TSX: WEF
DUNCAN, BC, Aug. 11 /CNW/ - Western Forest Products Inc. ("Western" or
the "Company") announced today the Company's results for the 2nd quarter ended
June 30, 2005. The Company will host a teleconference call on Monday, August
15, 2005 at 10:00 a.m. PST (1:00 p.m. EST) on the Company's results. (See
below for details on participation.)
Reflecting poor lumber and pulp markets, higher anti-dumping duty rates,
a foreign exchange translation loss on the Secured Bonds and a non-cash write
down of the Silvertree sawmill, we incurred a loss of $37.2 million ($1.45 per
share) in the second quarter compared to a loss of $5.3 million ($0.21 per
share) in the first quarter. EBITDA was negative $2.3 million in the quarter
compared to positive $8.7 million during the first three months of 2005.
Q2 2005 Overview
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- EBITDA for the solid wood segment of negative $2.2 million, down from
positive $11.0 million in the first quarter reflecting increased
anti-dumping deposits, lower sales margins, and lumber and pulp log
inventory write downs.
- EBITDA for the pulp segment of negative $0.7 million compared to
positive $1.9 million in the prior quarter as result of lower pulp
prices and pulp inventory write downs.
- Received $11.7 million proceeds from the sale of a previously closed
Vancouver sawmill site
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Reynold Hert, President & CEO commenting on the results noted, "The
results for the quarter were obviously very disappointing. As a result of the
ongoing strategic review of our operations, we have begun to implement a
number of initiatives to improve our solid wood segment with a focus on
increasing the long-term cash flow potential of this business. The first part
of this strategy was announced on August 4, 2005 with the reduction in the
number of operating sawmills from six to four. This will increase the
utilization of the Company's best assets and drive down unit costs in order to
make us more competitive. We are also implementing a number of non-capital
plans with a focus on developing an expanded presence in the cedar and dry
hemlock markets, continuing the process of integrating our operations from
logging through to sales and marketing, and hiring the management talent
necessary to implement the changes. We expect to start seeing the positive
impact of this on our results late in the year and building as we move through
2006. We have closely managed our cash to ensure we have sufficient liquidity
to start making these investments for the longer-term health of the Company,
and with operating conditions expected to remain difficult for the balance of
the year we will need to maintain this effort."
About Western:
Western is an integrated Canadian forest products company and the second
largest coastal woodland operator in British Columbia. Principal activities
conducted by Western and its subsidiaries include timber harvesting,
reforestation, sawmilling logs into lumber and wood chips, value-added
remanufacturing and producing NBSK pulp. Over 95% of Western's logging is
conducted on government owned timberlands in British Columbia. All of
Western's operations, employees and corporate facilities are located in the
coastal region of British Columbia and its products are sold in 25 to 30
countries worldwide.
Forward Looking Statement
This press release contains statements that are forward-looking in
nature. Those statements appear in a number of places herein and include
statements regarding the intent, belief or current expectations of Western,
primarily with respect to market and general economic conditions, future
costs, expenditures, available harvest levels and future operating performance
of Western. Such statements may be indicated by words such as "estimate",
"expect", "anticipate", "plan", "intend", "believe", "will", "should", "may"
and similar words and phrases. Readers are cautioned that any such forward-
looking statements are not guarantees and may involve known and unknown risks
and uncertainties, and that actual results may differ from those expressed or
implied in the forward-looking statements as a result of various factors,
including general economic and business conditions, product selling prices,
raw material and operating costs, changes in foreign-currency exchange rates,
changes in government regulation, fluctuations in demand and supply for
Western's products, industry production levels, the ability of Western to
execute its business plan and misjudgements in the course of preparing forward-
looking statements. The information contained under the "Risk Factors" section
of Western's Annual Information Form and under the "Risk Factors" section of
Western's Form 20-F/A identifies important factors that could cause such
differences. All written and oral forward-looking statements attributable to
Western or persons acting on behalf of Western are expressly qualified in
their entirety by the foregoing cautionary statements. Western does not expect
to update forward-looking statements as conditions change.
TELECONFERENCE CALL NOTIFICATION: Monday, August 15, 2005 at 10:00 a.m.
PST/1:00 p.m. EST
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On Monday, August 15, 2005, Western Forest Products Inc. will host a
teleconference call at 10:00 a.m. PST (1:00 p.m. EST). To participate in the
teleconference please dial 1-800-814-4890 in Canada and the U.S. (toll free)
and in Toronto or Internationally, 416-640-4127 before 10:00 a.m. PST
(1:00 p.m. EST). This call will be taped, available one hour after the
teleconference, and on replay until August 29, 2005. To hear a complete
replay, please call 1-877-289-8525 in Canada and the U.S. (toll free),
Passcode 21131875 followed by the number sign or in Toronto and
Internationally, 416-640-1917, Passcode 21131875 followed by the number sign.
This call will also be webcast from Western's website at
www.westernforest.com.
Western Forest Products Inc. - 2005 Second Quarter Report
Management's Discussion & Analysis
The following discussion and analysis reports and comments on the
financial condition and results of operations of Western Forest Products Inc.
(the "Company", "us", "we", or "our"), on a consolidated basis, for our second
quarter ended June 30, 2005 to help security holders and other readers
understand our Company and the key factors underlying our financial results.
You should read this discussion and analysis in conjunction with our
consolidated financial statements and related notes thereto, for the second
quarter ended June 30, 2005, and our audited consolidated financial statements
and management's discussion and analysis ("MD&A") for the period from July 28,
2004 to December 31, 2004 (the "2004 Annual Report") which are filed on SEDAR
at less than www.sedar.com greater than under our Company's name.
We acquired the solid wood and pulp business of Doman Industries Limited
("Doman") and certain of its subsidiaries (collectively with Doman, the
"Predecessor") on July 27, 2004 in connection with the implementation of the
Predecessor's Plan of Compromise and Arrangement under the Companies'
Creditors Arrangement Act (Canada) and Reorganization under the Canada
Business Corporations Act (the "Plan"). This discussion and analysis also
compares our results for the second quarter and six months ended June 30, 2005
with our Predecessor's results in the comparable periods of 2004. The
consolidated financial and other information of the Company issued subsequent
to the Plan implementation may not be comparable with the consolidated
financial information and other information issued by the Predecessor prior to
the Plan implementation due to differences in our corporate and financial
structure from that of our Predecessor, the application of "fresh start"
accounting as explained in note 1 of our audited consolidated financial
statements as a result of the implementation of our Predecessor's Plan and
differences in certain accounting policies from those applied by our
Predecessor. Accordingly, the discussion and analysis of our financial
condition and results of operations compared to our Predecessor should be
reviewed with caution.
Unless otherwise noted, the information in this discussion and analysis
is updated to August 9, 2005. All financial references are in Canadian dollars
unless otherwise noted.
<<
Summary of Selected Results for the Quarter and Six Months
Three Six
Three Three Six Months Months
Months Months Months Ended Ended
Ended Ended Ended June 30, June 30,
June 30, March 31, June 30, 2004 2004
(millions of 2005 2005 2005 Prede- Prede-
dollars) Company Company Company cessor(1) cessor(1)
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Sales $ 186.4 $ 162.7 $ 349.1 $ 228.6 $ 391.6
Countervailing &
anti-dumping
duties $ (13.6) $ (8.6) $ (22.1) $ (12.6) $ (22.1)
EBITDA $ (2.3) $ 8.7 $ 6.4 $ 47.0 $ 62.8
Write-down of
property, plant
and equipment $ (8.5) $ - $ (8.5) $ - $ -
Operating earnings
(loss) $ (21.1) $ 2.5 $ (18.6) $ 29.8 $ 34.2
Interest expense $ (12.0) $ (11.8) $ (23.8) $ (32.4) $ (62.4)
Foreign exchange
loss on long-
term debt $ (3.3) $ (1.6) $ (4.9) $ (15.1) $ (25.1)
Net loss attributable
to common shares $ (37.2) $ (5.3) $ (42.5) $ (30.3) $ (75.9)
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Per share:
Basic $ (1.45) $ (0.21) $ (1.66) $ (0.71) $ (1.79)
Diluted $ (1.45) $ (0.21) $ (1.66) $ (0.71) $ (1.79)
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(1) Q2 and six months of 2004 restated for the sale of the Port Alice
pulp mill by our Predecessor in May, 2004.
