.
Plywood shipment volumes were impacted by the weather-related railcar shortages but to a lesser extent than SPF lumber.
Costs and Production
All of our operating expenses increased due to the addition of the OSB operations.
- 11 -
Purchase price accounting increased our OSB cost of products sold by $86 million and Norbord’s pre-acquisition amortization by $29 million. Accounting standards require acquired inventory to be valued at fair value, which is represented by the estimated selling price, less the sum of (a) the costs of disposal, and (b) a reasonable profit allowance for the completing and selling effort, based on the profit for similar finished goods. Property, plant, and equipment assets were valued at depreciated replacement cost to represent fair value. The customer list intangible asset related to our North America operations will be amortized over 10-years and is based on a valuation model prepared by an independent valuation firm. The purchase price allocation is a preliminary estimate which is expected to be finalized by year-end.
Increased resin costs negatively impacted our OSB operating results and increased wood costs in B.C., Alberta, and Ontario increased our EWP group costs. B.C. purchased log costs increased due to fibre shortages, and B.C., Ontario, and Alberta stumpage costs increased due to higher fees tied to published product prices as discussed in our Lumber segment. Extreme weather in the U.S. South negatively impacted OSB production and increased operating costs due to the unscheduled weather-related downtime.
As a consequence of the items discussed above, the Adjusted EBITDA increased by $305 million compared to the previous quarter and by $347 million compared to the first quarter of 2020. The following table shows the Adjusted EBITDA variance for each comparative period after reclassifying the results of our NA OSB result into one line as the results are not included in the comparative periods. The other variances are only for plywood, LVL, and MDF.
| ($ millions) |
||||||||
| Q4-20 to Q1-21 | Q1-20 to Q1-21 | |||||||
| Adjusted EBITDA - comparative period |
48 | 6 | ||||||
| Price |
35 | 77 | ||||||
| OSB Adjusted EBITDA since the date of Acquisition1 |
280 | 280 | ||||||
| Volume |
(3 | ) | — | |||||
| Changes in costs |
(10 | ) | (10 | ) | ||||
| Other |
3 | — | ||||||
|
|
|
|
|
|||||
| Adjusted EBITDA - current period |
353 | 353 | ||||||
|
|
|
|
|
|||||
| 1. | Includes $86 million of inventory fair value adjustments from purchase price accounting (see above). |
Discussions on finance expense are included under the section “Discussion & Analysis of Non-Operational Items” in this MD&A.
- 12 -
Pulp & Paper Segment
| ($ millions unless otherwise indicated) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| Pulp & Paper Segment Earnings |
||||||||||||
| Sales |
177 | 159 | 165 | |||||||||
| Cost of products sold |
(125 | ) | (139 | ) | (117 | ) | ||||||
| Freight and other distribution costs |
(33 | ) | (31 | ) | (32 | ) | ||||||
| Amortization |
(9 | ) | (8 | ) | (8 | ) | ||||||
| Selling, general and administration |
(8 | ) | (9 | ) | (8 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Operating earnings |
2 | (28 | ) | — | ||||||||
| Finance expense |
(2 | ) | (2 | ) | (2 | ) | ||||||
| Other |
1 | (3 | ) | 3 | ||||||||
|
|
|
|
|
|
|
|||||||
| Earnings before tax |
1 | (33 | ) | 1 | ||||||||
|
|
|
|
|
|
|
|||||||
| Adjusted EBITDA1 |
11 | (20 | ) | 8 | ||||||||
| BCTMP (Mtonnes) |
||||||||||||
| Production |
159 | 156 | 166 | |||||||||
| Shipments |
156 | 167 | 163 | |||||||||
| NBSK (Mtonnes) |
||||||||||||
| Production |
117 | 103 | 116 | |||||||||
| Shipments |
120 | 112 | 117 | |||||||||
| Newsprint (Mtonnes) |
||||||||||||
| Production |
27 | 29 | 24 | |||||||||
| Shipments |
28 | 29 | 28 | |||||||||
| 1. | See section “Non-IFRS Measures” in this MD&A. |
The Pulp & Paper segment includes our NBSK, BCTMP, and newsprint businesses.
Sales and Shipments
Sales increased compared to the previous quarter and the first quarter of 2020 primarily due to higher NBSK prices. Lower newsprint prices for all comparative periods partially offset the increase. The price variance resulted in a $19 million increase in Adjusted EBITDA compared to the previous quarter and a $15 million increase compared to the first quarter of 2020.
Production
The cost of products sold was impacted by maintenance cost spending and increased energy costs compared to the previous and first quarter of 2020. The previous quarter was the major maintenance shutdown for our Hinton NBSK mill, resulting in increased maintenance expenses. The increase in maintenance costs compared to the first quarter of 2020 was partially related to increased contractor usage to address reliability issues at two of our pulp mills. Fibre costs increased compared to the first quarter of 2020, with increased NBSK pricing as the chip formula is tied to NBSK pricing. High power prices in Alberta led to some power mitigation curtailments at our Slave Lake BCTMP mill during periods of extreme cold in the winter.
Freight and other distribution costs generally trended with the changes in shipment volumes.
As a consequence of the items discussed above, the Adjusted EBITDA increased by $31 million compared to the previous quarter and by $3 million compared to the first quarter of 2020. The following table shows the Adjusted EBITDA variance for each comparative period.
- 13 -
Adjusted EBITDA
| ($ millions) |
||||||||
| Q4-20 to Q1-21 | Q1-20 to Q1-21 | |||||||
| Adjusted EBITDA - comparative period |
(20 | ) | 8 | |||||
| Price |
19 | 15 | ||||||
| Volume |
— | — | ||||||
| Changes in costs |
9 | (13 | ) | |||||
| Other |
3 | 1 | ||||||
|
|
|
|
|
|||||
| Adjusted EBITDA - current period |
11 | 11 | ||||||
|
|
|
|
|
|||||
Fluctuations in other income were due to foreign exchange revaluations on our Canadian operation Canadian dollar-denominated monetary assets and liabilities.
Europe Engineered Wood Products Segment
| ($ millions unless otherwise indicated) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| Europe EWP Segment Earnings |
||||||||||||
| Sales |
112 | — | — | |||||||||
| Cost of products sold |
(87 | ) | — | — | ||||||||
| Freight and other distribution costs |
(9 | ) | — | — | ||||||||
| Amortization |
(17 | ) | — | — | ||||||||
| Selling, general and administration |
(5 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Operating earnings |
(6 | ) | — | — | ||||||||
| Finance expense |
— | — | — | |||||||||
| Other |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Earnings before tax |
(6 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
| Adjusted EBITDA1 |
11 | — | — | |||||||||
| OSB (MMsf 3/8” basis) |
||||||||||||
| Production |
204 | — | — | |||||||||
| Shipments |
226 | — | — | |||||||||
| MDF (MMsf 3/8” basis) |
||||||||||||
| Production |
60 | — | — | |||||||||
| Shipments |
60 | — | — | |||||||||
| Particleboard (MMsf 3/8” basis) |
||||||||||||
| Production |
94 | — | — | |||||||||
| Shipments |
74 | — | — | |||||||||
| 1. | See section “Non-IFRS Measures” in this MD&A. Q1-21 Adjusted EBITDA was decreased by a one-time charge of $7 million related to inventory purchase price accounting. |
Our Europe EWP segment includes our U.K. and Belgium OSB, MDF, and particleboard operations effective from the February 1, 2021, acquisition date.
Sales prices for the OSB, MDF and particleboard in the European operations are not as volatile as those in the North American market due to longer-term customer contract pricing.
Purchase price accounting increased our cost of products sold by $7 million and Norbord’s pre-acquisition amortization by $12 million. Accounting standards require acquired inventory to be valued at fair value, which is represented by the estimated selling price, less the sum of (a) the costs of disposal, and (b) a reasonable profit allowance for the completing and selling effort, based on the profit for similar finished goods. Property, plant, and equipment assets were valued at depreciated replacement cost to represent fair value. The customer list intangible asset related to our European operations will be amortized over 10 years and is based on a valuation model prepared by an independent valuation firm. The purchase price allocation is a preliminary estimate which is expected to be finalized by year-end.
- 14 -
Costs increased compared to Norbord’s pre-acquisition levels due to increased raw material costs. Resin costs were negatively impacted in a similar manner as in North America.
Business Outlook
Markets
The most significant uses for our lumber and OSB products are residential construction, repair and remodelling, and industrial applications. Low mortgage rates, low volumes of homes available for resale, and favourable demographics appear to have positively influenced the demand for new housing in both Canada and the U.S. Also, the acceptance by companies of remote working is a new driver of demand for new homes. Economists are forecasting U.S. housing starts for 2021 to be approximately 1.5 million units, an increase of nearly 9% over 2020. An aging housing stock and increased repair and renovation spending should continue to drive strong lumber, plywood and OSB demand. However, it is uncertain if the resurgence of COVID-19 or the spread of variants will negatively impact demand.
Canadian lumber exports to Asia may be impacted by competition from suppliers in other countries and current North American pricing will continue to impact export markets.
The demand for our European products is expected to continue to be robust as demand for OSB as an alternative to plywood in Europe continues to grow.
Our BCTMP and NBSK pulp is primarily used in printing and writing paper, boxboard and tissue applications. Pulp markets are improving with the strong demand in China and increasing boxboard and tissue production in North America and Europe.
Softwood lumber dispute
Canadian softwood lumber exports to the U.S. have been the subject of trade disputes and managed trade arrangements for several decades. Countervailing and antidumping duties have been in place since April of 2017, and we are required to make deposits in respect of these duties. Whether and to what extent we can realize a selling price to recover the impact of duties payable will largely depend on the strength of demand for softwood lumber. This increase may not be solely for the benefit of Canadian producers and could, in turn, cause the price of SYP lumber to rise, but SYP would not be subject to the duty. Regardless of the commodity price, export duties on SPF shipments to the U.S. remain a cost to our Company to the extent we cannot pass on the cost through increased selling prices. We expect the USDOC to publish the preliminary rates for AR2 in the second quarter of 2021, and they began AR3 in April of 2021.
Operations
We expect lumber production in 2021 to improve moderately from 2020 levels as we recapture production lost due to temporary COVID-19-related curtailments in the first half of 2020 and continue to realize the benefits of capital investments over the past several years. As a result, we expect SPF production to be approximately 3.3 billion board feet in 2021. In the U.S. South, we expect 2021 lumber production to be approximately 3.0 billion board feet. Anticipated production levels assume continued strong demand, availability of sufficient logs within our economic return criteria, and no further temporary curtailments. Our operations and results could be negatively affected by the availability of labour due to the continuing impacts of COVID-19, adverse weather conditions in our operating areas, intense competition for logs in the B.C. Interior, and elevated stumpage fees. On January 1, 2021, stumpage rates increased in B.C. due to the market-based adjustments related to lumber costs. We expect a further increase in B.C. stumpage rates in July of 2021. In Alberta, stumpage rates will remain elevated as long as SPF lumber prices are high, as they are closely linked to the price of lumber and respond rapidly to changes in lumber prices. We expect the SYP log cost to moderate in the second quarter after weather-related increases in the first quarter of 2021.
- 15 -
Our SPF lumber typically experiences transportation challenges in the first quarter due to winter conditions and railcar shortages, resulting in production exceeding shipment volumes. The transportation issues are usually corrected in the second quarter, and shipment volumes usually catch up to production.
Our OSB and plywood operations are expected to continue to operate close to capacity in our NA EWP segment, subject to required maintenance shutdowns at our OSB facilities. Fibre costs for our B.C., Alberta, and Ontario panel mills are expected to remain elevated as long as plywood and OSB prices are high. Resin costs for the OSB business may remain high for the remainder of the year due to high resin raw material input costs and supply disruptions.
A strengthening Canadian dollar and stresses across the Company’s supply chain, owing in part to a strong global economic recovery, are also expected to contribute to inflationary pressures on our input costs in the coming quarters.
Our Cariboo NBSK mill major maintenance shutdown is expected to occur in the second quarter and our Hinton NBSK mill maintenance shutdown is expected to occur in the third quarter of 2021. Although we have put in place appropriate measures for employee and community safety relating to COVID-19 during the shutdown, there remains a risk that we could experience work stoppages if there are cases detected. We expect a slight improvement in 2021 pulp production levels compared to 2020 of approximately 40,000 tonnes.
Strategic capital investments
Progress on our new lumber manufacturing complex in Dudley, Georgia, remains on track with management’s initial expectations. Substantial portions of the new mill are being commissioned and are ramping up, with the new site expected to be fully operational by the end of the second quarter of 2021. Operations at the legacy site will be wound down by the end of the second quarter. When completed and fully ramped up, annual production capacity at the site will increase by 170 million board feet to 270 million board feet, which is expected to be achieved over the next several years.
Our OSB mill in Chambord, Quebec, has completed commissioning and panels are now being produced and shipped to customers. The Chambord mill has started the ramp-up towards its stated annual production capacity of 550 million square feet (3/8-inch basis), which typically takes 18-24 months.
With the milestones achieved at the Dudley and Chambord mills the Company is also pleased to announce that we will be moving forward with approximately $180 million of additional capital projects, identified under West Fraser’s strategic capital program. Work on the identified projects will begin the second half of 2021 and continue through 2023. This investment program will support safety, cost improvements and strategic growth initiatives as we continue our focus on capital execution and operational excellence. The average project payback period for this strategic capital program is expected to be three-to-four years. The addition of these new capital projects will largely offset lengthening lead times on projects currently underway and as such we are reiterating our capital expenditure target of approximately $450 million for 2021.
In the Lumber segment we expect to invest approximately $150 million at five of our U.S. South lumber mills under the strategic capital program. Investments at the target mills will expand capacity, increase the mix of higher-margin 2x4s and reduce fixed and variable production costs.
In the North America EWP segment we expect to invest approximately $30 million at two of our OSB mills. Investments at the target mills will reduce fixed and variable manufacturing costs and improve mill productivity.
- 16 -
Norbord Integration
The integration of the Norbord business is in the early stages and is a Company focus. We remain on track to achieve targeted annual synergies of $61 million over the next 18-24 months.
Cash Flows
We are anticipating levels of operating cash flows and available liquidity to support approximately $450 million of capital spending in 2021 and continue to support dividend and debt payment obligations. We have paid a dividend every quarter since we became a public company in 1986. We will continue to invest in high-return capital projects and consider share repurchases with excess cash if we are satisfied that this will enhance shareholder value and not compromise our financial flexibility.
We expect to maintain our investment-grade credit rating and intend to preserve sufficient liquidity to be able to take advantage of strategic growth opportunities that may arise. On April 6, 2021, we announced the redemption of the 2027 Notes. On May 6, 2021, we funded the redemption using cash on hand, following which the 2027 Notes will no longer be outstanding.