Overview
The net loss for the second quarter and first six months of 2005 was
$37.2 million ($1.45 per share) and $42.5 million ($1.66 per share),
respectively compared to a net loss of $5.3 million ($0.21 per share) in the
first quarter of 2005 and net losses attributable to the common shareholders
of our Predecessor of $30.3 million ($0.71 per share) and $75.9 million ($1.79
per share) in the corresponding periods of 2004. The results for the quarter
reflect the recently announced restructuring of our sawmill operations, higher
anti-dumping duty deposit rates, lower margins realised on lumber and pulp
sales and increased logging costs.
On August 4, 2005 the Company announced the restructuring of its sawmill
operations. Following a review of individual sawmill current and future
operating potential it was determined that the Silvertree sawmill should be
closed, dismantled and the site sold and the Saltair sawmill should be
curtailed pending a review of options to determine if there are viable
alternatives for it to operate on a profitable basis. This restructuring will
enable the Company to consolidate its sawmill operations into four lower cost
sawmills working two or three shifts instead of the six sawmills currently
operating one or two shifts. This will also enable the Company to focus its
capital and operating effectiveness programs in fewer sawmills as it moves to
improve the overall efficiency and cost effectiveness of the operations. Fixed
costs at the closed sawmill in the amount of approximately $4 million annually
will be eliminated as will a portion of the fixed costs at the curtailed unit.
Unit costs at the remaining operating sawmills should also decrease due to the
increased throughput.
As a result of the restructuring the Company has recorded a non-cash
write-down for the impairment in the carrying value of the Silvertree sawmill
as at June 30, 2005 of $8.5 million based on the estimated proceeds following
site clean up and sale. A further provision of approximately $7.2 million will
be taken in the third quarter with respect to the estimated severance payable
to the employees. No provisions have been recorded with respect to the Saltair
sawmill at this time pending determination of its future use, if any.
Both operating earnings and EBITDA were negatively impacted in the amount
of $2.9 million by the higher rate of anti-dumping duty that the Company is
currently required to pay while its application for change in circumstance is
reviewed by the US Department of Commerce.
The following table and discussion indicates the major factors impacting
EBITDA for the current quarter compared to EBITDA as reported in the previous
quarter:
(millions of dollars)
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EBITDA for the three months ended March 31, 2005 $ 8.7
Increased anti-dumping duty rates and shipments to the US (4.7)
Lower margins on lumber sales due to price and mix (4.5)
Increased write-down of lumber inventories (3.3)
Lower achieved NBSK pulp prices (2.5)
Increased pulp log write-downs due to higher production (2.3)
Higher external log sales and prices achieved 3.7
Foreign exchange gains 2.2
Increased volume of lumber sales 1.9
Other (1.5)
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EBITDA for the three months ended June 30, 2005 $ (2.3)
----------
----------
EBITDA for the current quarter changed compared to the previous quarter
due to:
- increased anti-dumping rates as discussed above in addition to which
there was a slight increase in the percentage of lumber shipped to
the US;
- lower margins were achieved on our overall sales of hemlock during
the quarter due to mix and price and there was a higher proportion of
lower margin fir sold in the quarter relative to the second quarter;
- lower market prices at the end of June resulted in higher lumber
inventory write-downs;
- NBSK pulp prices fell an average of 4% in the quarter;
- pulp log production was approximately 72% higher in the second
quarter resulting in increased pulp log write-downs as unit cost of
production exceeds market value;
- external log sales increased by 28% and average log prices received
by 11%;
- a weaker Canadian dollar resulted in foreign exchange gains; and
- lumber sales volumes were approximately 9% higher than the second
quarter.
EBITDA in the six months ended June 30, 2005 decreased to $6.4 million
compared to $62.8 million recorded by our Predecessor in the comparable period
of 2004. The decrease of $56.4 million is primarily attributable to the lower
average lumber, log and pulp prices received in 2005 ($25.6 million); changes
in the accounting policy for the treatment of spur roads ($8.1 million) (we
expense directly whereas our Predecessor capitalized and amortised); the
write-down of lumber inventories to market value due to lower lumber prices
and the change in accounting policy to treat each species separately instead
of netting profits and losses across species ($10.5 million); increases in
logging costs primarily due to fuel and camp costs ($6.4 million); and higher
freight costs ($5.0 million). Partially offsetting this, the provision for
losses on pulp log inventories (our Predecessor netted unrealised losses on
pulp log inventories against the unrealised profits on saw log inventories)
resulted in an increase in EBITDA during the six months of $4.6 million.
Solid Wood Segment
Three Six
Three Three Six Months Months
Months Months Months Ended Ended
Ended Ended Ended June 30, June 30,
(millions of June 30, March 31, June 30, 2004 2004
dollars except 2005 2005 2005 Prede- Prede-
where noted) Company Company Company cessor cessor
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Lumber sales $ 107.5 $ 97.3 $ 204.8 $ 116.5 $ 217.6
Log sales 26.0 18.2 44.2 53.4 67.5
By-product sales 7.0 7.1 14.1 6.5 11.8
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$ 140.5 $ 122.6 $ 263.1 $ 176.4 $ 296.9
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EBITDA $ 2.2 $ 11.0 $ 13.2 $ 37.0 $ 54.7
EBITDA margin 1.6% 9.0% 5.0% 21.0% 18.4%
Operating earnings
(loss) $ (16.0) $ 5.5 $ (10.5) $ 22.5 $ 31.0
Total assets
employed $ 577.0 $ 584.1 $ 577.0 $ 507.8 $ 507.8
Lumber production -
millions of board
feet 186 185 371 175 330
Lumber sales -
millions of board
feet 176 162 338 171 346
Log production -
thousands of cubic
metres 1,148 498 1,646 1,158 1,927
Log purchases -
thousands of
cubic metres 192 200 392 421 739
Log sales -
thousands of
cubic metres 213 166 379 449 549
Internal Log
consumption -
thousands of
cubic metres 844 875 1,719 936 1,745
Average lumber
sales revenue
per thousand
board feet $ 612 $ 599 $ 606 $ 681 $ 629
Average log sales
revenue per cubic
metre $ 122 $ 110 $ 117 $ 119 $ 123
The solid wood segment had an operating loss of $16.0 million in the
quarter and a loss of $10.5 million in the six months compared to operating
earnings of $5.5 million in the first quarter of 2005 and operating earnings
of $22.5 million and $31.0 million in the comparative period of 2004. As
previously discussed, operating earnings were impacted by the $8.5 million
non-cash write-down of property plant and equipment for the closure of the
Silvertree sawmill as part of our sawmill operations restructuring.
EBITDA for the solid wood segment decreased to $2.2 million in the second
quarter compared to $11.0 million in the first quarter and $37 million in the
corresponding quarter of 2004.