On May 6, 2021, we elected to redeem all of Norbord’s outstanding 2023 Notes on June 7, 2021. Approximately $314 million of 2023 Notes are presently outstanding following the repurchase of approximately $1 million of 2023 Notes under the change of control offer required under the relevant note indentures in connection with the acquisition of Norbord. The section below titled “Capital Structure and Liquidity” includes details on the Norbord senior notes. The impact on our interest expense and our debt repayment schedule is shown in the table “Contractual Obligations” below.
We are authorized under our NCIB, which expires in February of 2022, to purchase up to 6,044,000 Common shares of the Company, representing approximately 5% of the Company’s issued and outstanding Common shares.
Estimated Earnings Sensitivity to Key Variables1
| (based on annual shipment volumes - $ millions) |
||||
| Factor |
Variation | Change in pre-tax earnings | ||
| Lumber price | $10 (per Mfbm) | 55 | ||
| NA OSB price | $10 (per Msf) | 52 | ||
| Europe OSB price | £10 (per Msf) | 15 | ||
| Plywood price | $10 (per Msf) | 7 | ||
| NBSK price | $10 (per tonne) | 4 | ||
| BCTMP price | $10 (per tonne) | 6 | ||
| Canadian - US$ exchange rate2 | $0.01 (per CAD) | 18 |
| 1. | Each sensitivity has been calculated on the basis that all other variables remain constant and is based on changes in our realized sales prices. |
| 2. | Represents the impact on USD equivalent of net CAD revenues and expenses for the initial $0.01 change. Additional changes are substantially, but not exactly, linear. |
Capital Structure and Liquidity
Our capital structure consists of Common share equity and long-term debt, and our liquidity includes our operating facilities.
Changes to Long-term Debt and Operating Facilities
On February 1, 2021, concurrent with the closing of the Acquisition, we completed various administrative amendments to our $676 million (CAD$850 million) committed revolving credit facility and our $200 million term loan to facilitate the Acquisition. We replaced our CAD$150 million committed revolving credit facility with a $450 million committed revolving credit facility due 2024 on substantially the same terms.
- 17 -
Norbord’s accounts receivable securitization facility and secured revolving credit facilities were terminated at closing and the security related to all of Norbord’s debt was discharged as of February 1, 2021. Norbord’s $315 million 2023 Notes and $350 million 2027 Notes have been consolidated on our balance sheet at fair value as of the date of the Acquisition. On March 2, 2021, we made a mandatory change of control offer for 2023 Notes and 2027 Notes, which expired on April 1, 2021. As a result of the change of control offer, $1 million of the 2023 Notes and $1 million of the 2027 Notes were redeemed and were repaid in the second quarter of 2021. On April 6, 2021, we elected to redeem the remaining 2027 Notes, which redemption occurred on May 6, 2021. On May 6, 2021, we elected to redeem all of Norbord’s outstanding 2023 Notes on June 7, 2021. After the completion of the redemption of the 2023 Notes and the 2027 notes, the principal value of long-term debt will be reduced by $665 million from the date of the Acquisition.
Operating Facilities
On March 31, 2021, our operating facilities consisted of a $676 million (CAD$850 million) committed revolving credit facility, a $450 million committed revolving facility, a $25 million demand line of credit dedicated to our U.S. operations, and a $6 million (CAD$8 million) demand line of credit dedicated to our jointly-owned newsprint operation. On March 31, 2021, the revolving facilities were undrawn.
We also have credit facilities totalling $111 million dedicated to the issuance of letters of credit, of which $96 million (CAD$120 million) is committed to our Canadian operations. On March 31, 2021, our letter of credit facilities supported $56 million of open letters of credit.
Available liquidity on March 31, 2021, was $2,551 million. Available liquidity includes cash and short-term investments, cheques issued in excess of funds on deposit, and amounts available on our operating loans, excluding the $6 million (CAD$8 million) demand line of credit dedicated to our 50%-owned newsprint operation.
All debt is unsecured except the $6 million (CAD$8 million) joint newsprint operation demand line of credit, which is secured by that joint operation’s current assets.
Material Long-term Debt
In October 2014, we issued $300 million of fixed-rate senior unsecured notes, bearing interest at 4.35% and due October 2024, pursuant to a private placement in the U.S. The notes are redeemable, in whole or in part, at our option at any time as provided in the indenture governing the notes.
In August 2017, we were advanced a $200 million 5-year term loan that, with the July 2019 extension, matures on August 25, 2024. Interest is payable at floating rates based on Base Rate Advances or LIBOR Advances at our option. This loan is repayable at any time, in whole or in part, at our option and without penalty but cannot be redrawn after payment.
On March 9, 2020, we extended the duration of our interest rate swap from August 2022 to August 2024, resulting in a change to the fixed interest rate on the swap from 2.47% to 1.78% through August of 2024.
On April 15, 2020, we entered into additional interest rate swaps for a total notional amount of $100 million. We pay a combined fixed interest rate of 0.51% under the agreements and receive a floating interest rate equal to a 3-month LIBOR.
On February 1, 2021, we assumed Norbord’s 2023 Notes and 2027 Notes as part of the Acquisition. The details are described above under the title “Changes to Long-term Debt and Operating Facilities”.
Equity
Our outstanding Common share equity consists of 119,304,705 Common shares and 2,281,478 Class B Common shares for a total of 121,586,183 shares issued and outstanding as of May 5, 2021.
- 18 -
Our Class B Common shares are equal in all respects to our Common shares, including the right to dividends and the right to vote, and are exchangeable on a one-for-one basis for Common shares. Our Common shares are listed for trading on the TSX and NYSE, 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.
Concurrent with the Acquisition, the Common shares of West Fraser commenced trading on the NYSE on February 1, 2021, under the symbol WFG. The trading symbol for the Common shares on the TSX was also changed to WFG on February 1, 2021.
Share Repurchase Program
On February 17, 2021, we renewed our NCIB allowing us to acquire an additional 6,044,000 Common shares for cancellation until the expiry of the bid on February 16, 2022. The following table shows our purchases under two NCIB programs.
Share Repurchases
| (number of common shares and price per share) |
||||||
| NCIB period |
Common Shares | Average Price in CAD |
Average Price in USD | |||
| September 19, 2019 to September 18, 2020 |
— | — | — | |||
| February 17, 2021 to March 31, 2021 |
1,560,919 | $82.86 | $65.28 | |||
| April 1, 2021 to May 5, 2021 |
145,058 | $97.16 | $77.50 |
Share Options
As of May 5, 2021, there were 2,064,404 share purchase options outstanding with exercise prices ranging from CAD$92.79 to CAD$23.68 per Common share. This includes the assumption of Norbord’s outstanding share purchase options, after applying the Exchange Ratio.
Defined Benefit Pension Plans
The funded position of our defined benefit pension plans and other retirement benefit plans is estimated at the end of each period. As shown in Note 8 to our Financial Statements, the funded position is determined by subtracting the value of the plan assets from the plan obligations. We recorded in other comprehensive earnings an after-tax actuarial gain of $89 million during the quarter compared to $25 million in the previous quarter and $67 million in the first quarter of 2020. The current quarter gain reflects the increase in the discount rate used to calculate plan liabilities, partially offset by negative returns on plan assets.
Summary of Financial Position
| ($ millions, except as otherwise indicated) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| Cash and short-term investments |
1,400 | 461 | 66 | |||||||||
| Current assets |
3,245 | 1,336 | 1,058 | |||||||||
| Current liabilities |
1,450 | 528 | 827 | |||||||||
| Ratio of current assets to current liabilities |
2.2 | 2.5 | 1.3 | |||||||||
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|
|
|
|
|
|
|||||||
| Available liquidity1 |
2,551 | 1,272 | 207 | |||||||||
| Total debt to total capital1 |
11 | % | 19 | % | 36 | % | ||||||
| Net debt to total capital1 |
(2 | )% | 2 | % | 33 | % | ||||||
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| 1. | Non-IFRS measure. See “Non-IFRS Measures”. |
- 19 -
Debt Ratings
West Fraser is considered investment grade by three leading rating agencies. The ratings in the table below are as of May 6, 2021.
| 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.
Cash Flow
Our cash requirements are primarily for operating purposes, interest payments, repayment of debt, additions to property, plant, equipment and timber, acquisitions, and dividends. In normal business cycles and in years without a major acquisition or debt repayment, cash on hand and cash provided by operations have typically been sufficient to meet these requirements.
- 20 -
Cash Flow Statement
| ($ millions—cash provided by (used in)) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| Operating Activities |
||||||||||||
| Earnings |
665 | 282 | 9 | |||||||||
| Amortization |
122 | 54 | 52 | |||||||||
| Finance expense |
13 | (3 | ) | 12 | ||||||||
| Foreign exchange (gain) loss |
6 | 7 | (10 | ) | ||||||||
| Export duty deposits |
8 | (90 | ) | (6 | ) | |||||||
| Post-retirement expense |
25 | 20 | 19 | |||||||||
| Contributions to post-retirement plans |
(13 | ) | (20 | ) | (10 | ) | ||||||
| Income tax provision (recovery) |
205 | 103 | (3 | ) | ||||||||
| Income taxes received (paid) |
(246 | ) | (34 | ) | (1 | ) | ||||||
| Reforestation and decommissioning obligations |
13 | 6 | 18 | |||||||||
| Other |
(13 | ) | (4 | ) | 4 | |||||||
| Changes in accounts receivable |
(172 | ) | 41 | (49 | ) | |||||||
| Changes in inventories |
(221 | ) | (51 | ) | (145 | ) | ||||||
| Changes in prepaid expenses |
(4 | ) | 1 | (3 | ) | |||||||
| Changes in payables and accrued liabilities |
74 | (36 | ) | 22 | ||||||||
|
|
|
|
|
|
|
|||||||
| 462 | 276 | (91 | ) | |||||||||
|
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|
|
|
|||||||
| Financing Activities |
||||||||||||
| Debt and operating loans |
(2 | ) | — | 219 | ||||||||
| Financing fees paid |
(3 | ) | — | — | ||||||||
| Financing expense paid |
(3 | ) | (9 | ) | (7 | ) | ||||||
| Repurchases of Common shares |
(93 | ) | — | — | ||||||||
| Dividends paid |
(11 | ) | (11 | ) | (10 | ) | ||||||
| Other |
3 | — | — | |||||||||
|
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|
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|
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|
|||||||
| (109 | ) | (20 | ) | 202 | ||||||||
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|||||||
| Investing Activities |
||||||||||||
| Acquired cash and short-term investments |
642 | — | — | |||||||||
| Additions to capital assets |
(62 | ) | (45 | ) | (45 | ) | ||||||
| Government assistance |
3 | 2 | — | |||||||||
| Other |
(1 | ) | 1 | 4 | ||||||||
|
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|
|||||||
| 582 | (42 | ) | (41 | ) | ||||||||
|
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|
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| Change in cash |
935 | 214 | 70 | |||||||||
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|
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The Acquisition was a non-cash share consideration transaction and therefore only the acquired cash is included in the above cash flow. Changes in Norbord’s cash position incurred subsequent to February 1, 2021 are incorporated into our cash flow results and are contributing to some of the swings.
Operating Activities
The table above shows the main components of cash flows used for or provided by operating activities for each comparative period. The significant factors affecting the comparison were improved earnings, changes in export duty deposits, accounts receivable, log and lumber inventory, and accounts payable, and income tax payments.
Accounts receivable increased primarily due to increased pricing for most of our products. Fourth quarter duty deposits were impacted by the AR1 duty rate recovery of $95 million that was recorded when the rate was finalized.
SPF and SYP lumber inventory increased due to shipping delays from the seasonal railcar shortages in Canada and a period of extreme winter conditions in the U.S. South which interrupted both production and activity in the supply chain. In addition, SPF lumber had increased raw material input costs related to increased stumpage rates.
- 21 -
Log inventory in the northern regions of North America is built up in the first quarter to sustain SPF lumber and EWP operations during the second quarter when logging is curtailed due to wet and inaccessible land conditions. Our operations typically consume this log inventory in the spring and summer months.
Accounts payable increased due in part to higher accruals for stumpage fees and equity-based compensation. It was also impacted by the restart of the share repurchase program which is paid a week in arrears and for the increase in volume of dividend declared but unpaid at the end of the quarter.
Income tax payments were $246 million in the quarter, comprised of $206 million on account of Canadian 2020 taxable income and the balance reflecting high taxable earnings estimates for both Canada and the U.S. As minimum income tax instalments for Canada are based on prior year’s earnings, a significant income tax payable has accumulated in respect of 2021 results to date.
Financing Activities
We returned $104 million to our shareholders through dividend payments and Common shares repurchased under our NCIB program.
Investing Activities
The Acquisition was a non-cash share consideration transaction and therefore only the acquired cash is included in investing activities.
Capital additions were $34 million for our Lumber segment, $20 million for our NA EWP segment, $4 million for our Pulp & Paper segment, and $4 million for our Europe EWP segment.
Contractual Obligations
Changes in Debt Obligations
On February 1, 2021, we assumed Norbord’s 2023 Notes and 2027 Notes as part of the Acquisition. The details are described above under the title “Changes to Long-term Debt and Operating Facilities”.
Updated Contractual Obligations
Contractual obligations mean an agreement related to debt, enforceable agreements to purchase goods or services on specified terms, but does not include payroll obligations, reforestation and decommissioning obligations, energy purchases under various agreements, non-defined benefit post-retirement contributions payable, equity-based compensation including equity hedges, accounts payable in the ordinary course of business or contingent amounts payable.
- 22 -
Contractual Obligations
| (at March 31, 2021, in $ millions) |
||||||||||||||||||||||||
| 20214 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||||||
| Long-term debt1 |
665 | — | 1 | 500 | — | 1,166 | ||||||||||||||||||
| Interest on long-term debt2 |
83 | 16 | 15 | 12 | — | 126 | ||||||||||||||||||
| Lease obligations |
8 | 8 | 4 | 1 | 5 | 26 | ||||||||||||||||||
| Contributions to defined benefit pension plans3 |
28 | 51 | 57 | — | — | 136 | ||||||||||||||||||
| Asset purchase commitments |
103 | — | — | — | — | 103 | ||||||||||||||||||
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|
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|
|
|
|||||||||||||
| Total |
887 | 75 | 77 | 513 | 5 | 1,557 | ||||||||||||||||||
|
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|
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|
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|
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| 1. | Includes the principal amount of the Norbord 2023 Notes and 2027 Notes but not the purchase price fair value bump. The repayment of the 2027 Notes and 2023 Notes and the early repayment premium are expected to occur on May 6, 2021 and June 7, 2021, respectively. |
| 2. | Includes our estimated $68 million of interest and early redemption penalty on the 2027 Notes and 2023 Notes, and excludes the purchase price fair value adjustment, as the latter is not cash. The early redemption penalty is not finalized until three days before the redemption so the estimate for the 2023 Notes may change. |
| 3. | Contributions to the defined benefit pension plans are based on the most recent actuarial valuation. Future contributions will be determined at the next actuarial valuation date. |
| 4. | Contractual obligations for the nine months remaining in 2021. |
Significant Management Judgments Affecting Financial Results
For a review of significant management judgments affecting financial results and critical accounting estimates, see the 2020 annual MD&A, which is included in our 2020 Annual Report and Note 2 and 3 of our Financial Statements.
Controls and Procedures
Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to our Company is gathered and reported to senior management, including the President and Chief Executive Officer (“CEO”) and the Vice-President, Finance and Chief Financial Officer (“CFO”), on a timely basis so that appropriate decisions can be made regarding public disclosure.
Internal Control over Financial Reporting
Our management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with IFRS.
Limitations on Scope of Design
In accordance with the provisions of National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, management, including the CEO and CFO, have limited the scope of their design of the Company’s disclosure controls and procedures and internal control over financial reporting to exclude controls, policies and
procedures of Norbord which was acquired on February 1, 2021.
Norbord’s contribution to our consolidated financial statements for the quarter ended March 31, 2021 was approximately 30% of consolidated sales and approximately 24% of consolidated earnings. Additionally, Norbord’s current assets and current liabilities were approximately 42% and 55% of consolidated current assets and current liabilities, respectively, and its long term assets and long term liabilities were approximately 59% and 43% of consolidated non-current assets and non-current liabilities, respectively.
- 23 -
Change in Internal Control over Financial Reporting
There has been no change in the design of our internal control over financial reporting during the three months ended March 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Risks and Uncertainties
Our Company is subject to a number of risks and uncertainties. Risks and uncertainties are included in our 2020 annual MD&A, in our 2020 Annual Report, as well as in our public filings with securities regulatory authorities, including those set out in our Base Shelf Prospectus under the heading “Risk Factors”.
Forward-Looking Statements
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. These forward-looking statements constitute “forward-looking information” within the meaning of Canadian provincial securities laws and “forward-looking statements” within the meaning of the U.S. Securities Act of 1933, the U.S. Securities Exchange Act of 1934, and “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995.
Forward-looking statements are included under the headings:
| • | “Our Business and Strategy” (exchange rate fluctuations as a source of earnings volatility, our goals to reinvest, return to shareholders, achieve, maintain or improve our low-cost position); |
| • | “Norbord Acquisition” (finalization of the purchase price allocation); |
| • | “Discussion & Analysis of Annual Results by Product Segment - Lumber Segment - Softwood Lumber Dispute” (administrative review commencement, estimated duty rates and proceedings related to final duty rates for AR2, AR3 and AR4); |
| • | “NA EWG Segment” (finalization of the purchase price allocation); |
| • | “Europe EWG Segment” (finalization of the purchase price allocation); |
| • | “Business Outlook” (forecasted U.S. housing starts, market conditions and product demand, softwood lumber dispute proceedings, production levels, fibre costs, transportation improvements, maintenance shutdowns at Cariboo and Hinton mills, preliminary duty rates for AR2, inflationary pressures, progress at Dudley and Chambord projects, expected synergies from the Acquisition and estimated completion, liquidity, cash flows, capital spending in 2021 and the related payback and expected completion, maintenance of debt ratings); |
| • | “Estimated Earnings Sensitivity to Key Variables” (impact of changes in price and foreign exchange rate); |
| • | “Cash Flow - Operating Activities” (log consumption); and |
| • | “Contractual Obligations” (redemption price for 2023 Notes, purchase commitments). |
By their nature, these forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, which contribute to the possibility that the predictions, forecasts, and other forward-looking statements will not occur. Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include, but are not limited to:
| • | assumptions in connection with the economic and financial conditions in the U.S., Canada, Europe and globally and consequential demand for our products; |
| • | risks inherent to product concentration and cyclicality; |
| • | effects of competition and product pricing pressures; |
| • | effects of variations in the price and availability of manufacturing inputs, including continued access to fibre resources at competitive prices and the impact of third-party certification standards; |
| • | availability of transportation services, including truck and rail services, and port facilities; |
- 24 -
| • | various events that could disrupt operations, including natural, man-made or catastrophic events and ongoing relations with employees; |
| • | risks inherent to customer dependence; |
| • | impact of future cross border trade rulings or agreements; |
| • | implementation of important strategic initiatives and identification, completion and integration of acquisitions; |
| • | impact of changes to, or non-compliance with, environmental or other regulations; |
| • | the impact of the COVID-19 pandemic on our operations and on customer demand, supply and distribution and other factors; |
| • | government restrictions, standards or regulations intended to reduce greenhouse gas emissions; |
| • | changes in government policy and regulation; |
| • | impact of weather and climate change on our operations or the operations or demand of its suppliers and customers; |
| • | ability to implement new or upgraded information technology infrastructure; |
| • | impact of information technology service disruptions or failures; |
| • | impact of any product liability claims in excess of insurance coverage; |
| • | risks inherent to a capital intensive industry; |
| • | impact of future outcomes of tax exposures; |
| • | potential future changes in tax laws, including tax rates; |
| • | effects of currency exposures and exchange rate fluctuations; |
| • | future operating costs; |
| • | availability of financing, bank lines, securitization programs and/or other means of liquidity; |
| • | integration of the Norbord business; and |
| • | other risks detailed from time-to-time in our annual information forms, annual reports, MD&A, quarterly reports and material change reports filed with and furnished to securities regulators. |
In addition, actual outcomes and results of these statements will depend on a number of factors, including those matters described under the title “Risks and Uncertainties” in our 2020 Annual MD&A and the “Risk Factors” of our Base Shelf Prospectus, and may differ materially from those anticipated or projected. This list of important factors affecting forward-looking statements is not exhaustive, and reference should be made to the other factors discussed in public filings with securities regulatory authorities, including those set out in the Company’s final Short Form Base Shelf Prospectus dated April 12, 2021. Accordingly, readers should exercise caution in relying upon forward-looking statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether written or oral, to reflect subsequent events or circumstances except as required by applicable securities laws.
Additional Information
Additional information on West Fraser, including our Annual Information Form and other documents, publicly filed, is available on the Company’s website at www.westfraser.com, the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com and on the Electronic Data Gathering, Analysis and Retrieval System (EDGAR) section of the U.S. Securities and Exchange Commission website at www.sec.gov/edgar.shtml.
- 25 -
Non-IFRS Measures
Throughout this MD&A, reference is made to Adjusted EBITDA, available liquidity, and total and net debt to total capital ratio (collectively “these Non-IFRS measures”). We believe that, in addition to earnings, these Non-IFRS measures are useful performance indicators for investors with regard to operating and financial performance. These Non-IFRS measures are not generally accepted financial measures under IFRS and do not have standardized meanings prescribed by IFRS. Investors are cautioned that none of these Non-IFRS measures should be considered as an alternative to earnings, or cash flow, as determined in accordance with IFRS. As there is no standardized method of calculating any of these Non-IFRS 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 Non-IFRS measures may not be directly comparable to similarly titled measures used by other entities. Accordingly, these Non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. The reconciliation of the Non-IFRS measures used and presented by the Company to the most directly comparable IFRS measures is provided in the tables set forth below.
Adjusted EBITDA
Adjusted EBITDA is used to evaluate the operating and financial performance of our operating segments, generate future operating plans, and make strategic decisions. Adjusted EBITDA is defined as earnings determined in accordance with IFRS adding back the following line items from the consolidated statements of earnings and comprehensive earnings: tax provision or recovery, other, finance expense, equity-based compensation, restructuring and impairment charges, and amortization.
The following tables reconcile Adjusted EBITDA to the most directly comparable IFRS measures. Effective January 1, 2021, and for all comparative periods, export duties are no longer excluded from the definition of Adjusted EBITDA.
Quarterly Adjusted EBITDA
| ($ millions) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| Earnings |
665 | 282 | 9 | |||||||||
| Tax provision (recovery) |
205 | 103 | (3 | ) | ||||||||
| Other |
(4 | ) | 13 | (9 | ) | |||||||
| Finance expense, net |
13 | (3 | ) | 12 | ||||||||
| Equity-based compensation |
7 | 4 | 7 | |||||||||
| Amortization |
122 | 54 | 52 | |||||||||
|
|
|
|
|
|
|
|||||||
| Adjusted EBITDA |
1,008 | 453 | 68 | |||||||||
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|
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Quarterly Adjusted EBITDA by segment
| ($ millions) |
||||||||||||||||||||||||
| Q1-21 | Lumber | NA EWP | Pulp & Paper |
Europe EWP |
Corporate & Other |
Total | ||||||||||||||||||
| Earnings before tax |
609 | 298 | 1 | (6 | ) | (32 | ) | 870 | ||||||||||||||||
| Other |
(7 | ) | — | (1 | ) | — | 4 | (4 | ) | |||||||||||||||
| Finance expense, net |
5 | 1 | 2 | — | 5 | 13 | ||||||||||||||||||
| Equity-based compensation |
— | — | — | — | 7 | 7 | ||||||||||||||||||
| Amortization |
39 | 54 | 9 | 17 | 3 | 122 | ||||||||||||||||||
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| Adjusted EBITDA by Segment |
646 | 353 | 11 | 11 | (13 | ) | 1,008 | |||||||||||||||||
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| Q4-20 | Lumber | Panels | Pulp & Paper |
Corporate & Other |
Total | |||||||||||||||
| Earnings before tax |
383 | 42 | (33 | ) | (7 | ) | 385 | |||||||||||||
| Other |
8 | 1 | 3 | 1 | 13 | |||||||||||||||
| Finance expense, net |
(6 | ) | 1 | 2 | — | (3 | ) | |||||||||||||
| Equity-based compensation |
— | — | — | 4 | 4 | |||||||||||||||
| Amortization |
40 | 4 | 8 | 2 | 54 | |||||||||||||||
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| Adjusted EBITDA by segment |
425 | 48 | (20 | ) | — | 453 | ||||||||||||||
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- 26 -
| Q1-20 | Lumber | Panels | Pulp & Paper |
Corporate & Other |
Total | |||||||||||||||
| Earnings before tax |
17 | 2 | 1 | (14 | ) | 6 | ||||||||||||||
| Other |
(12 | ) | — | (3 | ) | 6 | (9 | ) | ||||||||||||
| Finance expense, net |
9 | 1 | 2 | — | 12 | |||||||||||||||
| Equity-based compensation |
— | — | — | 7 | 7 | |||||||||||||||
| Amortization |
39 | 3 | 8 | 2 | 52 | |||||||||||||||
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| Adjusted EBITDA by segment |
53 | 6 | 8 | 1 | 68 | |||||||||||||||
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Available Liquidity
The following table reconciles Available liquidity to the most directly comparable IFRS measures.
Available Liquidity
| ($ millions) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| Available liquidity |
||||||||||||
| Cash and short-term investments |
1,400 | 461 | 66 | |||||||||
| Operating lines available (excluding newsprint operation)1 |
1,151 | 811 | 624 | |||||||||
|
|
|
|
|
|
|
|||||||
| 2,551 | 1,272 | 690 | ||||||||||
| Borrowings on operating lines |
— | — | (483 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Available liquidity |
2,551 | 1,272 | 207 | |||||||||
|
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|||||||
| 1. | Excludes $6 million (CAD$8 million) demand line of credit dedicated to our jointly-owned newsprint operation as West Fraser cannot draw on it. Operating lines available include a CAD$850 million demand line of credit (Q4-20 included an additional CAD$150 million) translated at the balance sheet date foreign exchange rate. |
Total and net debt to total capital ratio
The following table reconciles total and net debt to total capital ratio to the most directly comparable IFRS measures.
Total and net debt to total capital ratio
| ($ millions) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| Debt |
||||||||||||
| Operating loans |
— | — | 483 | |||||||||
| Current and long-term lease obligation |
19 | 6 | 8 | |||||||||
| Current and long-term debt |
1,217 | 509 | 510 | |||||||||
| Interest rate swaps1 |
4 | 6 | 6 | |||||||||
| Open letters of credit1 |
56 | 50 | 43 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total debt |
1,296 | 571 | 1,050 | |||||||||
| Cash and short-term investments |
(1,400 | ) | (461 | ) | (66 | ) | ||||||
| Open letters of credit1 |
(56 | ) | (50 | ) | (43 | ) | ||||||
| Interest rate swaps1 |
(4 | ) | (6 | ) | (6 | ) | ||||||
|
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|
|
|
|
|
|||||||
| Net Debt |
(164 | ) | 54 | 935 | ||||||||
| Shareholders’ equity |
6,614 | 2,478 | 1,853 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total debt to capital2 |
16 | % | 19 | % | 36 | % | ||||||
| Net debt to total capital2 |
(3 | )% | 2 | % | 33 | % | ||||||
|
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|
|||||||
| 1. | Letters of credit facilities and the fair value of interest rate swaps are part of our bank covenants’ total debt calculation. |
| 2. | Total capital is total debt or net debt plus shareholders’ equity. |
- 27 -
Exhibit 99.3
Form 52-109F2
Certification of Interim Filings
Full Certificate
I, Raymond W. Ferris, President and Chief Executive Officer of West Fraser Timber Co. Ltd., certify the following:
| 1. | Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of West Fraser Timber Co. Ltd. (the “issuer”) for the interim period ended March 31, 2021. |
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
| 4. | Responsibility: The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. |
| 5. | Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer and I have, as at the end of the period covered by the interim filings |
| (a) | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
| (i) | material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and |
| (ii) | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
| (b) | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
1
| 5.1 | Control framework: The control framework the issuer’s other certifying officer and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (2013 COSO Framework) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO). |
| 5.2 | “N/A” |
| 5.3 | Limitation on scope of design: The issuer has disclosed in its interim MD&A |
| (a) | the fact that the issuer’s other certifying officer(s) and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of a business that the issuer acquired not more than 365 days before the last day of the period covered by the interim filings; and |
| (b) | summary financial information about the business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer’s financial statements. |
| 6. | Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on January 1, 2021 and ended on March 31, 2021 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. |
Date: May 6, 2021
| /s/ Raymond W. Ferris |
|
|
| Raymond W. Ferris |
| President and Chief Executive Officer |
2
Exhibit 99.4
Form 52-109F2
Certification of Interim Filings
Full Certificate
I, Christopher A. Virostek, Vice-President, Finance and Chief Financial Officer of West Fraser Timber Co. Ltd., certify the following:
| 1. | Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of West Fraser Timber Co. Ltd. (the “issuer”) for the interim period ended March 31, 2021. |
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
| 4. | Responsibility: The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. |
| 5. | Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer and I have, as at the end of the period covered by the interim filings |
| (a) | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
| (i) | material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and |
| (ii) | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
| (b) | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
1
| 5.1 | Control framework: The control framework the issuer’s other certifying officer and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (2013 COSO Framework) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO). |
| 5.2 | “N/A” |
| 5.3 | Limitation on scope of design: The issuer has disclosed in its interim MD&A |
| (a) | the fact that the issuer’s other certifying officer(s) and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of a business that the issuer acquired not more than 365 days before the last day of the period covered by the interim filings; and |
| (b) | summary financial information about the business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer’s financial statements. |
| 6. | Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on January 1, 2021 and ended on March 31, 2021 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. |
Date: May 6, 2021
| /s/ Christopher A. Virostek |
|
|
| Christopher A. Virostek |
| Vice-President, Finance and Chief Financial Officer |
2
Exhibit 99.5
|
|
858 Beatty Street Suite 501 Vancouver, B.C. Canada V6B 1C1 Phone: (604) 895-2700 www.westfraser.com |
NEWS RELEASE
WEST FRASER TIMBER CO. LTD.