During the second quarter we were notified by the US Department of
Commerce ("USDOC") that we were not entitled to use the reduced "all others
rate" of 3.78% for the US anti-dumping duty unless we filed a changed
circumstances review request with the USDOC to confirm that we are the
successor in interest to our Predecessor. We subsequently filed an application
for an expedited changed circumstances review. In the interim we have been
posting anti-dumping deposits at the recently revised higher rate of 11.54%,
which has resulted in an increase in the countervailing and anti-dumping
expense for the quarter of approximately $2.4 million. In addition, as we had
been posting deposits at our Predecessors' "all others rate" of 3.78% with
respect to the period from December 20, 2004 to April 26, 2005, we have been
required to post an additional $0.5 million to June 30, 2005 which we have
expensed in these financial statements. A favourable preliminary ruling was
issued in July and a final ruling is expected in August 2005. When combined
with higher sales volumes and a higher proportion of sales to US customers
during the quarter, the anti-dumping and countervail duty expense increased by
approximately $5.0 million in the second quarter compared to the first
quarter.
Lumber sales increased to 176 million board feet in the second quarter of
2005 from 162 million board feet in the first quarter as conditions improved
from the first quarter's un-seasonally poor weather and logistical
difficulties in obtaining rail cars to move our lumber into the United States.
Volumes of lumber sold for the second quarter and first six months were
similar to the corresponding periods of 2004. Overall average lumber prices
received in the second quarter of 2005, when translated into Canadian dollars,
also improved to $612 per thousand board feet compared to $599 in the first
quarter. For the first six months of 2005 the average price received was
$606 per thousand board feet compared to $629 in the comparable period of
2004. The improvement in average prices received compared to the first quarter
was primarily attributable to product mix with a higher proportion of fir
lumber sales and a lower proportion of hemlock. Actual prices received by
species were relatively unchanged except for a small increase in cedar. The
increased proportion of fir sales and lower hemlock had a negative impact on
solid wood EBITDA as the margins for fir are lower than for hemlock.
Log production increased to 1.148 million cubic metres in the second
quarter compared to 0.498 million cubic metres in the first quarter as the
first quarter's results were impacted by the delayed start up of logging
operations due to higher than optimum inventories. The delay in commencing
logging operations also resulted in lower log production for the six months
ended June 30, 2005 compared to the same period in 2004. Logging production
costs increased by just over $4 per cubic metre in the second quarter as we
harvested more volume from the higher cost logging areas such as the Nootka
and Mainland regions. Logging activity is typically higher in the second
quarter to take advantage of the better logging conditions and lower costs
than during the summer period.
The higher log production also resulted in higher third party log sales
compared to the previous quarter. Average log prices received increased to
$122 per m3 compared to $110 per m3 as a result of the sale of higher quality
logs. Pulp log production in the second quarter also exceeded the first
quarter and resulted in an additional charge to period earnings of
$2.3 million due to the lower market pulp log price compared to the cost of
production. Higher log production in the quarter also resulted in higher
amortization charges for the period as it is primarily based on units of
production. Log sales were lower in the second quarter of 2005 compared to the
same period of 2004 as the prior year included pulp log sales to Port Alice
Specialty Cellulose Inc. from May 11 (the date the Port Alice pulp mill was
sold by our Predecessor to them) to June 30, 2004.
Pulp Segment
Three Six
Three Three Six Months Months
Months Months Months Ended Ended
Ended Ended Ended June 30, June 30,
(millions of June 30, March 31, June 30, 2004 2004
dollars except 2005 2005 2005 Prede- Prede-
where noted) Company Company Company cessor(1) cessor(1)
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Sales $ 45.9 $ 40.1 $ 86.0 $ 52.2 $ 94.6
EBITDA $ (0.7) $ 1.9 $ 1.2 $ 12.2 $ 12.3
EBITDA margin (1.5%) 4.7% 1.4% 23.3% 13.0%
Operating earnings
(loss) $ (1.4) $ 1.2 $ (0.2) $ 9.6 $ 7.6
Total assets
employed $ 86.4 $ 86.5 $ 86.4 $ 232.6 $ 232.6
Pulp production -
thousands of tonnes 72 67 139 72 136
Pulp sales -
thousands of tonnes 73 62 135 66 127
Average pulp revenue
per tonne $ 624 $ 651 $ 635 $ 797 $ 749
Average pulp price
delivered to
Northern Europe -
(US$ per tonne)(2) $ 620 $ 640 $ 630 $ 647 $ 619
Average pulp price
delivered to
Northern Europe -
(C$ equivalent
per tonne)(2) $ 769 $ 785 $ 777 $ 872 $ 826
(1) 2004 restated for the sale of the Port Alice pulp mill which was sold
by our Predecessor in May 2004.
(2) Benchmark prices sourced from Resource Information Systems, Inc.
Canadian equivalent translated at average exchange rate for the
period
There was an operating loss from the pulp segment during the quarter of
$1.4 million compared to operating earnings of $1.2 million in the first
quarter and $9.6 million in the comparative quarter of 2004. EBITDA for the
pulp segment in the quarter was negative $0.7 million compared to positive
$1.9 million in the first quarter and positive $12.2 million in the second
quarter of 2004. Results in the quarter were negatively impacted by a 4%
decrease in pulp prices received compared to the first quarter of 2005 and a
22% decrease compared to the second quarter of 2004. In addition cash
production costs were higher as a result of the write-down of the pulp
inventory to the lower of cost and market.
Production in the quarter benefited from both more operating days (90
compared to 86) and higher daily volumes as the mill operated well in the
quarter.
Other Corporate Items
Selling and administration expense decreased to $5.5 million in the
quarter compared to $6.2 million in the first quarter and the $6.0 million
recorded by our Predecessor in the second quarter of 2004 primarily due to
lower legal and consulting costs.
Interest expense and foreign exchange loss on the translation of long-
term debt costs recorded in 2005 are not directly comparable to the amounts
recorded by our predecessor in 2004 due to the different capital structures.
Financial restructuring costs recorded by our Predecessor in 2004 relate
to the costs of implementing the Plan. Discontinued operations of our
Predecessor relate to the results of the Port Alice pulp mill prior to its
sale by them in May, 2004.
Other income primarily represents reimbursements from the BC Government
for project engineering and other costs incurred by our Predecessor with
respect to certain timber cutting rights taken back by the BC Government under
the Forestry Revitalisation Plan.
Changes in Financial Position and Liquidity
Three Six
Three Three Six Months Months
Months Months Months Ended Ended
Ended Ended Ended June 30, June 30,
(millions of June 30, March 31, June 30, 2004 2004
dollars except 2005 2005 2005 Prede- Prede-
where noted) Company Company Company cessor(1) cessor(1)
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Cash flow from
operations $ (15.8) $ 15.2 $ (0.6) $ (3.4) $ (3.3)
Capital additions $ (8.8) $ (2.5) $ (11.3) $ (13.0) $ (18.8)
Change in bank
indebtedness $ 12.0 $ (10.9) $ 1.1 $ 11.4 $ 14.0
Financial ratios:
Current assets to
current liabilities 1.80 1.93 1.80 n/a n/a
Debt to shareholders
equity 2.25 1.83 2.25 n/a n/a
Debt to market
capitalization 4.41 2.43 4.41 n/a n/a
(1) Q2 and six months of 2004 restated for the sale of the Port Alice
pulp mill by our Predecessor in May, 2004.
There was negative cash flow from operations in the quarter of
$15.8 million compared to positive cash flow of $15.2 million in the first
quarter and negative $3.3 million in the second quarter of 2004. The
$31.0 million decrease in cash flow from operations compared to the previous
quarter is primarily attributable to the changes in EBITDA discussed above,
the payment of interest on the Secured Bonds and cash consumed by working
capital, primarily inventory and prepaids. We deliberately increased log
inventories in the second quarter as this is a low cost quarter for logging
operations. Logging will be curtailed in the higher cost summer months.