Thursday, May 6, 2021
West Fraser Announces 2021 First Quarter Results
Vancouver, B.C. - West Fraser Timber Co. Ltd. (“West Fraser” or the “Company”) (TSX and NYSE: WFG) reported today the first quarter results of 2021. All dollar amounts in this news release are expressed in U.S. dollars unless noted otherwise.
The results of operations presented and discussed below include those of Norbord from February 1, 2021, the date of the completion of the acquisition of Norbord.
First Quarter Highlights
| • | Sales increased 81% from the prior quarter to $2.343 billion |
| • | Earnings increased to $665 million, or 28% of sales, from $282 million in the prior quarter |
| • | Adjusted EBITDA increased to $1.008 billion from $453 million in the prior quarter |
| • | Completed the acquisition of Norbord on February 1, 2021 |
| • | Commenced commissioning at the new lumber mill in Dudley, Georgia and shipments commenced from the recently re-started OSB mill in Chambord, Quebec |
| • | Repurchased $102 million of WFG shares for cancellation under Normal Course Issuer Bid |
| • | Executing on plan to redeem Norbord Notes and retire $665 million of debt |
| • | Finished the quarter with liquidity at $2.551 billion and net debt to capital ratio of (3%) |
Results Compared to Previous Periods
| ($ millions except earnings per share (“EPS”)) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| Sales |
2,343 | 1,294 | 890 | |||||||||
| Adjusted EBITDA1 |
1,008 | 2 | 453 | 68 | ||||||||
| Operating earnings |
879 | 395 | 9 | |||||||||
| Earnings |
665 | 282 | 9 | |||||||||
| Basic EPS ($) |
6.96 | 4.09 | 0.13 | |||||||||
| Diluted EPS ($) |
6.96 | 4.09 | (0.09 | ) | ||||||||
| 1. | Throughout this news release, reference is made to Adjusted EBITDA, and liquidity (collectively “Non-IFRS measures”). For information on these Non-IFRS measures see below under the heading “Non-IFRS Measures”. |
| 2. | Cost of products sold was increased and Adjusted EBITDA decreased by a one-time charge of $93 million related to inventory purchase price accounting. |
Operational Results Summary
The acquisition of Norbord was completed on February 1, 2021. As a result of the acquisition, we have combined the North American operations of Norbord and our Panels segment and renamed that segment North America (“NA”) Engineered Wood Products (“EWP”). In addition, we have created a Europe EWP segment that includes the results from the United Kingdom (“U.K.”) and Belgium operations.
Our Lumber segment generated operating earnings in the quarter of $607 million (Q4-20 - $385 million) and Adjusted EBITDA of $646 million (Q4-20 - $425 million). Prior quarter operating earnings included a $95 million duty recovery related to the AR1 duty rate finalization. Adjusted EBITDA, which includes duties, increased due to higher lumber prices, partially offset by lower shipment volumes that were negatively impacted by seasonal railcar shortages in Canada and a period of extreme winter conditions in the U.S. South. Higher SPF log costs resulting from B.C. fibre shortages and higher B.C. and Alberta stumpage rates also negatively impacted Adjusted EBITDA compared to the prior quarter. Commissioning at Dudley continues on track and all major machine centres have now been operationalized.
Our NA EWP segment generated operating earnings in the quarter of $299 million (Q4-20 - $44 million) and Adjusted EBITDA of $353 million (Q4-20 - $48 million). Segment operating earnings and Adjusted EBITDA were decreased by a one-time charge of $86 million related to inventory fair value adjustments from purchase price accounting. The addition of our OSB operations from the date of the Norbord acquisition, higher plywood pricing and robust plywood demand positively impacted the NA EWP operating earnings for the quarter. These positive drivers of operating earnings were partially offset by purchase price accounting related to the Norbord acquisition that increased cost of products sold and increased levels of amortization. Higher log costs from increased B.C., Alberta and Ontario stumpage rates, higher resin costs and increased costs from the extreme weather in the U.S. South also negatively impacted operating earnings. Production levels at Chambord continue to gradually increase toward targeted levels in line with expectations.
Our Pulp & Paper segment generated operating earnings in the quarter of $2 million (Q4-20 - loss of $28 million) and Adjusted EBITDA of $11 million (Q4-20 - negative $20 million) while the Europe EWP segment generated an operating loss in the quarter of $6 million (Q4 - N/A) and Adjusted EBITDA of $11 million (Q4-20 - N/A). Our Europe EWP segment operating earnings and Adjusted EBITDA were decreased by a one-time charge of $7 million related to inventory fair value adjustments from purchase price accounting.
Capital Allocation
Strong first quarter results increased quarter-end available liquidity to $2,551 million from $1,272 million at the end of the prior quarter. This balance sheet improvement has afforded us greater flexibility to undertake strategic capital investments, repay debt and repurchase shares.
Strategic Capital Program
With the milestones achieved at the Dudley and Chambord mills, we are also pleased to announce that we will be moving forward with approximately $180 million of additional capital projects identified under West Fraser’s strategic capital program. Work on the identified projects will begin the second half of 2021 and continue through 2023. This investment program will support safety, cost improvements and strategic growth initiatives as we continue our focus on capital execution and operational excellence. The average project payback period for this strategic capital program is expected to be three to four years. The addition of these new capital projects will largely offset lengthening lead times on projects currently underway and as such we are reiterating our capital expenditure target of approximately $450 million for 2021.
In the Lumber segment we expect to invest approximately $150 million at five of our U.S. South lumber mills under the strategic capital program. Investments at the target mills will expand capacity, increase the mix of higher-margin 2x4s and reduce fixed and variable production costs.
In the North America EWP segment we expect to invest approximately $30 million at two of our OSB mills. Investments at the target mills will reduce fixed and variable manufacturing costs and improve mill productivity.
Debt Repayment
Concurrent with the closing of the Norbord acquisition we assumed Norbord’s $315 million senior notes due April 2023 (the “2023 Notes”), bearing interest at 6.25%, and $350 million senior notes due July 2027 (the “2027 Notes”), bearing interest at 5.75%.
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Subsequent to quarter-end we elected to redeem the remaining 2027 Notes. On May 6, 2021, we funded the redemption using cash on hand, following which the 2027 Notes will no longer be outstanding. As discussed below, we have also given notice to redeem the 2023 Notes. Once the redemptions of the 2023 Notes and the 2027 Notes are complete, we will have retired $665 million of principal value of long-term debt and reduced annual interest expense by approximately $40 million.
Normal Course Issuer Bid
On February 17, 2021, we renewed our normal course issuer bid (“NCIB”) allowing us to acquire an additional 6,044,000 Common shares until the expiry of the bid on February 16, 2022. In the first quarter of 2021, we repurchased approximately 1.56 million shares under the NCIB at an average share price of CAD$82.86 ($65.28) for aggregate consideration of $102 million. All shares purchased by the Company under the NCIB will be cancelled.
Outlook
The most significant uses for our lumber and OSB products are residential construction, repair and remodelling, and industrial applications. Low mortgage rates, low volumes of homes available for resale, favourable demographics, increasing acceptance of remote working and the underlying housing construction deficit due to several years of underbuilding appear to be positively influencing the demand for new housing in North America. Economists are forecasting U.S. housing starts for 2021 to be approximately 1.5 million units, an increase of nearly 9% over 2020. An aging housing stock and increased repair and renovation spending should also continue to drive strong lumber, plywood and OSB demand.
We expect to maximize our capacity utilization in lumber, OSB and plywood operations subject to required maintenance downtime and assuming no unexpected disruptions from COVID-19 or other supply chain disruptions from weather, transportation, raw material availability or other factors.
Demand for our European products is expected to continue to be robust as demand for OSB as an alternative to plywood in Europe continues to grow.
Fibre costs for our B.C., Alberta, and Ontario lumber and EWP operations are expected to remain elevated as long as lumber, and EWP prices remain high and demand exceeds the available log supply in B.C. A strengthening Canadian dollar and stresses across the Company’s supply chain, owing in part to a strong global economic recovery, are also expected to contribute to inflationary pressures on our input costs in the coming quarters.
Our balance sheet remains strong and is well equipped to face potential volatility that may exist in our markets over the coming quarters and to support capital expenditure plans and returning capital to shareholders.
Norbord Integration Update
Efforts to integrate the Norbord business are in the early stages and are a Company focus. There have been some early successes identifying cost savings in our fibre supply chain, and we remain on track to achieve targeted annual synergies of $61 million over the next 18-24 months.
- 3 -
Adjusted EBITDA
The following tables reconcile Adjusted EBITDA to the most directly comparable IFRS measures.
Quarterly Adjusted EBITDA
| ($ millions) |
||||||||||||
| Q1-21 | Q4-20 | Q1-20 | ||||||||||
| Earnings |
665 | 282 | 9 | |||||||||
| Tax provision (recovery) |
205 | 103 | (3 | ) | ||||||||
| Other |
(4 | ) | 13 | (9 | ) | |||||||
| Finance expense, net |
13 | (3 | ) | 12 | ||||||||
| Equity-based compensation |
7 | 4 | 7 | |||||||||
| Amortization |
122 | 54 | 52 | |||||||||
|
|
|
|
|
|
|
|||||||
| Adjusted EBITDA |
1,008 | 453 | 68 | |||||||||
|
|
|
|
|
|
|
|||||||
Quarterly Adjusted EBITDA by segment
| ($ millions) |
||||||||||||||||||||||||
| Q1-21 |
Lumber | NA EWP | Pulp & Paper |
Europe EWP |
Corporate & Other |
Total | ||||||||||||||||||
| Earnings before tax |
609 | 298 | (1 | ) | (6 | ) | (32 | ) | 870 | |||||||||||||||
| Other |
(7 | ) | — | 1 | — | 4 | (4 | ) | ||||||||||||||||
| Finance expense, net |
5 | 1 | 2 | — | 5 | 13 | ||||||||||||||||||
| Equity-based compensation |
— | — | — | — | 7 | 7 | ||||||||||||||||||
| Amortization |
39 | 54 | 9 | 17 | 3 | 122 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Adjusted EBITDA by Segment |
646 | 353 | 11 | 11 | (13 | ) | 1,008 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Q4-20 |
Lumber | Panels | Pulp & Paper |
Corporate & Other |
Total | |||||||||||||||
| Earnings before tax |
383 | 42 | (33 | ) | (7 | ) | 385 | |||||||||||||
| Other |
8 | 1 | 3 | 1 | 13 | |||||||||||||||
| Finance expense, net |
(6 | ) | 1 | 2 | — | (3 | ) | |||||||||||||
| Equity-based compensation |
— | — | — | 4 | 4 | |||||||||||||||
| Amortization |
40 | 4 | 8 | 2 | 54 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Adjusted EBITDA by segment |
425 | 48 | (20 | ) | — | 453 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Q1-20 |
Lumber | Panels | Pulp & Paper |
Corporate & Other |
Total | |||||||||||||||
| Earnings before tax |
17 | 2 | 1 | (14 | ) | 6 | ||||||||||||||
| Other |
(12 | ) | — | (3 | ) | 6 | (9 | ) | ||||||||||||
| Finance expense, net |
9 | 1 | 2 | — | 12 | |||||||||||||||
| Equity-based compensation |
— | — | — | 7 | 7 | |||||||||||||||
| Amortization |
39 | 3 | 8 | 2 | 52 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Adjusted EBITDA by segment |
53 | 6 | 8 | 1 | 68 | |||||||||||||||
|
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|||||||||||
West Fraser has also made available on its website (www.westfraser.com) select historical quarterly and annual financial information converted from Canadian dollars to U.S. dollars.
Norbord Notes
West Fraser announced today that it will redeem on June 7, 2021 all of Norbord’s outstanding 2023 Notes. A total of approximately $314 million of 2023 Notes are presently outstanding following the repurchase of approximately $1 million of 2023 Notes under the change of control offer required under the relevant note indentures in connection with the acquisition of Norbord.
- 4 -
The redemption will be completed under the optional redemption provisions of the indenture governing the 2023 Notes at a redemption price equal to par plus the make-whole premium in accordance with the indenture, together with accrued and unpaid interest to the redemption date. The impact of this transaction is not expected to be material to West Fraser’s earnings.
This news release does not constitute a notice of redemption of the 2023 Notes, nor a solicitation to buy or an offer to purchase or sell any securities. The notice of redemption was sent to the registered holders of the 2023 Notes on May 6, 2021. The 2023 Notes are to be surrendered to the paying agent in exchange for payment of the redemption price. On and after the date of redemption, the 2023 Notes will no longer be outstanding, interest thereon will cease to accrue and all rights of the holders of the 2023 Notes will cease to exist, except for the right to receive the redemption price on the date of redemption.
Further to West Fraser’s April 6, 2021 news release, on May 6, 2021, we funded the redemption of the 2027 notes, following which the 2027 Notes will no longer be outstanding.
Risks and Uncertainties
Risk and uncertainty disclosures are included under the heading “Risks and Uncertainties” in our first quarter 2021 MD&A. These risks and uncertainties include risks and uncertainties related to the business of Norbord, and the integration of the business of Norbord into our business.
MD&A
Our first quarter 2021 MD&A is available on our website at www.westfraser.com and the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com and the Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) website at www.sec.gov/edgar.shtml under the Company’s profile.
Financial Information Related to Norbord and Norbord’s Notes
We have applied purchase price accounting to the Norbord acquisition, resulting in a significant increase from the historical cost base of Norbord and $1,374 million of goodwill. Note 3 to our Financial Statements provides details on the purchase price allocation. For additional information, refer to the section titled “Norbord Acquisition” in our first quarter 2021 Management’s Discussion & Analysis (“2021 Q1 MD&A”).
An addendum to this news release has been included to provide holders of Norbord’s Notes financial information regarding Norbord’s underlying performance for the first quarter of 2021 and to provide to such holders the information required under the terms of the relevant indentures governing the 2023 Notes and the 2027 Notes. The addendum discloses Norbord’s results for the period from January 1, 2021 to March 31, 2021 and comparative periods and provides a brief discussion of those results.
Norbord has filed its audited financial statements for the year ended December 31, 2020 (“Norbord 2020 Audited Financial Statements”), its annual MD&A for the year ended December 31, 2020 (“Norbord 2020 MD&A”) and annual information form for the year ended December 31, 2020 (“Norbord 2020 AIF”) (together, the “Norbord Annual Filings”) on SEDAR and EDGAR. The Norbord Annual Filings include important information regarding the business of Norbord and the financial results of Norbord on a stand-alone basis in United States dollars for the year ended December 31, 2020. This news release does not include a discussion of the financial results or operations of Norbord for the year ended December 31, 2020, and investors are referred to Norbord’s 2020 MD&A for this discussion. In addition, investors are referred to the Norbord 2020 AIF for information on Norbord’s business.
Responsibility Report
West Fraser’s full Environmental, Social, and Governance (ESG) Responsibility Report is available on the Company’s website at www.westfraser.com. This report reviews the Company’s key ESG topics, opportunities and performance and includes information aligned with the Sustainable Accounting Standards Board (SASB), Global Reporting Initiative (GRI), and the recommendations of the Task Force on Climate-Related Disclosures (TFCD).
- 5 -
The Company
West Fraser is a diversified wood products company with more than 60 facilities in Canada, the United States, the United Kingdom, and Europe. From responsibly sourced and sustainably managed forest resources, the Company produces lumber, engineered wood products (OSB, LVL, MDF, plywood, and particleboard), pulp, newsprint, wood chips, other residuals and renewable energy. West Fraser’s products are used in home construction, repair and remodelling, industrial applications, papers, tissue, and box materials.
Conference Call
West Fraser will hold an analysts’ conference call to discuss the Company’s first quarter 2021 financial and operating results on Friday, May 7, 2021 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time). To participate in the call, please dial: 1-888-390-0605 (toll-free North America) or 416-764-8609 (toll) or connect on the webcast. The call and an earnings presentation may also be accessed through West Fraser’s website at www.westfraser.com. Please let the operator know you wish to participate in the West Fraser conference call chaired by Mr. Ray Ferris, President and Chief Executive Officer of the Company.
Following management’s discussion of the quarterly results, investors and the analyst community will be invited to ask questions. The call will be recorded for webcasting purposes and will be available on the West Fraser website at www.westfraser.com.
Forward-Looking Statements
This news release contains “forward-looking information” and “forward-looking statements” within the meaning of Canadian provincial securities laws and “forward-looking statements” within the meaning of the U.S. Securities Act of 1933, the U.S. Securities Exchange Act of 1934, and the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, include statements which reflect management’s expectations regarding the operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook of West Fraser and its subsidiaries, including Norbord, as well as the outlook for North American and international economies for the current fiscal year and subsequent periods, and include words such as “expects,” “anticipates,” “plans,” “believes,” “estimates,” “seeks,” “intends,” “targets,” “projects,” “forecasts” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” In particular, this news release contains forward-looking statements under the headings “Operational Results Summary” (regarding the commissioning of Dudley and increase in production levels at Chambord), “Capital Allocation - Strategic Capital Program” (regarding the amount and timing of planned capital expenditures, anticipated incremental Adjusted EBITDA and payback period) and - Debt Repayment (regarding the redemption of the 2023 Notes and reduction in long-term debt), “Outlook” (regarding housing start forecasts and lumber and EWP demand, fibre costs, lumber and OSB production, achievement of synergies and integration of Norbord), and “Norbord Notes” (regarding the completion of the redemption of the 2027 Notes and the timing of the redemption of the 2023 Notes).
- 6 -
By their nature, forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, which contribute to the possibility that the predictions, forecasts, and other forward-looking statements will not occur. Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include, but are not limited to: (1) assumptions in connection with the economic and financial conditions in the U.S., Canada, Europe and globally and consequential demand for our products; (2) risks inherent in our product concentration and cyclicality; (3) effects of competition and product pricing pressures; (4) effects of variations in the price and availability of manufacturing inputs, including continued access to fibre resources at competitive prices and the impact of third-party certification standards; (5) availability of transportation services, including truck and rail services, and port facilities; (6) various events that could disrupt operations, including natural, man-made or catastrophic events and ongoing relations with employees; (7) risks inherent to customer dependence; (8) impact of future cross border trade rulings or agreements; (9) implementation of important strategic initiatives and identification, completion and integration of acquisitions; (10) impact of changes to, or non-compliance with, environmental or other regulations; (11) the impact of the COVID-19 pandemic on our operations and on customer demand, supply and distribution and other factors; (12) government restrictions, standards or regulations intended to reduce greenhouse gas emissions; (13) changes in government policy and regulation; (14) impact of weather and climate change on our operations or the operations or demand of our suppliers and customers; (15) ability to implement new or upgraded information technology infrastructure; (16) impact of information technology service disruptions or failures; (17) impact of any product liability claims in excess of insurance coverage; (18) risks inherent to a capital intensive industry; (19) impact of future outcomes of tax exposures; (20) potential future changes in tax laws, including tax rates; (21) effects of currency exposures and exchange rate fluctuations; (22) future operating costs; (23) availability of financing, bank lines, securitization programs and/or other means of liquidity; (24) integration of the Norbord business; and (25) other risks detailed from time-to-time in our annual information forms, annual reports, MD&A, quarterly reports and material change reports filed with and furnished to securities regulators.
In addition, actual outcomes and results of these statements will depend on a number of factors, including those matters described under “Risks and Uncertainties” in our 2020 MD&A, and may differ materially from those anticipated or projected. This list of important factors affecting forward-looking statements is not exhaustive, and reference should be made to the other factors discussed in public filings with securities regulatory authorities. Accordingly, readers should exercise caution in relying upon forward-looking statements, and we undertake no obligation to update or revise any forward-looking statements publicly, whether written or oral, to reflect subsequent events or circumstances except as required by applicable securities laws.
Non-IFRS Measures
Throughout this news release, reference is made to Adjusted EBITDA, available liquidity, and total and net debt to total capital ratio (collectively “these Non-IFRS measures”). We believe that, in addition to earnings, these Non-IFRS measures are useful performance indicators for investors with regard to operating and financial performance. Adjusted EBITDA is also used to evaluate the operating and financial performance of our operating segments, generate future operating plans, and make strategic decisions. These Non-IFRS measures are not generally accepted financial measures under IFRS and do not have standardized meanings prescribed by IFRS. Investors are cautioned that none of these Non-IFRS measures should 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 Non-IFRS 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 Non-IFRS measures may not be directly comparable to similarly titled measures used by other entities. Accordingly, these Non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. The reconciliation of the Non-IFRS measures used and presented by the Company to the most directly comparable IFRS measures is set out in our Q1 2021 MD&A.
- 7 -
Addendum - Norbord Results
Norbord results are included in our consolidated results in the North America Engineered Wood Products and Europe Engineered Wood Products segments commencing on the closing of the acquisition of Norbord (the Acquisition), February 1, 2021. As a result, in the first four quarters following the Acquisition, our prior period comparative figures will not include Norbord. To provide the holders of Norbord’s 2023 Notes and 2027 Notes (the Norbord Notes) with the information required under the terms of the relevant indentures governing the Norbord Notes, we have provided a brief discussion of Norbord comparative operating results below.
Below is a summary of Norbord operating results for the quarters ended April 3, 2021, December 31, 2020 and April 4, 2020. The results for the first quarter of 2021 include the period from January 1, 2021 to January 31, 2021, which are the results from 2021 prior to the closing of the Acquisition and not included in our consolidated results or available in any of Norbord’s prior standalone News Releases and exclude any impact of the purchase price allocation recognized upon closing of the Acquisition.
| (US $ millions, unless otherwise noted) (unaudited) |
Q1 2021 | Q4 2020 | Q1 2020 | |||||||||
| Sales |
984 | 794 | 467 | |||||||||
| Adjusted EBITDA(1) |
526 | 384 | 75 | |||||||||
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| KEY STATISTICS |
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| Shipments (MMsf–3/8”) |
||||||||||||
| North America OSB |
1,446 | 1,405 | 1,459 | |||||||||
| Europe panels |
543 | 485 | 499 | |||||||||
|
|
|
|
|
|
|
|||||||
| SELECTED BALANCE SHEET DATA |
||||||||||||
| Total assets(2) |
2,791 | 2,477 | 1,904 | |||||||||
| Long-term debt, principal value(3) |
663 | 665 | 685 | |||||||||
| Cash and cash equivalents |
777 | 568 | 30 | |||||||||
|
|
|
|
|
|
|
|||||||
| 1. | Non-IFRS measure; excludes acquisition-related items and based on Norbord’s historical definition. |
| 2. | Q1-21 excludes the fair value adjustments due to purchase price accounting upon closing of the Acquisition. |
| 3. | Q1-20 included drawings on Norbord’s revolving bank lines. |
Sales
Total sales in the quarter were $984 million, compared to $794 million in the fourth quarter of 2020 and $467 million in the first quarter of 2020. Quarter-over-quarter, total sales increased by $190 million or 24%. In North America, sales increased by 24% primarily due to higher realized OSB prices as well as a 3% increase in shipment volumes. In Europe, sales increased by 21% due to higher average panel prices and a 12% increase in shipment volumes. Year-over-year, total sales increased by $517 million or 111%. In North America, sales increased by 138% due to significantly higher realized OSB prices. In Europe, sales were 32% higher due to higher average panel prices and a 9% increase in shipment volumes.
- 8 -
Operating Results
| Adjusted EBITDA(1) (US $ millions) (unaudited) |
Q1 2021 | Q4 2020 | Q1 2020 | |||||||||
| North America |
$ | 503 | $ | 370 | $ | 68 | ||||||
| Europe |
25 | 20 | 10 | |||||||||
| Unallocated |
(2 | ) | (6 | ) | (3 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 526 | $ | 384 | $ | 75 | ||||||
|
|
|
|
|
|
|
|||||||
| 1. | Non-IFRS measure; excludes acquisition-related items and based on Norbord’s historical definition. |
Norbord generated Adjusted EBITDA of $526 million in the first quarter of 2021, compared to $384 million in the fourth quarter of 2020 and $75 million in the first quarter of 2020. The increase versus both comparative periods was driven primarily by higher realized North American OSB prices, with increased shipment volumes also contributing quarter-over-quarter.
Norbord’s North American operations generated Adjusted EBITDA of $503 million in the first quarter of 2021 versus $370 million in the fourth quarter of 2020 and $68 million in the first quarter of 2020. Quarter-over-quarter, the increase of $133 million was primarily attributed to higher OSB prices and shipment volumes, as well as the timing of and lower costs associated with maintenance shuts, partially offset by higher input prices and the impact on production of weather-related issues in the U.S. South and resin supply disruptions. The year-over-year increase of $435 million was primarily attributed to significantly higher OSB prices and improved productivity, partially offset by higher mill profit share costs attributed to higher earnings, higher input prices, and the impact on production of weather-related issues in the U.S. South and resin supply disruptions.
In the first quarter, Norbord’s North American OSB cash production costs per unit (excluding mill profit share) increased 3% versus the fourth quarter of 2020 due to higher input prices and the impact on production of weather-related issues in the U.S. South and resin supply disruptions during the quarter, partially offset by the timing of and lower costs associated with maintenance shuts. Unit costs increased by 10% versus the first quarter of 2020 due to higher input prices, including Canadian stumpage-related wood costs, and the impact on production of weather-related issues in the U.S. South and resin supply disruptions.
Norbord’s North American operating mills produced at 88% of available capacity in the first quarter of 2021, compared with 80% in the fourth quarter of 2020 and 79% in the first quarter of 2020. These figures do not include the Chambord, Quebec mill, which restarted at the end of the first quarter of 2021, and exclude the capacity of the 100 Mile House, British Columbia mill effective the fourth quarter of 2020, which was permanently closed during that quarter. The improvement against the prior quarter reflects improved productivity and the holiday and maintenance downtime taken in the fourth quarter. The improvement against the prior year quarter is driven primarily by improved productivity and the removal of the 100 Mile House mill’s capacity starting in the fourth quarter of 2020.
Norbord’s European operations generated Adjusted EBITDA of $25 million in the first quarter of 2021, $5 million higher than the fourth quarter of 2020 and $15 million higher than the same quarter last year. Quarter-over-quarter, the increase was primarily due to higher average panel prices and higher shipment volumes, partially offset by higher input prices. Year-over-year, the increase was due primarily to higher average panel prices and higher shipment volumes, partially offset by higher resin prices.
Norbord’s European mills produced at 87% of stated capacity in the first quarter of 2021, compared to 88% in the fourth quarter of 2020 and 93% in the first quarter of 2020. Productivity is in-line quarter-over-quarter but decreased year-over-year due to the inclusion of the Phase 2 capacity at Inverness starting in the fourth quarter of 2020, partially offset by the continued ramp-up of the Inverness mill.
- 9 -
Information for Norbord bondholders
Prior to the Acquisition, Norbord had an aggregate commitment of $300 million in revolving bank lines which were secured by a first lien on Norbord’s North American OSB inventory and property, plant and equipment. This lien was shared pari passu with the holders of the Norbord Notes, aggregating $665 million in principal value. In addition, Norbord had a $125 million multi-currency accounts receivable securitization program with a third-party trust sponsored by a highly rated Canadian financial institution. Both the revolving bank line commitment and the accounts receivables securitization program were terminated on February 1, 2021 upon closing of the Acquisition.
Following the repayment and termination of Norbord’s revolving bank lines, the collateral platform providing for security over assets of Norbord in favour of the revolving banks was terminated. As a consequence, the collateral platform providing for security over assets of Norbord in favour of the holders of the Norbord Notes was terminated. The termination of the collateral platforms resulted in the discharge of the liens that supported both collateral platforms. The Norbord Notes are now, as a consequence of such termination, unsecured obligations of Norbord Inc.