The basic structure of the Company needs improvement for long-term
profitability and cash flow. Our strategy is to balance the need to maintain
the liquidity of the Company while at the same time ensuring there is
sufficient cash available to make the needed structural changes and capital
investments. During the first and second quarter the focus was on increasing
liquidity to enable changes, such as the recently announced sawmill
restructuring with the closing of the Silvertree sawmill, curtailment of the
Saltair sawmill and plan to operate the Duke Point, Ladysmith and Cowichan Bay
sawmills on three shifts. Management is exercising discipline in the
management of cash through operations, inventory, receivables and payables, as
well as in assessing the value of individual assets to the Company, in order
to maintain liquidity during the process of making the needed changes.
We elected to defer payment of 50% of the interest due on June 30, 2005
as permitted under the terms of our Secured Bond Indenture. This action was
taken as a precautionary measure to maintain the Company's liquidity. There
are a number of individually significant cash outlays that occur during the
June, July and August, 2005 time period for items such as the bond interest
payment, property taxes, vacation pay and the Squamish pulp mill annual
maintenance program, that, when combined, would reduce our liquidity. The
deferral of interest may continue for up to 10 consecutive semi-annual
periods, but may not continue beyond the date of maturity of the Secured
Bonds. The deferred interest, amounting to $10.3 million, carries interest at
15% which is payable on the semi-annual interest payment dates during the
period of deferral.
Additions to property, plant and equipment in the second quarter
primarily relating to improvements at the Duke Point sawmill and logging
equipment were $2.9 million compared to $0.4 million in the first quarter and
$2.1 million in the second quarter of 2004. Expenditures on logging roads
totalled $11.4 million in the quarter and $16.0 million for the year to date
of which $5.9 million relating to intermediate and mainline logging roads was
capitalised in the quarter ($7.9 million for the year to date) with the
balance relating to spur roads expensed in accordance with the Company's
accounting policy. This was lower than expected due to the slow start up of
logging operations in the first quarter as previously discussed. During the
second quarter we received $12.4 million from property disposals relating to
the sale of a previously closed sawmill site in Vancouver and the
reclassification of $0.6 million proceeds from the BC Government in connection
with the Bill 28 takeback from other income. The proceeds on sale of the
former sawmill site are subject to the Secured Bond Indenture and were
deposited in the working capital reserve.
Cash decreased by $11.9 million and bank indebtedness increased by
$12 million (total use of funds of $23.9 million) during the second quarter
due to the funding of the negative cash flow from operations and additions to
property, plant and equipment.
At June 30, 2005 the Company had a cash balance of $0.1 million, the
working capital reserve of $33.1 million and available credit of $16.7 million
under its credit facility to meet its operational requirements. Due to the
highly cyclical nature of our business we believe we need available liquidity
of approximately $50 million to enable us to have sufficient reserve for
market downturns.
In response to lower than forecast sales and following our increased
logging in the second quarter, to reduce the amount of cash tied up in log and
lumber inventories we are taking down-time at both our logging and sawmilling
operations over the summer. Taking this down-time should enable us to reduce
our log and lumber inventories and generate cash over the August to October
time period. This cash will reduce the amount drawn on our line of credit and
increase the available credit for future draws.
Selected Quarterly Information
To assist shareholders and other readers understand our business, we have
included as Appendix A to the MD&A a table of the financial results and
operating data for the Company and its Predecessor for the last eight
quarters. Note that in the case of the Predecessor the amounts shown do not
extend beyond the operating earnings (loss) line as a comparison of items
below that line is not meaningful as a result of the Predecessors different
capital structure.
In a normal operating year, there is some seasonality to the Company's
operations with higher activity in the second and third quarters as
construction activity, particularly in the US tends to be higher. Logging
activity may also vary depending on weather conditions due to snow and ice in
the winter and the threat of forest fires in the summer.
Risks and Uncertainties
Our business is subject to a number of risks and uncertainties which are
described in this quarterly report, our 2004 Annual Report, Annual Information
Form and our Form 20-F/A filed with the US Securities and Exchange Commission.
A key risk and uncertainty that we are currently facing is our cash flow and
liquidity position.
As at June 30, 2005, we had approximately $339.0 million indebtedness
outstanding comprising our Secured Bonds and Working Capital Facility. Our
ability to pay our debt obligations depends on our current and future
performance. To a significant extent, our performance will be subject to
general economic, financial, competitive, legislative, regulatory and other
factors, including lumber and pulp prices, all of which are beyond our
control.
As a result of the continuing softwood lumber dispute, current market
conditions and our current capital and operating cost structure, we have not
generated sufficient cash flows from operations to meet our debt service
obligations and to fund the capital requirements and structural changes of our
business. We have taken and will be taking certain steps, including taking
down-time at our logging and sawmill operations during the summer of 2005 and
deferral of the payment of 50% of the interest due on June 30, 2005 on our
Secured Bonds, to improve our liquidity situation in the short term. We have
also initiated a strategic review of our operations to address long term
liquidity and operating prospects and strategy. Although we believe the steps
we have taken to date should give us sufficient liquidity to sustain our
current operations into 2006, there can be no assurance that we will be
successful in our efforts to implement our plan to reduce our debt service
requirements and improve our cash flow. Moreover, no assurance can be given
that our business will generate sufficient cash flow from operations to pay
our ongoing debt obligations or fund our other liquidity needs.
We believe it will be necessary for us to reduce our level of
indebtedness and debt service requirements to sustain and improve our
operating performance, particularly if market conditions for our products do
not improve. Although we will likely seek to refinance our Secured Bonds now
that they have become redeemable, we cannot provide any assurance that we will
be able to do so on favourable terms or at all or that we can secure any
further credit facilities or that the terms of any such credit facilities will
be favourable.
For a full discussion of the risks and uncertainties which affect our
business please see our 2004 Annual Report, Annual Information Form and Form
20-F/A which are available on Sedar at www.sedar.com. Any of the risks and
uncertainties described in this quarterly report and in the above noted
documents could have a material adverse affect on our operations and financial
conditions and cash flow and should be carefully considered in evaluating our
business.
Outlook
Lumber prices fell in June and have continued to decrease in July driven
by excess supply in the market place and the summer buying slowdown. Both
Canadian and US producers have been producing at high levels with BC Interior
producers in particular processing the wood affected by the pine beetle.
Housing starts in the US remain strong and we expect to see some recovery in
prices towards the end of the summer. The Japanese market remains stable and
is not expected to move significantly in either direction. The Western Red
Cedar market continues to be oversupplied. We have managed to increase our
cedar lumber sales volumes in each of the last two years and have recently
strengthened our cedar sales team to continue to enhance our competitiveness
in these markets.
NBSK pulp prices fell off in the third quarter and we expect to see them
continuing to decrease during the remainder of the summer. However, NBSK pulp
inventory levels are currently fairly low indicating that prices may be at or
near the bottom of the cycle and may increase as we move into the fall.
We have taken action to preserve the Company's short-term liquidity by
establishing the working capital reserve currently with a balance of
$33 million, deferring payment of 50% of the secured bond interest that was
due on June 30, 2005 and taking down-time in our solid wood division over the
summer to free up cash currently invested in log and lumber inventories.
Given these challenging market conditions, we have begun to implement a
number of strategic initiatives to improve our solid wood segment with a focus
on increasing the long-term cash flow potential of this business. The first
part of this strategy was announced on August 4, 2005 with the reduction in
the number of operating sawmills from six to four. This will increase the
utilization of the Company's best assets and drive down unit costs in order to
make us more competitive. We are also implementing a number of non-capital
plans with a focus on developing an expanded presence in the cedar and dry
hemlock markets, continuing the process of integrating our operations from
logging through to sales and marketing, and hiring the management talent
necessary to implement the changes.
With the uncertain outlook our debt is too high. We are reviewing
alternatives to reduce the Secured Bonds that became callable by us after
July 27, 2005. This may include a refinancing of the bonds, reducing the
overall level of indebtedness through the use of existing cash resources,
reviewing all of our assets including our private timberlands and pulp
operations to determine if they should remain core to our business and a
common share equity offering, or any combination thereof.
Longer-term, we continue to believe that consolidation of the British
Columbia coastal forest industry will enhance the ability of coastal producers
to compete in world markets. We will seek opportunities to lead in this
consolidation as well as looking at other growth possibilities.
Outstanding Share Data
As of August 9, 2005, 25,631,795 of our Common Shares are issued and
outstanding. In addition, we have issued 569,373 Tranche 1 Class C Warrants,
854,146 Tranche 2 Class C Warrants, and 1,423,743 Tranche 3 Class C Warrants
(collectively, the "Class C Warrants"). We have reserved up to 2,847,262
Common Shares for issuance upon the exercise of the Class C Warrants. We have
also reserved 2,500,000 Common Shares for issuance upon the exercise of
options granted under our incentive stock option plan. As of August 9, 2005 we
have granted 374,590 options under our incentive stock option plan.
Other Matters
Other than as described in this quarterly report, there has been no
change to the information provided in our MD&A for the period from July 28,
2004 to December 31, 2004, dated March 24, 2005 ("2004 Annual MD&A") in
respect of the following items: Contractual Obligations (other than ordinary
course), Financial Instruments, Off-balance Sheet Arrangements, Transactions
with Related Parties, Critical Accounting Estimates, Changes in Accounting
Policy and Risks and Uncertainties. Please see our 2004 Annual MD&A for
information on these items.
Additional information about the Company, including our Annual
Information Form is available at less than www.sedar.com greater than under
the Company name, Western Forest Products Inc. Information about the operation
of our business by our Predecessor prior to the implementation of the Plan,
including our Predecessor's last Form 20-F, is available at less than
www.sedar.com greater than under the Predecessor's name, Doman Industries
Limited.
On behalf of the Board of Directors
John MacIntyre Reynold Hert
Chairman President and Chief Executive Officer
Duncan, BC
August 9, 2005
Note:
We have prepared the financial information contained in this discussion
and analysis in accordance with Canadian generally accepted accounting
principles ("GAAP"). Reference is also made to EBITDA. EBITDA is defined as
operating earnings (loss) plus amortization of property, plant and equipment
and the write-down of property, plant and equipment. We use EBITDA as a
benchmark measurement of our own operating results, and as a benchmark
relative to its competitors. We consider EBITDA to be a meaningful supplement
to operating income as a performance measure primarily because amortization
expense and property write-downs are not actual cash costs, and varies widely
from company to company in a manner that we consider largely independent of
the underlying cost efficiency of their operating facilities. In addition, we
believe EBITDA is commonly used by securities analysts, investors and other
interested parties to evaluate our financial performance.
EBITDA does not represent cash generated from operations as defined by
Canadian GAAP and it is not necessarily indicative of cash available to fund
cash needs. Furthermore, EBITDA does not reflect the impact of a number of
items that affect our net income (loss). EBITDA is not a measure of financial
performance under GAAP, and should not be considered as an alternative to
measures of performance under GAAP. Moreover, because all companies do not
calculate EBITDA in the same manner, EBITDA as calculated by us may differ
from EBITDA as calculated by other companies.
The foregoing contains statements which constitute forward-looking
statements within the meaning of the United States Securities Exchange Act of
1934. Those statements appear in a number of places in this document and
include statements regarding our intent, belief or current expectations
primarily with respect to market and general economic conditions, future
costs, expenditures, available harvest levels and our future operating
performance. Such statements may be indicated by words such as "estimate",
"expect", "anticipates", "plan", "intend", "believe", "will", "should", "may"
and similar words and phrases. Readers are cautioned that any such forward-
looking statements are not guarantees and may involve known and unknown risks
and uncertainties, and that actual results may differ from those expressed or
implied in the forward-looking statements as a result of various factors,
including general economic and business conditions, product selling prices,
raw material and operating costs, changes in foreign currency exchange rates,
changes in government regulation, fluctuations in demand and supply for our
products, industry production levels, our ability to execute our business plan
and misjudgments in the course of preparing forward-looking statements. The
information contained under the "Risk Factors" section in our Annual
Information Form and under the "Risk Factors" section of our Form 20-F/A
identifies important factors that could cause such differences. All written
and oral forward-looking statements attributable to us or persons acting on
our behalf are expressly qualified in their entirety by the foregoing
cautionary statements.
Management's Discussion and Analysis - Appendix A
Summary of Selected Results for the Last Eight Quarters
Selected Financial Information
(millions of Canadian dollars except per unit sales prices)
Quarter
---------------------------------------
2005 2004
------------------- -------------------
2nd 1st 4th 3rd
------------------- -------------------
(July 28 -
Sept 30)
---------------------------------------
Company
---------------------------------------
Average Exchange Rate -
Cdn $ to purchase
one U.S. $ $1.2411 $1.2259 $1.2219 $1.3227
Net sales
Lumber $ 107.5 $ 97.3 $ 87.8 $ 85.5
Logs 26.0 18.2 27.7 31.8
By-Products 7.0 7.1 5.7 5.2
------------------- -------------------
Solid wood segment 140.5 122.6 121.2 122.5
Pulp segment 45.9 40.1 44.6 35.8
------------------- -------------------
$ 186.4 $ 162.7 $ 165.8 $ 158.3
------------------- -------------------
------------------- -------------------
Lumber
Lumber production -
millions of board feet 186 185 158 132
Lumber sales -
millions of board feet 176 162 158 135
Logging
Log production -
thousands of cubic
metres 1,148 498 894 681
Log purchases -
thousands of cubic
metres 192 200 257 254
Log sales - thousands
of cubic metres 213 166 236 291
Internal Log
consumption -
thousands of cubic
metres 844 875 768 605
NBSK Pulp
Pulp production -
thousands of tonnes 72 67 73 46
Pulp sales - thousands
of tonnes 73 62 75 51
Sales prices
Lumber - per thousand
board feet $ 612 $ 599 $ 557 $ 633
Logs - per cubic metre $ 122 $ 110 $ 117 $ 109
Pulp - per tonne $ 624 $ 651 $ 601 $ 694
EBITDA
Solid wood segment $ 2.2 $ 11.0 $ (10.3) $ 19.7
Pulp segment (0.7) 1.9 (1.8) 0.5
General corporate (3.8) (4.2) (3.7) (2.4)
------------------- -------------------
$ (2.3) $ 8.7 $ (15.8) $ 17.8
------------------- -------------------
------------------- -------------------
Net earnings (loss) $ (37.2) $ (5.3) $ (19.6) $ 14.1
Net earnings loss per
share - basic and
diluted $ (1.45) $ (0.21) $ (0.76) $ 0.55
Reconciliation of EBITDA
to net earnings (loss)
EBITDA $ (2.3) $ 8.7 $ (15.8) $ 17.8
Amortization of property,
plant and equipment (10.3) (6.2) (8.7) (5.5)
Write-down of property,
plant and equipment (8.5) - - -
Interest expense (12.0) (11.8) (11.2) (8.7)
Foreign exchange gain
(loss) on translation
of long-term debt (3.3) (1.6) 12.6 14.9