Pursuant to each of the Norbord Notes indentures, Norbord commenced a change of control offer (the Offer) to repurchase the Norbord Notes on March 2, 2021 at a purchase price equal to 101% of the principal amount of the Notes. Upon expiration of the Offer on April 1, 2021, $2 million of the Norbord Notes were tendered and these were repurchased on April 6, 2021. On the same date, a redemption call for the remaining outstanding senior notes due in 2027 was announced at a redemption price equal to par plus a make-whole premium of $31 million. The notes were redeemed on May 6, 2021 using cash on hand. On that date a redemption call for the remaining outstanding senior notes due in 2023 was announced under the optional redemption provisions of the indenture governing the 2023 Notes at a redemption price equal to par plus the make-whole premium in accordance with the indenture, together with accrued and unpaid interest to the redemption date. The notes will be redeemed on June 7, 2021.
- 10 -
West Fraser Timber Co. Ltd.
Condensed Consolidated Balance Sheets
(in millions of United States dollars, except where indicated - unaudited)
| March 31 2021 |
Currency remeasurement December 31 2020 |
Currency remeasurement January 1 2020 |
||||||||||
| Assets |
||||||||||||
| Current assets |
||||||||||||
| Cash and short-term investments |
$ | 1,400 | $ | 461 | $ | 12 | ||||||
| Receivables |
679 | 277 | 199 | |||||||||
| Income taxes receivable |
— | 8 | 104 | |||||||||
| Inventories (note 5) |
1,137 | 578 | 561 | |||||||||
| Prepaid expenses |
29 | 12 | 7 | |||||||||
|
|
|
|
|
|
|
|||||||
| 3,245 | 1,336 | 883 | ||||||||||
| Property, plant and equipment |
3,688 | 1,657 | 1,648 | |||||||||
| Timber licences |
378 | 372 | 380 | |||||||||
| Goodwill and other intangibles |
2,445 | 591 | 594 | |||||||||
| Export duty deposits (note 14) |
171 | 178 | 61 | |||||||||
| Other assets |
43 | 35 | 20 | |||||||||
| Deferred income tax assets |
3 | 9 | 8 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 9,973 | $ | 4,178 | $ | 3,594 | |||||||
|
|
|
|
|
|
|
|||||||
| Liabilities |
||||||||||||
| Current liabilities |
||||||||||||
| Cheques issued in excess of funds on deposit |
$ | — | $ | — | $ | 12 | ||||||
| Operating loans (note 6) |
— | — | 288 | |||||||||
| Payables and accrued liabilities |
802 | 389 | 305 | |||||||||
| Current portion of long-term debt (note 6) |
376 | 7 | 7 | |||||||||
| Current portion of reforestation and decommissioning obligations |
36 | 34 | 32 | |||||||||
| Income taxes payable |
236 | 98 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| 1,450 | 528 | 644 | ||||||||||
| Long-term debt (note 6) |
839 | 500 | 500 | |||||||||
| Other liabilities (note 7) |
348 | 408 | 350 | |||||||||
| Deferred income tax liabilities |
722 | 264 | 195 | |||||||||
|
|
|
|
|
|
|
|||||||
| 3,359 | 1,700 | 1,689 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Shareholders’ Equity |
||||||||||||
| Share capital (note 9) |
3,917 | 481 | 480 | |||||||||
| Contributed surplus |
15 | — | — | |||||||||
| Accumulated other comprehensive earnings |
(239 | ) | (240 | ) | (272 | ) | ||||||
| Retained earnings |
2,921 | 2,237 | 1,697 | |||||||||
|
|
|
|
|
|
|
|||||||
| 6,614 | 2,478 | 1,905 | ||||||||||
|
|
|
|
|
|
|
|||||||
| $ | 9,973 | $ | 4,178 | $ | 3,594 | |||||||
|
|
|
|
|
|
|
|||||||
Number of Common shares and Class B Common shares outstanding at May 5, 2021 was 121,586,183.
- 11 -
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(in millions of United States dollars, except where indicated - unaudited)
| Currency January 1 to March 31 |
||||||||
| 2021 | 2020 | |||||||
| Share capital |
||||||||
| Balance - beginning of period |
$ | 481 | $ | 480 | ||||
| Issuance of Common shares (note 9) |
3,487 | — | ||||||
| Repurchase of Common shares for cancellation (note 9) |
(51 | ) | — | |||||
|
|
|
|
|
|||||
| Balance - end of period |
$ | 3,917 | $ | 480 | ||||
|
|
|
|
|
|||||
| Contributed surplus |
||||||||
| Balance - beginning of period |
$ | — | $ | — | ||||
| Equity settled share option plan acquired (note 3) |
14 | — | ||||||
| Share based compensation for equity settled plan |
1 | — | ||||||
|
|
|
|
|
|||||
| Balance - end of period |
$ | 15 | $ | — | ||||
|
|
|
|
|
|||||
| Accumulated other comprehensive earnings |
||||||||
| Balance - beginning of period |
$ | (240 | ) | $ | (272 | ) | ||
| Translation gain on foreign operations |
1 | — | ||||||
| Translation effect on change in reporting currency |
— | (119 | ) | |||||
|
|
|
|
|
|||||
| Balance - end of period |
$ | (239 | ) | $ | (391 | ) | ||
|
|
|
|
|
|||||
| Retained earnings |
||||||||
| Balance - beginning of period |
$ | 2,237 | $ | 1,697 | ||||
| Actuarial gain on post-retirement benefits, net of tax |
89 | 67 | ||||||
| Repurchase of Common shares for cancellation (note 9) |
(51 | ) | — | |||||
| Earnings for the period |
665 | 9 | ||||||
| Dividends declared |
(19 | ) | (9 | ) | ||||
|
|
|
|
|
|||||
| Balance - end of period |
$ | 2,921 | $ | 1,764 | ||||
|
|
|
|
|
|||||
| Shareholders’ Equity |
$ | 6,614 | $ | 1,853 | ||||
|
|
|
|
|
|||||
- 12 -
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Earnings and Comprehensive Earnings
(in millions of United States dollars, except where indicated - unaudited)
| Currency January 1 to March 31 |
||||||||
| 2021 | 2020 | |||||||
| Sales |
$ | 2,343 | $ | 890 | ||||
|
|
|
|
|
|||||
| Costs and expenses |
||||||||
| Cost of products sold |
1,039 | 630 | ||||||
| Freight and other distribution costs |
181 | 125 | ||||||
| Export duties (note 14) |
37 | 26 | ||||||
| Amortization |
122 | 52 | ||||||
| Selling, general and administration |
78 | 41 | ||||||
| Equity-based compensation |
7 | 7 | ||||||
|
|
|
|
|
|||||
| 1,464 | 881 | |||||||
|
|
|
|
|
|||||
| Operating earnings |
879 | 9 | ||||||
| Finance expense |
(13 | ) | (12 | ) | ||||
| Other (note 10) |
4 | 9 | ||||||
|
|
|
|
|
|||||
| Earnings before tax |
870 | 6 | ||||||
| Tax (provision) recovery (note 11) |
(205 | ) | 3 | |||||
|
|
|
|
|
|||||
| Earnings |
$ | 665 | $ | 9 | ||||
|
|
|
|
|
|||||
| Earnings per share (dollars) (note 12) |
||||||||
| Basic |
$ | 6.96 | $ | 0.13 | ||||
| Diluted |
$ | 6.96 | $ | (0.09 | ) | |||
|
|
|
|
|
|||||
| Comprehensive earnings |
||||||||
| Earnings |
$ | 665 | $ | 9 | ||||
| Other comprehensive earnings |
||||||||
| Translation gain on foreign operations |
1 | — | ||||||
| Translation effect on change in reporting currency |
— | (119 | ) | |||||
| Actuarial gain on post-retirement benefits, net of tax |
89 | 67 | ||||||
|
|
|
|
|
|||||
| Comprehensive earnings |
$ | 755 | $ | (43 | ) | |||
|
|
|
|
|
|||||
- 13 -
West Fraser Timber Co. Ltd.
Condensed Consolidated Statements of Cash Flows
(in millions of United States dollars, except where indicated - unaudited)
| Currency remeasurement January 1 to March 31 |
||||||||
| Cash provided by (used in) |
2021 | 2020 | ||||||
| Operating activities |
||||||||
| Earnings |
$ | 665 | $ | 9 | ||||
| Adjustments |
||||||||
| Amortization |
122 | 52 | ||||||
| Finance expense |
13 | 12 | ||||||
| Foreign exchange loss (gain) |
6 | (10 | ) | |||||
| Export duty deposits |
8 | (6 | ) | |||||
| Post-retirement expense |
25 | 19 | ||||||
| Contributions to post-retirement benefit plans |
(13 | ) | (10 | ) | ||||
| Tax provision (recovery) |
205 | (3 | ) | |||||
| Income taxes paid |
(246 | ) | (1 | ) | ||||
| Reforestation and decommissioning obligations |
13 | 18 | ||||||
| Other |
(13 | ) | 4 | |||||
| Changes in non-cash working capital |
||||||||
| Receivables |
(172 | ) | (49 | ) | ||||
| Inventories |
(221 | ) | (145 | ) | ||||
| Prepaid expenses |
(4 | ) | (3 | ) | ||||
| Payables and accrued liabilities |
74 | 22 | ||||||
|
|
|
|
|
|||||
| 462 | (91 | ) | ||||||
|
|
|
|
|
|||||
| Financing activities |
||||||||
| Repayment of long-term debt |
(2 | ) | — | |||||
| Proceeds from operating loans |
— | 219 | ||||||
| Financing fees paid |
(3 | ) | — | |||||
| Finance expense paid |
(3 | ) | (7 | ) | ||||
| Repurchase of Common shares for cancellation |
(93 | ) | — | |||||
| Issuance of Common shares |
5 | — | ||||||
| Dividends paid |
(11 | ) | (10 | ) | ||||
| Other |
(2 | ) | — | |||||
|
|
|
|
|
|||||
| (109 | ) | 202 | ||||||
|
|
|
|
|
|||||
| Investing activities |
||||||||
| Acquired cash and short-term investments (note 3) |
642 | — | ||||||
| Additions to capital assets |
(62 | ) | (45 | ) | ||||
| Government assistance |
3 | — | ||||||
| Other |
(1 | ) | 4 | |||||
|
|
|
|
|
|||||
| 582 | (41 | ) | ||||||
|
|
|
|
|
|||||
| Change in cash |
935 | 70 | ||||||
| Foreign exchange effect on cash |
4 | (4 | ) | |||||
| Cash - beginning of period |
461 | — | ||||||
|
|
|
|
|
|||||
| Cash - end of period |
$ | 1,400 | $ | 66 | ||||
|
|
|
|
|
|||||
- 14 -
West Fraser Timber Co. Ltd.
Notes to Condensed Consolidated Interim Financial Statements
(figures are in millions of United States 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 with more than 60 facilities in Canada, the United States (“U.S.”), the United Kingdom (“U.K.”), and Europe. From responsibly sourced and sustainably managed forest resources, the Company produces lumber, engineered wood products (OSB, LVL, MDF, plywood, and particleboard), pulp, newsprint, wood chips, other residuals and renewable energy. West Fraser’s products are used in home construction, repair and remodelling, industrial applications, papers, tissue, and box materials. 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 (“TSX”) and on the New York Stock Exchange (“NYSE”) under the symbol WFG.
| 2. | Basis of presentation and statement of compliance |
These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 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, 2020, audited annual consolidated financial statements, except for the change in functional and reporting currency and the business combination as discussed below. These condensed consolidated interim financial statements should be read in conjunction with our 2020 audited annual consolidated financial statements, which are presented in Canadian dollars.
Change in functional and reporting currency
Determination of functional currency may involve certain judgments to determine the primary economic environment, and we reconsider the functional currency of our entities if there is a change in events and conditions which determine the primary economic environment. We have determined that as a result of the acquisition of Norbord Inc. (the “Acquisition”), the functional currency of our Canadian operations has changed from Canadian dollars (“CAD”) to United States dollars (“USD”). We considered a variety of factors when making this decision. The most significant being an increase in the level of sales made in U.S. dollars, a significant portion of operating expenses are incurred in U.S. dollars, and increased levels of U.S. dollar financing from the Acquisition.
Concurrent with the change in functional currency, we also changed our reporting currency from Canadian dollars to U.S. dollars. This change in reporting currency is to better reflect our business activities, following the increased presence in the U.S. as a result of the Acquisition and in connection with the listing of West Fraser’s common shares on the NYSE on February 1, 2021.
A change in functional currency is applied prospectively and must be based on a change in economic facts, events and conditions. In contrast, a change in reporting currency requires retroactive restatement. Both changes have specific transition rules under IAS 21, The Effects of Changes in Foreign Exchange Rates.
As at and for the year ended December 31, 2020 and all prior periods, the functional and reporting currency of the Company was the Canadian dollar as described in our audited annual consolidated financial statements. The currency remeasurement of our results applied the IAS 21 transitional rules.
To prepare our December 31, 2020 and January 1, 2020 consolidated balance sheets, all assets and liabilities were translated into U.S. dollars at the closing exchange rate on December 31, 2020 and December 31, 2019, as listed below. Equity items were retroactively restated at historical exchange rates to give effect to the change in reporting currency. The accounting policy used to translate the equity items prior to 2020, was to use the annual average exchange rate for each equity transaction that occurred in the year. For 2020, equity items were translated quarterly using the average exchange rate for each quarter.
- 15 -
To prepare our 2020 consolidated statement of earnings, all revenues and expenses were translated into U.S. dollars at the average exchange rate for each quarter, with no adjustments to the measurement of or accounting for previously reported results. To prepare our 2020 consolidated statement of cash flow, all items were translated into U.S. dollars at the average exchange rate for each quarter, with no adjustments to the measurement of or accounting for previously reported results.
The exchange rates used to reflect the change in reporting currency were as follows:
| Canadian - USD exchange rate |
Q1-20 | Q2-20 | Q3-20 | Q4-20 | Q4-19 | |||||||||||||||
| Closing rate |
0.7049 | n/a | n/a | 0.7854 | 0.7699 | |||||||||||||||
| Average rate |
0.7443 | 0.7221 | 0.7508 | 0.7676 | n/a | |||||||||||||||
Foreign currency translation effective from February 1, 2021
Assets and liabilities of foreign operations having a functional currency other than the US dollar are translated at the rate of exchange prevailing at the reporting date, and revenues and expenses at average rates during the period. Gains or losses on translation are included as a component of shareholders’ equity in other comprehensive earnings.
Foreign currency-denominated (non-U.S. currencies) monetary assets and liabilities are translated using the rate of exchange prevailing at the reporting date. Gains or losses on translation of these items are included in earnings and reported other income or expense.