Other income/expense (0.4) 5.8 - (0.1)
Financial restructuring
costs - -
Income taxes (0.3) (0.3) 3.5 (4.3)
Net loss from
discontinued operations - - - -
Provision for preferred
dividends - - - -
---------------------------------------
Net earnings (loss)
attributable to
common shares $ (37.2) $ (5.3) $ (19.6) $ 14.1
---------------------------------------
---------------------------------------
Quarter
-------------------------------------------------
2004 2003
----------------------------- -------------------
3rd 2nd 1st 4th 3rd
----------------------------- -------------------
(July 1 -
July 27)
-------------------------------------------------
Predecessor (restated for sale of
Port Alice pulp mill in May, 2004)
-------------------------------------------------
Average Exchange Rate -
Cdn $ to purchase
one U.S. $ $1.3338 $1.3489 $1.3190 $1.3226 $1.3794
Net sales
Lumber $ 21.4 $ 116.5 $ 101.1 $ 81.3 $ 92.2
Logs 13.5 53.4 14.1 25.9 22.1
By-Products 3.0 6.5 5.3 6.2 5.5
----------------------------- -------------------
Solid wood segment 37.9 176.4 120.5 113.4 119.8
Pulp segment 6.4 52.2 42.4 43.4 40.1
----------------------------- -------------------
$ 44.3 $ 228.6 $ 163.0 $ 156.8 $ 159.9
----------------------------- -------------------
----------------------------- -------------------
Lumber
Lumber production -
millions of board feet 59 175 155 165 143
Lumber sales -
millions of board feet 30 171 175 156 164
Logging
Log production -
thousands of cubic
metres 422 1,158 769 709 473
Log purchases -
thousands of cubic
metres 99 421 318 227 301
Log sales - thousands
of cubic metres 120 449 100 176 171
Internal Log
consumption -
thousands of cubic
metres 261 936 809 907 896
NBSK Pulp
Pulp production -
thousands of tonnes 11 72 64 62 59
Pulp sales - thousands
of tonnes 9 66 61 67 64
Sales prices
Lumber - per thousand
board feet $ 712 $ 681 $ 577 $ 521 $ 562
Logs - per cubic metre $ 113 $ 119 $ 141 $ 147 $ 129
Pulp - per tonne $ 734 $ 797 $ 697 $ 648 $ 627
EBITDA
Solid wood segment $ 10.9 $ 37.0 $ 17.7 $ (1.1) $ (1.6)
Pulp segment (10.7) 12.2 0.1 (2.2) (1.0)
General corporate (0.7) (2.1) (2.0) (2.6) (1.6)
----------------------------- -------------------
$ (0.5) $ 47.1 $ 15.8 $ (5.9) $ (4.2)
----------------------------- -------------------
----------------------------- -------------------
Net earnings (loss)
Net earnings loss per
share - basic and
diluted
Reconciliation of EBITDA
to net earnings (loss)
EBITDA $ (0.5) $ 47.1 $ 15.8 $ (5.9) $ (4.2)
Amortization of property,
plant and equipment (4.4) (17.2) (11.5) (12.2) (9.5)
Write-down of property,
plant and equipment - - - (1.1) (4.9)
Interest expense (8.7) (31.5) (28.9) (22.2) (27.1)
Foreign exchange gain
(loss) on translation
of long-term debt 0.6 (16.1) (11.1) 34.2 (2.0)
Other income/expense (5.5) (0.4) 0.1 0.7 0.4
Financial restructuring
costs (3.1) (5.0) (3.3) (2.5) (1.7)
Income taxes 0.7 (0.4) (0.4) (0.5) (0.4)
Net loss from
discontinued operations (1.6) (5.6) (5.1) (5.0) (5.7)
Provision for preferred
dividends (0.4) (1.2) (1.2) (1.2) (1.2)
-------------------------------------------------
Net earnings (loss)
attributable to
common shares $ (22.9) $ (30.3) $ (45.5) $ (15.7) $ (56.4)
-------------------------------------------------
-------------------------------------------------
Consolidated Balance Sheets
(Expressed in millions of Canadian dollars)
-------------------------------------------------------------------------
June 30, December 31,
2005 2004
--------------------------
(Unaudited) (Audited)
Assets
Current assets
Cash $ 0.1 $ 5.0
Accounts receivable 77.3 78.0
Inventory 180.4 176.7
Restricted cash (note 5) 33.1 -
Prepaid expenses 7.1 5.2
--------------------------
298.0 264.9
Restricted assets (note 5) 24.4
Investments 7.2 7.1
Property, plant and equipment 367.1 395.6
Other assets 1.1 1.4
--------------------------
$ 673.4 $ 693.4
--------------------------
--------------------------
Liabilities and Shareholders' Equity
Current liabilities
Bank indebtedness (note 4) $ 79.2 $ 78.1
Accounts payable and accrued liabilities 86.0 72.2
--------------------------
165.2 150.3
Long-term debt (note 5) 259.8 253.5
Future income taxes 10.5 10.5
Other liabilities 30.5 29.4
--------------------------
466.0 443.7
Shareholders' equity
Common Shares 255.2 255.2
Contributed surplus 0.2 -
Deficit (48.0) (5.5)
--------------------------
207.4 249.7
--------------------------
$ 673.4 $ 693.4
--------------------------
--------------------------
Commitments and Contingencies (note 6)
See accompanying notes to consolidated financial statements
Approved on behalf of the Board:
"Reynold Hert" Director
"John MacIntyre" Director
Consolidated Statements of Operations
(Unaudited)
(Expressed in millions of Canadian dollars, except for share and per
share amounts)
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2005 2004 2005 2004
--------------------- ---------------------
Company Predecessor Company Predecessor
(Restated) (Restated)
Sales $ 186.4 $ 228.6 $ 349.1 $ 391.6
Cost and expenses
Cost of goods sold 153.0 148.6 278.0 267.6
Anti-dumping and
countervailing duties 13.6 12.6 22.1 22.1
Freight expenses 16.6 14.4 30.9 28.2
Amortization of property,
plant and equipment 10.3 17.2 16.5 28.6
Write-down of property,
plant and equipment (note 10) 8.5 - 8.5 -
Selling and administration 5.5 6.0 11.7 10.9
--------------------- ---------------------
207.5 198.8 367.7 357.4
--------------------- ---------------------
Operating earnings (loss) (21.1) 29.8 (18.6) 34.2
Interest expense (12.0) (32.4) (23.8) (62.4)
Foreign exchange loss on
translation of long-term debt (3.3) (15.1) (4.9) (25.1)
Other income/expense (0.5) (0.4) 5.3 (0.4)
Financial restructuring costs - (5.0) - (8.3)
--------------------- ---------------------
Loss before income taxes (36.9) (23.1) (42.0) (62.0)
Income taxes (0.3) (0.4) (0.5) (0.7)
--------------------- ---------------------
Net loss from continuing
operations (37.2) (23.5) (42.5) (62.7)
Net loss from discontinued
operations - (5.6) - (10.8)
--------------------- ---------------------
Net loss (37.2) (29.1) (42.5) (73.5)
Provision for dividends on
preferred shares - (1.2) - (2.4)
--------------------- ---------------------
Net loss attributable to
common and non-voting shares $ (37.2) $ (30.3) $ (42.5) $ (75.9)
--------------------- ---------------------
--------------------- ---------------------
Loss per share:
Basic $ (1.45) $ (0.71) $ (1.66) $ (1.79)
Diluted $ (1.45) $ (0.71) $ (1.66) $ (1.79)
Weighted average number of
common and non-voting shares
outstanding (thousands of
shares) 25,636 42,481 25,636 42,481
See accompanying notes to the consolidated financial statements
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in millions of Canadian dollars)
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2005 2004 2005 2004
--------------------- ---------------------
Company Predecessor Company Predecessor
(Restated) (Restated)
Cash provided by (used in):
Operations:
Net loss from continuing
operations $ (37.2) $ (23.5) $ (42.5) $ (62.7)
Items not involving cash:
Amortization of property,
plant and equipment 10.3 17.2 16.5 28.6
Amortization and write-down
of deferred charges - 0.9 0.1 2.0
Write-down of property,
plant and equipment 8.5 - 8.5 -
Foreign currency
translation loss 3.3 15.1 4.9 25.1
Accretion of debt discount 0.7 - 1.4 -
(Gain) loss on property,
plant and equipment
disposals 0.3 - 0.3 (0.4)
Other 1.3 (5.4) 1.2 (4.9)
--------------------- ---------------------
(12.8) 4.3 (9.6) (12.3)
--------------------- ---------------------
Changes in non-cash working
capital items:
Accounts receivable 4.4 (25.0) 0.7 (41.1)
Inventory (6.3) (23.2) (3.7) (29.4)
Prepaid expenses (2.3) (2.1) (1.8) (4.1)
Accounts payable and
accrued liabilities 1.2 22.1 13.8 46.0
Accounts payable and
accrued liabilities
subject to compromise - 21.6 - 41.2
--------------------- ---------------------
(3.0) (6.6) 9.0 12.6
--------------------- ---------------------
Cash provided (used) by
continuing operations (15.8) (2.3) (0.6) 0.3
Cash used by discontinued
operations - (1.0) - (3.7)
--------------------- ---------------------
(15.8) (3.3) (0.6) (3.4)
--------------------- ---------------------
Investments:
Additions to property,
plant and equipment (2.9) (2.1) (3.4) (2.1)
Additions to capitalized
roads (5.9) (11.0) (7.9) (16.7)
Disposals of property,
plant and equipment 12.4 - 14.4 1.1
Restricted cash (11.8) - (30.2) -
Bill 28 take back proceeds
and infrastructure
advance (note 6(a)) - - 21.5 -
Other 0.1 3.3 0.2 3.4
--------------------- ---------------------
(8.1) (9.8) (5.4) (14.3)
--------------------- ---------------------
Financing:
Bank indebtedness 12.0 11.4 1.1 14.0
--------------------- ---------------------
12.0 11.4 1.1 14.0
--------------------- ---------------------
Increase (decrease) in cash (11.9) (1.7) (4.9) (3.7)
Cash, beginning of period 12.0 19.6 5.0 21.6
--------------------- ---------------------
Cash, end of period $ 0.1 $ 17.9 $ 0.1 $ 17.9
--------------------- ---------------------
--------------------- ---------------------
See accompanying notes to the consolidated financial statements
Notes to Interim Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in millions of Canadian dollars)
1. Basis of Presentation
Western Forest Products Inc.'s (the "Company") business is the
harvesting of timber and the manufacturing and sale of lumber and
pulp for worldwide markets.
The Company acquired all of its operating assets from Doman
Industries Limited and certain of it subsidiaries ("Doman" or the
"Predecessor") on July 27, 2004. For a full discussion of the
Company's acquisition of Doman's assets and Doman's reorganization,
please see the Company's annual information form filed on Sedar at
www.sedar.com.
The Predecessor's financial information has been presented to provide
additional information for the reader. In reviewing the Predecessor's
financial information, readers are reminded that they do not reflect
the effects of the financial reorganization or the application of its
accounting described in the Company's 2004 annual report. Certain
amounts presented in the Predecessor's financial information have
been reclassified to conform with the presentation adopted by the
Company and have also been restated to reflect the classification of
the Port Alice pulp mill as discontinued operations.
2. Significant Accounting Policies
These interim consolidated financial statements do not include all
disclosures required by Canadian generally accepted accounting
principles for annual financial statements and, accordingly, should
be read in conjunction with the Company's most recent audited annual
consolidated financial statements. These interim consolidated
financial statements follow the same accounting policies and methods
of application used in the Company's consolidated financial
statements as at December 31, 2004 and for the period from July 28,
2004 to December 31, 2004.
3. Adoption of New Accounting Policy
The new Canadian Institute of Chartered Accountants Accounting
Guideline 15 "Consolidation of Variable Interest Entities" is
effective for fiscal years commencing after November 1, 2004. The
Guideline provides criteria for identifying Variable Interest
Entities and their consolidation. The Company has determined that the
Guideline does not materially impact the Company's Interim
Consolidated Financial Statements.
4. Credit Facility
On July 27, 2004 the Company established a three-year revolving
credit facility, secured by receivables and inventory, which bears an
interest rate of prime plus 0.75%. The size of this asset backed
facility is determined by the level of outstanding receivables and
inventory, but cannot exceed $100.0 million.
At June 30, 2005, of the full $100.0 million of the facility that was
available to the Company, $79.2 million had been drawn down and
$4.0 million was used to support standby letters of credit leaving a
balance of $16.7 million available for future use.
5. Long-Term Debt
On July 27, 2004 the Company issued US$221.0 million of 15% Secured
Bonds due in 2009 for proceeds of US$210.0 million. Interest is
payable semi-annually in arrears on December 31 and June 30 of each
year commencing December 31, 2004. The Company has the right to defer
payment of up to one-half of the interest payable on any interest
payable date for up to five years but not beyond the maturity date of
the Secured Bonds. The Secured Bonds are secured by a first priority
charge over all of the fixed assets of the Company including timber
tenures, sawmills and the value-added lumber remanufacturing plant.
The security ranks subordinate to the security provided under the
working capital facility (see note 4). The Secured Bonds are
redeemable at the option of the Company at any time after July 27,
2005 at their principal amount plus (i) a premium (which decreases
annually to their 2009 maturity date resulting in a redemption price
of: 2005 - 107.50%; 2006 - 105.50%; 2007 - 103.50%; 2008 - 101.50%)
and (ii) any accrued and unpaid interest.
The indenture governing the Secured Bonds contains certain
restrictions regarding, among other things, the ability of the
Company to incur additional indebtedness (with certain exceptions)
and limitations on the payment of dividends and other restricted
payments. Subject to ensuring adequate liquidity, proceeds from asset
sales, a softwood lumber duty settlement and capital market
transactions are generally to be used to redeem Secured Bonds. On
March 24, the Company established a working capital reserve account
as defined in the Bond Indenture with a permissible ceiling of up to
$50.0 million. Proceeds from asset sales will be credited to the
reserve account and be available for operational requirements, if
needed. At June 30, 2005, the balance in the working capital reserve
account was $33.1 million and is included in current assets as
restricted cash.
The Company chose to defer payment of 50% of the interest due on
June 30, 2005 as it is entitled to do as discussed above. The Company
has not yet determined when it will pay this interest to the
bondholders. The interest deferred of US$8.3 million accrues interest
at 15% and is included in accounts payable and accrued liabilities.
6. Commitments and Contingencies
(a) The Forestry Revitalization Plan
Retroactive to March 31, 2003, the Government of British Columbia
(the "Crown" or "Provincial Government") as part of the Forestry
Revitalization Plan (the "FR Plan"), reduced the Crown land portion
of the allowable annual cut ("AAC") from major tenure holders by 20%,
less an exemption for the first 200,000 cubic metres, in exchange for
compensation payable by the Crown. In January 2005, pursuant to terms
of the settlement framework agreement negotiated in late 2004, the
Company received $16.5 million in compensation for the loss of
685,216 cubic metres of AAC and 827 hectares of timber licences.
Under this agreement, the Company also received an advance payment of
$5.0 million towards compensation for improvements the Company made
to Crown land in the take-back areas ($4.0 million was recorded as a
reduction in capitalized roads and $1.0 million has been recorded in
accounts payable for future site obligations). The amounts were
included as receivables in restricted assets as of December 31, 2004
and these proceeds resulted in no gain or loss due to the fair value
allocations as at July 28, 2004.
Negotiations in 2005 will finalize take-back areas, complete the
compensation payments for improvements and determine if there will be
cost recovery for costs already incurred for planning and
inventories. Included in other income during the first quarter was
$5.8 million for reimbursements agreed to date with the BC Government
for project engineering and other costs incurred by our Predecessor
with respect to certain timber cutting rights taken back by the BC
Government. This was adjusted in the second quarter to reallocate
$0.7 million as proceeds from the disposal of property, plant and
equipment. The final comprehensive settlement agreement is expected
to be reached in 2005.