Foreign currency fluctuation effective from February 1, 2021
Our Canadian operations incur a portion of their operating expenses in Canadian dollars. Therefore, an increase in the value of the Canadian dollar relative to the U.S. dollar increases the value of expenses in U.S. dollar terms incurred by our Canadian operations, which reduces operating margin and the cash flow available to fund operations.
The impact on USD equivalent of net CAD revenues and expenses for a $0.01 change results in a pre-tax earnings adjustment of $18 million.
| 3. | Norbord acquisition |
Business combinations are accounted for using the acquisition method. We measure goodwill at the acquisition date as the fair value of the consideration transferred less the fair value of the identifiable assets acquired and liabilities assumed. Customer lists acquired in a business combination that qualify for separate recognition are recognized as intangible assets at their fair value and amortized straight-line over 10-years. Transaction costs in connection with business combinations are expensed as incurred. The determination of the fair value of the assets acquired and liabilities assumed requires management to use estimates that contain uncertainty and critical judgments including the remaining estimated useful life of non-monetary assets. We have engaged a valuations expert to prepare the fair value for Norbord’s working capital, property, plant and equipment, and intangible assets. This work is expected to be complete by the end of the year.
On February 1, 2021, we acquired all of the outstanding shares of Norbord Inc. (“Norbord”). According to the terms of the Acquisition, Norbord shareholders received 0.675 of a West Fraser shares for each Norbord share held. The result was the issuance of 54,484,188 Common shares of West Fraser at a price of US$63.90 per share (CAD$81.94 per share) for $3,482 million. The price per share is based on the West Fraser Common shares’ closing price as listed on the TSX on January 29, 2021, and a CAD/USD exchange rate of 0.7798.
- 16 -
Included in the Acquisition are five OSB mills in Canada, seven OSB mills in the U.S., one OSB mill, one MDF plant and two particleboard plants in the U.K., one OSB mill in Belgium, and their related corporate offices.
We have incorporated the North American operations of Norbord into our Panels segment and renamed that segment North America (“NA”) Engineered Wood Products (“EWP”). This segment includes the results from North American operations for OSB, plywood, MDF, and LVL. In addition, we have identified a Europe EWP segment, which includes the results from the U.K. and Belgium operations for OSB, MDF and particleboard. The EWP segments have been separated due to differences in the operating region, customer base, profit margins and sales volumes.
The Acquisition has been accounted for as an acquisition of a business in accordance with IFRS 3, Business Combinations. We have allocated the purchase price based on our preliminary estimated fair value of the assets acquired and the liabilities assumed as follows:
| West Fraser purchase consideration: |
Preliminary March 31, 2021 |
|||
| Fair value of 54 million West Fraser shares issued |
$ | 3,482 | ||
| Fair value of equity-based compensation instruments |
24 | |||
|
|
|
|||
| $ | 3,506 | |||
|
|
|
|||
| Fair value of net assets acquired: |
||||
| Cash and short-term investments |
$ | 642 | ||
| Accounts receivable |
232 | |||
| Inventories |
339 | |||
| Prepaid expenses |
12 | |||
| Property, plant and equipment |
2,084 | |||
| Timber |
10 | |||
| Other non-current assets |
6 | |||
| Other intangibles |
17 | |||
| Customer list intangible |
470 | |||
| Goodwill |
1,374 | |||
| Deferred income tax assets |
3 | |||
| Payables and accrued liabilities |
(300 | ) | ||
| Income tax payable |
(144 | ) | ||
| Current portion of reforestation and decommissioning obligations |
(2 | ) | ||
| Long-term debt |
(720 | ) | ||
| Other non-current liabilities |
(37 | ) | ||
| Deferred income tax liabilities |
(480 | ) | ||
|
|
|
|||
| $ | 3,506 | |||
|
|
|
|||
Factors contributing to goodwill include the Norbord workforce, assets that are geographically complementary to our existing facilities and offer close access to large markets and timber baskets. The Acquisition also provides increased scale and geographic diversification of manufacturing and markets. The goodwill of $1,374 million is not deductible for tax purposes.
The following tables represent Norbord’s actual results included in our statement of earnings and the proforma results of operations for the three months ended March 31, 2021 assuming the Acquisition occurred on January 1, 2021 and including purchase price accounting for the Acquisition.
- 17 -
Norbord Results
| ($ millions except as otherwise indicated) |
||||
| Norbord results for February 1 to March 31, 20211 |
||||
| Sales |
707 | |||
| Operating earnings |
218 | 2 | ||
| Earnings |
160 | 2 | ||
| 1. | Represents the results of the Norbord operations since the acquisition date that are included in our Q1-21 results. |
| 2. | Includes purchase price accounting impact of $93 million expense for the one-time inventory adjustment in cost of products sold and $41 million expense for amortization. Earnings was further impacted by a $3 million recovery for finance expense and the related tax impact on these items. |
Proforma Q1-21 Results
| ($ millions except as otherwise indicated) |
||||||||||||
| West Fraser Actual Results Q1-21 |
Norbord Proforma Results1 Jan-21 |
West
Fraser Proforma Results1 Q1-21 |
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| Sales |
2,343 | 277 | 2,620 | |||||||||
| Operating earnings |
879 | 2 | 115 | 3 | 994 | 4 | ||||||
| Earnings |
665 | 2 | 86 | 3 | 751 | 4 | ||||||
| 1. | These unaudited proforma results have been provided as required per IFRS 3 - Business Combinations. West Fraser proforma Q1-21 presents West Fraser’s results as if the Acquisition was completed on January 1, 2021. |
| 2. | Operating earnings includes purchase price accounting impact of $93 million expense for the one-time inventory adjustment in cost of products sold; $41 million expense for amortization. Earnings was further impacted by a $3 million recovery for finance expense and the related tax impact on these items. |
| 3. | Operating earnings includes purchase price accounting impact of $18 million expense for amortization. Earnings was further impacted by a $1 million recovery for finance expense and the related tax impact on these items. |
| 4. | Includes purchase price accounting per footnote 2 and 3. |
Balances that required significant fair value adjustments for purchase price accounting included inventory, property, plant and equipment, timber, and customer list intangibles. Goodwill and deferred income tax liabilities were also significant.
Acquisition costs of $16 million have been expensed in selling, general and administration.
| 4. | Seasonality of operations |
Our operating results are subject to seasonal fluctuations that may impact quarter-to-quarter comparisons. Consequently, interim operating results may not proportionately reflect operating results for a full year.
Market demand varies seasonally, as homebuilding activity and repair-and-remodelling work are generally stronger in the spring and summer months. Extreme weather conditions, including wildfires in Western Canada and hurricanes in the U.S. South may periodically affect operations, including logging, manufacturing and transportation. Log inventory is typically built up in the Northern regions of North America and Europe during the winter to sustain our lumber and EWP production during the second quarter when logging is curtailed due to wet and inaccessible land conditions. This inventory is generally consumed in the spring and summer months.
- 18 -
| 5. | Inventories |
At March 31, 2021, no inventory valuation reserve was recognized (December 31, 2020 - $2 million; March 31, 2020 - $16 million; January 1, 2020 - $30 million) to reflect net realizable value being lower than cost.
| March 31, 2021 | Currency remeasurement December 31, 2020 |
Currency remeasurement January 1, 2020 |
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| Manufactured products |
$ | 426 | $ | 270 | $ | 262 | ||||||
| Logs and other raw materials |
502 | 189 | 174 | |||||||||
| Processing materials and supplies |
209 | 119 | 125 | |||||||||
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| $ | 1,137 | $ | 578 | $ | 561 | |||||||
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| 6. | Operating loans and long-term debt |
Operating loans
Our revolving lines of credit consist of a $676 million (CAD$850 million) committed revolving credit facility which matures August 2024, a $450 million committed revolving credit facility which matures April 2024, a $25 million demand line of credit dedicated to our U.S. operations and a $6 million (CAD$8 million) demand line of credit dedicated to our jointly -owned newsprint operation.
At March 31, 2021, our revolving credit facilities were undrawn and the associated deferred financing costs of $5 million were recorded in other assets.
Interest on the facilities is payable at floating rates based on Prime, Base Rate Advances, Bankers’ Acceptances or LIBOR Advances at our option.
In addition, we have credit facilities totalling $111 million dedicated to letters of credit, of which $96 million (CAD$120 million) is committed to our Canadian operations. On March 31, 2021, our letter of credit facilities supported $56 million of open letters of credit.
All debt is unsecured except the $6 million (CAD$8 million) joint operation demand line of credit, which is secured by that joint operation’s current assets.
Long-term debt
| March 31, 2021 |
Currency remeasurement December 31, 2020 |
Currency remeasurement January 1, 2020 |
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| $350 million senior notes due July 2027; interest at 5.75% |
$ | 376 | $ | — | $ | — | ||||||
| $315 million senior notes due April 2023; interest at 6.25% |
340 | — | — | |||||||||
| Senior notes due October 2024; interest at 4.35% |
300 | 300 | 300 | |||||||||
| Term loan due August 2024; floating interest rate |
200 | 200 | 200 | |||||||||
| Note payable due March 2021; interest at 2% |
— | 7 | 7 | |||||||||
| Notes payable |
1 | 2 | 3 | |||||||||
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| 1,217 | 509 | 510 | ||||||||||
| Less: deferred financing costs |
(2 | ) | (2 | ) | (3 | ) | ||||||
| Less: current portion |
(376 | ) | (7 | ) | (7 | ) | ||||||
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| $ | 839 | $ | 500 | $ | 500 | |||||||
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- 19 -
As part of the Acquisition, we assumed Norbord’s $315 million senior notes due April 2023 (the “2023 Notes”), bearing interest at 6.25% and $350 million senior notes due July 2027 (the “2027 Notes”), bearing interest at 5.75%. The purchase price fair value adjustment resulted in an increase of $28 million for the 2023 Notes and $26 million for the 2027 Notes. These adjustments are amortized into income over the remaining life of the debt, of which $3 million went through earnings by March 31, 2021.
On March 2, 2021, we made a mandatory change of control offer for 2023 Notes and 2027 Notes, which expired on April 1, 2021. As a result of the change of control offer, $1 million of the 2023 Notes and $1 million of the 2027 Notes were redeemed and were repaid in the second quarter of 2021. On April 6, 2021, we elected to redeem the remaining 2027 Notes, which redemption occurred on May 6, 2021. On May 6, 2021, we elected to redeem all of Norbord’s outstanding 2023 Notes on June 7, 2021. After the completion of the redemption of the 2023 Notes and the 2027 notes, the principal value of long-term debt will be reduced by $665 million from the date of the Acquisition.
The fair value of the long-term debt at March 31, 2021, was $1,230 million (December 31, 2020 - $524 million) based on rates available to us at the balance sheet date for long-term debt with similar terms and remaining maturities.
Interest rate swap contracts
At March 31, 2021, the Company had interest rate swap contracts to pay fixed interest rates (weighted average interest rate of 1.14%) and receive variable interest rates equal to 3-month LIBOR on $200 million notional principal amount of indebtedness. These agreements terminate in August 2024.
The agreements are accounted for as a derivative, and the gain or loss related to changes in the fair value is included in other income. For the three months ended March 31, 2021, a $3 million gain was recorded.
| 7. | Other liabilities |
| March 31, 2021 | Currency remeasurement December 31, 2020 |
Currency remeasurement January 1, 2020 |
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| Post-retirement (note 8) |
$ | 207 | $ | 295 | $ | 242 | ||||||
| Long-term portion of reforestation |
75 | 58 | 57 | |||||||||
| Long-term portion of decommissioning |
23 | 25 | 24 | |||||||||
| Other |
43 | 30 | 27 | |||||||||
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| $ | 348 | $ | 408 | $ | 350 | |||||||
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| 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 the commencement of retirement. We also provide group life insurance, medical and extended health benefits to certain employee groups.
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The status of the defined benefit pension plans and other retirement benefit plans, in aggregate, is as follows:
| March 31, 2021 | Currency remeasurement December 31, 2020 |
Currency remeasurement January 1, 2020 |
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| Projected benefit obligations |
$ | (1,520 | ) | $ | (1,471 | ) | $ | (1,305 | ) | |||
| Fair value of plan assets |
1,322 | 1,181 | 1,067 | |||||||||
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| $ | (198 | ) | $ | (290 | ) | $ | (238 | ) | ||||
| Represented by |
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| Post-retirement assets |
$ | 9 | $ | 5 | $ | 4 | ||||||
| Post-retirement liabilities |
(207 | ) | (295 | ) | (242 | ) | ||||||
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| $ | (198 | ) | $ | (290 | ) | $ | (238 | ) | ||||
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The significant actuarial assumptions used to determine our balance sheet date post-retirement assets and liabilities are as follows:
| March 31, 2021 | December 31, 2020 | |||||||
| Discount rate |
3.24 | % | 2.69 | % | ||||
| Future compensation rate increase |
3.62 | % | 3.65 | % | ||||
For the three months ended March 31, 2021, we recognized in other comprehensive earnings a before tax gain of $118 million to reflect the changes in the valuation of the post-retirement benefit plans. The gain reflects the increase in the discount rate used to calculate plan liabilities from the beginning of the year, partially offset by a negative return on plan assets.
The actuarial gain on post-retirement benefits, included in other comprehensive earnings, is as follows:
| January 1 to March 31 | ||||||||
| 2021 | Currency remeasurement 2020 |
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| Actuarial gain |
$ | 118 | $ | 91 | ||||
| Tax provision |
(29 | ) | (24 | ) | ||||
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| $ | 89 | $ | 67 | |||||
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| 9. | Share Capital |
Authorized
400,000,000 Common shares, without par value
20,000,000 Class B Common shares, without par value
10,000,000 Preferred shares, issuable in series, without par value
Issued
| March 31, 2021 | December 31, 2020 | |||||||||||||||
| Number | Amount | Number | Currency remeasurement Amount |
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| Common |
119,400,329 | $ | 3,917 | 66,397,144 | $ | 481 | ||||||||||
| Class B Common |
2,281,478 | — | 2,281,478 | — | ||||||||||||
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| Total Common |
121,681,807 | $ | 3,917 | 68,678,622 | $ | 481 | ||||||||||
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As part of the Acquisition, we issued 54,484,188 of West Fraser Common shares at a price of US$63.90 per share (CAD$81.94 per share) for $3,482 million. The price per share is based on the West Fraser Common shares’ closing price as listed on the TSX on January 29, 2021, and a CAD/USD exchange rate of 0.7798.
- 21 -
During the quarter, we issued 77,600 Common shares of the Company under our share option plans and 2,316 under our employee share purchase plan. On April 20, 2021, our board of directors approved a change to the assumed Norbord option plan to allow holders the right to elect to receive a cash payment in lieu of exercising an option to purchase Common shares. No other changes were made to the plan.
On February 17, 2021, we renewed our normal course issuer bid (“NCIB”) allowing us to acquire an additional 6,044,000 Common shares for cancellation until the expiry of the bid on February 16, 2022. This represents approximately 5% of the Company’s issued and outstanding Common shares. During the quarter, we have repurchased 1,560,919 at an average price of US$65.28 (CAD$82.86) per share under this NCIB.
| 10. | Other |
| January 1 to March 31 | ||||||||
| 2021 | Currency remeasurement 2020 |
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| Foreign exchange (loss) gain |
$ | (6 | ) | $ | 14 | |||
| Gain (loss) on interest rate swap contracts |
3 | (4 | ) | |||||
| Other |
7 | (1 | ) | |||||
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| $ | 4 | $ | 9 | |||||
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| 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:
| January 1 to March 31 | ||||||||
| 2021 | Currency remeasurement 2020 |
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| Income tax expense at statutory rate of 27% |
$ | (235 | ) | $ | (2 | ) | ||
| Rate differential between jurisdictions |
28 | — | ||||||
| Non-taxable amounts |
(2 | ) | 5 | |||||
| Other |
4 | — | ||||||
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| Tax (provision) recovery |
$ | (205 | ) | $ | 3 | |||
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| 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 cash-settled share option expense (recovery) charged to earnings and after deducting a notional charge for cash-settled share options assuming the use of the equity-settled method, as set out below. No earnings adjustment is required for our equity-settled share option plan. 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.
- 22 -
| January 1 to March 31 | ||||||||
| 2021 | Currency remeasurement 2020 |
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| Earnings |
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| Basic |
$ | 665 | $ | 9 | ||||
| Share option expense (recovery) |
9 | (13 | ) | |||||
| Equity-settled share option adjustment |
(3 | ) | (2 | ) | ||||
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| Diluted |
$ | 671 | $ | (6 | ) | |||
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| Weighted average number of shares (thousands) |
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| Basic |
95,670 | 68,665 | ||||||
| Share options |
536 | 132 | ||||||
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| Diluted |
96,206 | 68,797 | ||||||
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| Earnings per share (dollars) |
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| Basic |
$ | 6.96 | $ | 0.13 | ||||
| Diluted |
$ | 6.96 | $ | (0.09 | ) | |||
- 23 -
13. Segmented information
| Lumber | NA EWP | Pulp & Paper | Europe EWP | Corporate & Other |
Total | |||||||||||||||||||
| January 1, 2021 to March 31, 2021 |
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| Sales |
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| To external customers |
$ | 1,275 | $ | 779 | $ | 177 | $ | 112 | $ | — | $ | 2,343 | ||||||||||||
| To other segments |
25 | 2 | — | — | (27 | ) | — | |||||||||||||||||
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| $ | 1,300 | $ | 781 | $ | 177 | $ | 112 | $ | (27 | ) | $ | 2,343 | ||||||||||||
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| Cost of products sold |
(490 | ) | (364 | ) | (125 | ) | (87 | ) | 27 | (1,039 | ) | |||||||||||||
| Freight and other distribution costs |
(91 | ) | (48 | ) | (33 | ) | (9 | ) | — | (181 | ) | |||||||||||||
| Export duties, net |
(37 | ) | — | — | — | — | (37 | ) | ||||||||||||||||
| Amortization |
(39 | ) | (54 | ) | (9 | ) | (17 | ) | (3 | ) | (122 | ) | ||||||||||||
| Selling, general and administration |
(36 | ) | (16 | ) | (8 | ) | (5 | ) | (13 | ) | (78 | ) | ||||||||||||
| Equity-based compensation |
— | — | — | — | (7 | ) | (7 | ) | ||||||||||||||||
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| Operating earnings |
$ | 607 | $ | 299 | $ | 2 | $ | (6 | ) | $ | (23 | ) | $ | 879 | ||||||||||
| Finance expense, net |
(5 | ) | (1 | ) | (2 | ) | — | (5 | ) | (13 | ) | |||||||||||||
| Other |
7 | — | 1 | — | (4 | ) | 4 | |||||||||||||||||
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| Earnings before tax |
$ | 609 | $ | 298 | $ | 1 | $ | (6 | ) | $ | (32 | ) | $ | 870 | ||||||||||
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| Currency remeasurement |
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| January 1, 2020 to March 31, 2020 |
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| Sales |
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| To external customers |
$ | 622 | $ | 103 | $ | 165 | $ | — | $ | — | $ | 890 | ||||||||||||
| To other segments |
21 | 1 | — | — | (22 | ) | — | |||||||||||||||||
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| $ | 643 | $ | 104 | $ | 165 | $ | — | $ | (22 | ) | $ | 890 | ||||||||||||
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| Cost of products sold |
(453 | ) | (82 | ) | (117 | ) | — | 22 | (630 | ) | ||||||||||||||
| Freight and other distribution costs |
(82 | ) | (11 | ) | (32 | ) | — | — | (125 | ) | ||||||||||||||
| Export duties, net |
(26 | ) | — | — | — | — | (26 | ) | ||||||||||||||||
| Amortization |
(39 | ) | (3 | ) | (8 | ) | — | (2 | ) | (52 | ) | |||||||||||||
| Selling, general and administration |
(29 | ) | (5 | ) | (8 | ) | — | 1 | (41 | ) | ||||||||||||||
| Equity-based compensation |
— | — | — | — | (7 | ) | (7 | ) | ||||||||||||||||
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| Operating earnings |
$ | 14 | $ | 3 | $ | — | $ | — | $ | (8 | ) | $ | 9 | |||||||||||
| Finance expense, net |
(9 | ) | (1 | ) | (2 | ) | — | — | (12 | ) | ||||||||||||||
| Other |
12 | — | 3 | — | (6 | ) | 9 | |||||||||||||||||
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| Earnings before tax |
$ | 17 | $ | 2 | $ | 1 | $ | — | $ | (14 | ) | $ | 6 | |||||||||||
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The geographic distribution of external sales is as follows1:
| January 1 to March 31 | ||||||||
| 2021 | Currency remeasurement 2020 |
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| Canada |
$ | 407 | $ | 176 | ||||
| U.S. |
1,636 | 559 | ||||||
| China |
118 | 104 | ||||||
| Other Asia |
64 | 44 | ||||||
| Other |
118 | 7 | ||||||
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| $ | 2,343 | $ | 890 | |||||
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| 1. | Sales distribution is based on the location of product delivery. |
- 24 -
| 14. | Countervailing and antidumping duty dispute |
Additional details can be found in Note 25 - Countervailing (“CVD”) and antidumping (“ADD”) duty dispute of our 2020 annual audited consolidated financial statements.
Developments in CVD and ADD rates
On April 24, 2017, the United States Department of Commerce (“USDOC”) issued its preliminary determination in the CVD investigation, and on June 26, 2017, the USDOC issued its preliminary determination in the ADD investigation. On December 4, 2017, the duty rates were revised. On November 24, 2020, the USDOC finalized these rates based on its first Administrative Review (“AR”) of the first Period of Investigation (“POI”) as listed below.
Effective November 30, 2020 for ADD and December 1, 2020 for CVD, shipments from Canada to the U.S. were subject to the new cash deposit rate of 7.57% for CVD and 1.40% for ADD.
The respective Cash Deposit Rates, the AR1 Final Rate, and the West Fraser Estimated ADD Rate for each period are as follows:
| Effective dates for CVD |
Cash Deposit Rate |
AR1 Final
Rate3 (24-Nov-20) |
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| AR1 POI |
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| April 28, 2017 - August 24, 20171 |
24.12 | % | 6.76 | % | ||||
| August 25, 2017 - December 27, 20171 |
— | — | ||||||
| December 28, 2017 - December 31, 20172 |
17.99 | % | 6.76 | % | ||||
| January 1, 2018 - December 31, 2018 |
17.99 | % | 7.57 | % | ||||
| AR2 POI |
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| January 1, 2019 - December 31, 2019 |
17.99 | % | n/a | 5 | ||||
| AR3 POI |
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| January 1, 2020 - November 30, 2020 |
17.99 | % | n/a | 6 | ||||
| December 1, 2020 - December 31, 20204 |
7.57 | % | n/a | 6 | ||||
| AR4 POI |
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| January 1, 2021 – March 31, 2021 |
7.57 | % | n/a | 7 | ||||
| 1. | On April 24, 2017, the USDOC issued its preliminary rate in the CVD investigation. The requirement that we make cash deposits for CVD was suspended on August 24, 2017, until the USDOC published the revised rate. |
| 2. | On December 4, 2017, the USDOC revised our CVD Cash Deposit Rate effective December 28, 2017. |
| 3. | On February 3, 2020, the USDOC issued a preliminary CVD rate and, on November 24, 2020, a final CVD rate for the AR1 POI. This table only reflects the final rate. |
| 4. | Effective December 1, 2020, shipments from Canada to the U.S. were subject to the new Cash Deposit rate of 7.57% for CVD. |
| 5. | The CVD rate for the AR2 POI will be adjusted when AR2 is complete and the USDOC finalizes the rate, which is not expected until 2021. |
| 6. | The CVD rate for the AR3 POI will be adjusted when AR3 is complete and the USDOC finalizes the rate, which is not expected until 2022. |
| 7. | The CVD rate for the AR4 POI will be adjusted when AR4 is complete and the USDOC finalizes the rate, which is not expected until 2023. |
- 25 -
| Effective dates for ADD |
Cash Deposit Rate |
AR1
Final Rate3 (24-Nov-20) |
West Fraser Estimated Rate |
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| AR1 POI |
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| June 30, 2017 - December 3, 20171 |
6.76 | % | 1.40 | % | 1.46 | % | ||||||
| December 4, 2017 - December 31, 20172 |
5.57 | % | 1.40 | % | 1.46 | % | ||||||
| January 1, 2018 - December 31, 2018 |
5.57 | % | 1.40 | % | 1.46 | % | ||||||
| AR2 POI |
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| January 1, 2019 - December 31, 2019 |
5.57 | % | n/a | 5 | 4.65 | % | ||||||
| AR3 POI |
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| January 1, 2020 - November 29, 2020 |
5.57 | % | n/a | 6 | 3.40 | % | ||||||
| November 30, 2020 – December 31, 20204 |
1.40 | % | n/a | 6 | 3.40 | % | ||||||
| AR4 POI |
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| January 1, 2021 – March 31, 2021 |
1.40 | % | n/a | 7 | 3.77 | % | ||||||
| 1. | On June 26, 2017, the USDOC issued its preliminary rate in the ADD investigation effective June 30, 2017. |
| 2. | On December 4, 2017, the USDOC revised our ADD Cash Deposit Rate effective December 4, 2017. |
| 3. | On February 3, 2020, the USDOC issued a preliminary ADD Rate and, on November 24, 2020, a final CVD rate for the AR1 POI. This table only reflects the final rate. |
| 4. | Effective November 30, 2020, shipments from Canada to the U.S. were subject to the new Cash Deposit Rate of 1.40% for ADD. |
| 5. | The ADD rate for the AR2 POI will be adjusted when AR2 is complete and the USDOC finalizes the rate, which is not expected until 2021. |
| 6. | The ADD rate for the AR3 POI will be adjusted when AR3 is complete and the USDOC finalizes the rate, which is not expected until 2022. |
| 7. | The ADD rate for the AR4 POI will be adjusted when AR4 is complete and the USDOC finalizes the rate, which is not expected until 2023. |
Impact on earnings
The following table reconciles our cash deposits paid during the period to the amount recorded in our earnings statement.
| January 1 to March 31 | ||||||||
| 2021 | Currency remeasurement 2020 |
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| Cash deposits1 |
$ | (29 | ) | $ | (32 | ) | ||
| Adjust to West Fraser Estimated ADD rate2 |
(8 | ) | 6 | |||||
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| Duty recovery (expense)3 |
$ | (37 | ) | $ | (26 | ) | ||
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| Interest income on duty deposits attributable to West Fraser Estimated rate adjustments |
$ | — | $ | — | ||||
| Interest income on the AR1 duty deposits receivable4 |
1 | — | ||||||
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| Interest income on duty deposits |
$ | 1 | $ | — | ||||
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| 1. | Represents combined CVD and ADD cash deposit rate of 8.97% for Q1-21 and 23.56% for Q1-20. |
| 2. | Represents adjustment to West Fraser Estimated ADD rate of 3.77% for Q1-21 and 0.77% for Q1-20. |
| 3. | The total represents the combined CVD cash deposit rate and West Fraser Estimated ADD rate of 11.34% for Q1-21 and 18.76% for Q1-20. |
| 4. | Represents interest income accrued on the $95 million AR1 true-up duty deposit receivable. |
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Impact on the balance sheet
Export duty deposits receivable is represented by:
| Export duty deposits receivable |
January 1 to March 31 2021 |
Currency remeasurement January 1 to December 31 2020 |
||||||
| Beginning balance |
$ | 178 | $ | 61 | ||||
| Export duties recognized as long-term duty deposits receivable in consolidated balance sheets |
(8 | ) | 104 | |||||
| Interest recognized on the long-term duty deposits receivable |
1 | 13 | ||||||
|
|
|
|
|
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| Ending balance |
$ | 171 | $ | 178 | ||||
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|
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As at March 31, 2021, export duties paid and payable on deposit with the USDOC are $562 million.
AR2, AR3 and AR4
The preliminary rates for AR2 (POI January 1 to December 31, 2019) are expected in the second quarter of 2021 and rates finalized by the fourth quarter. AR3 (POI January 1 to December 31, 2020) commenced in April 2021, and the rates are expected to be finalized sometime in 2022. AR4 (POI January 1 to December 31, 2021) is expected to commence in 2022 with the results finalized in 2023. We have been selected as a mandatory respondent for AR3, which will result in West Fraser continuing to be subject to a company-specific rate.
Appeals
Our 2020 annual MD&A included in our 2020 Annual Report includes details on Softwood Lumber Dispute appeals.
Notwithstanding the deposit rates assigned under the investigations, our final liability for CVD and ADD will not be determined until each annual administrative review process is complete and related appeal processes are concluded.
For More Information
West Fraser Investors:
Robert B. Winslow, CFA
Director, Investor Relations & Corporate Development
Tel. (416) 777-4426
shareholder@westfraser.com
West Fraser Media:
Heather Colpitts
Director, Corporate Affairs
Tel. (416) 643-8838
shareholder@westfraser.com
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