(b) Softwood Lumber Duties
The Company has recorded countervailing and antidumping duties
assessed on Canadian softwood lumber exports to the United States
totalling $13.6 million for the second quarter of 2005. Cumulative
duties from May 22, 2002, when cash deposits were made necessary for
shipments of Canadian lumber into the US, until June 30, 2005, total
US$90.1 million.
On April 26, 2005 we were notified by the US Department of Commerce
("USDOC") that we were not entitled to use the reduced "all others
rate" for anti-dumping duty deposits of 3.78% unless we filed a
changed circumstances review request with the USDOC to confirm that
we are the successor in interest to our Predecessor. We have since
filed an application for an expedited changed circumstances review
and while we believe the outcome will be favourable, we can provide
no assurance as to its outcome. In the interim we will post
anti-dumping deposits at the recently revised higher rate of 11.54%.
In addition, as we had been posting deposits at our Predecessors'
"all others rate" of 3.78% with respect to the period from
December 20, 2004 to April 26, 2005, we have been required to post an
additional $0.5 million to June 30, 2005 which we have expensed in
these financial statements, and posted a further $0.2 million
subsequent to the quarter end. We may be required to post further
deposits amounting to $2.1 million for which no provision has been
recorded in these financial statements. We have received a
preliminary ruling on our application accepting our position. A final
ruling is expected in August 2005.
The Company and other Canadian forest product companies, the Federal
Government and Canadian Provincial Governments ("Canadian Interests")
categorically deny the US allegations and strongly disagree with the
final countervailing and antidumping determinations made. Canadian
Interests continue to aggressively defend the Canadian industry in
this U.S. trade dispute and have appealed the US decisions to NAFTA
panels and the WTO.
A NAFTA Panel has ruled that the US authorities have not been able to
provide the NAFTA Panel with substantive evidence to support their
ruling of "threat of injury". The NAFTA Panel requested that they
reverse their ruling on "threat of injury" with which they
reluctantly complied. US interests are appealing this ruling to an
Extraordinary Challenge Committee ("ECC") Panel. If the ECC Panel
upholds this finding by the NAFTA Panel, the Company would expect
that all prior duties paid would be refunded with interest. However,
there can be no certainty that they would comply with this ruling and
US industry and trade groups have indicated that they may even
challenge the constitutional validity of NAFTA in US courts.
On June 1, 2005, the USDOC issued preliminary results for the second
administrative review period from May 1, 2003 to April 30, 2004 in
the anti-dumping case and April 1, 2003 to March 31, 2004 in the
countervailing duty case. The review process resulted in preliminary
anti-dumping rates ranging from 0.51% to 5.62% for the eight selected
companies reviewed and a review specific average of 2.44% (currently
3.78%) for all of the other companies that had requested a
company-specific review. The review process also resulted in a
preliminary countervailing rate of 8.18% (currently 16.37%) for all
imports of softwood lumber from Canada excluding companies and
certain products from the Maritime Provinces. These rates are
preliminary, subject to review and comments, with expected final
rates to be published in October of 2005 (unless the review is
extended). The final rates will also be subject to appeals as
discussed below.
The final amount of countervailing and anti-dumping duties that may
be assessed on the Company's Canadian softwood lumber exports to the
U.S. cannot be determined at this time and will depend on appeals of
the final determinations to any reviewing courts, NAFTA or WTO
panels. Notwithstanding the final rates established in the
investigations, the final liability for the assessment of
countervailing and anti-dumping duties will not be determined until
each annual administrative review process is complete, including
appeals. A fuller discussion of the softwood lumber duty issue can be
found in our 2004 Annual Report, 2004 Annual Information Form and
Form 20-F/A.
(c) Litigation and Claims
In the normal course of its business activities, the Company may be
subject to a number of claims and legal actions that may be made by
customers, suppliers and others in respect of which either provision
has been made or for which no material liability is expected.
A lumber broker for our Predecessor, commenced an action in New York
in 2001 alleging that our Predecessor was in breach of U.S.
anti-trust legislation. The court dismissed the lumber brokers
complaint, however, they are appealing the decision. We believe the
claim is without merit and will vigorously defend it.
During the quarter the Company and the Province of British Columbia
resolved a number of outstanding claims and counterclaims in
settlement of which the Company received $1.3 million in cash.
7. Segmented Information
The Company is an integrated Canadian forest products company
operating in two industry segments. The Solid Wood Segment comprises
the Company's timber harvesting, reforestation, sawmilling,
value-added lumber remanufacturing and lumber marketing operations.
The Pulp Segment comprises the Company's NBSK pulp manufacturing and
sales operations. Sales to other segment are accounted for at prices
which approximate market value.
---------------------------------------------------------------------
Quarter ended June 30, 2005
----------------------------------------
Solid wood Pulp Corporate Total
---------------------------------------------------------------------
Sales to external customers $ 140.5 45.9 - 186.4
Sales to other segment $ 7.2 - - 7.2
Operating Loss $ (16.0) (1.4) (3.7) (21.1)
Amortization of property,
plant and equipment $ 9.7 0.7 - 10.3
Write-down of property, plant
and equipment $ 8.5 - - 8.5
Capital expenditures $ 8.6 0.3 - 8.8
---------------------------------------------------------------------
Six months ended June 30, 2005
----------------------------------------
Solid wood Pulp Corporate Total
---------------------------------------------------------------------
Sales to external customers $ 263.1 86.0 - 349.1
Sales to other segment $ 14.9 - - 14.9
Operating Loss $ (10.5) (0.2) (7.9) (18.6)
Amortization of property,
plant and equipment $ 15.2 1.3 - 16.5
Write-down of property, plant
and equipment $ 8.5 - - 8.5
Capital expenditures $ 10.9 0.4 - 11.3
8. Pension Expense
The Company has defined benefit pension plans which cover
substantially all salaried employees. The plans provide pensions
based on length of service and final average earnings. The Company
also has health care plans covering certain hourly and retired
salaried employees. The Company recorded expense of $0.9 million in
the three months ended June 30, 2005 with respect to these defined
benefit plans and a further $2.1 million with respect to the
contributions to the hourly paid employee union pension plans
($1.8 million and $4.2 million, respectively for the year to date).
9. Financial Instruments
The Company has significant exposures to individual customers
including one customer which comprised 12% of the Company's sales for
the six months ended June 30, 2005. The accounts receivable balance
from the same customer comprised 19% of the Company's outstanding
receivables at June 30, 2005 and was insured through the Export
Development Corporation as to approximately 83% of the balance
outstanding. The Company's general practice is to make sales on a
cash basis, without credit terms, or to insure them for 90% of their
sales value with the Export Development Corporation. The uninsured
portion primarily results from the timing of shipments.
10. Subsequent Events
On August 4, 2005 the Company announced that it would restructure its
sawmill operations. The Silvertree sawmill will be closed at the end
of October, the buildings dismantled and the site sold and production
transferred to the Duke Point sawmill. The Saltair sawmill will be
indefinitely curtailed also effective at the end of October pending
determination on future opportunities for profitable production and
its current production transferred to the Cowichan Bay and Ladysmith
sawmills. The Company has written down the Silvertree sawmill to its
estimated recoverable value and taken a charge of $8.5 million in
these financial statements. In the third quarter the Company
estimates that it will record an additional charge of approximately
$7.2 million with respect to severance and other restructuring costs
associated with the closure of the Silvertree sawmill. No write-down
has been recorded with respect to the Saltair sawmill at this time
pending a final decision on its future. The net book value of the
Saltair sawmill at June 30, 2005 was $10.3 million.
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