TSX: WEF
DUNCAN, BC, Nov. 14 /CNW/ - Western Forest Products Inc. ("Western" or
the "Company") announced today the Company's results for the 3rd quarter ended
September 30, 2005. The Company will host a teleconference call on Tuesday,
November 15, 2005 at 10:00 a.m. PST (1:00 p.m. EST) on the Company's results.
(See below for details on participation.)
Results for the quarter reflect weak lumber and pulp prices due to an
oversupplied market and the impact of a strong Canadian dollar.
Q3 2005 Overview
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- EBITDA for the solid wood segment of negative $2.2 million, down
from positive $2.2 million in the second quarter reflecting lower
realised lumber prices and change in sale mix, a stronger Canadian
dollar and the Silvertree severance of $7.2 million partially
offset by the gain of $13.1 million from the termination of the
Saw-log supply agreement with TimberWest.
- EBITDA for the pulp segment of negative $4.2 million compared to
negative $0.7 million in the prior quarter as a result of lower
pulp prices and a stronger Canadian dollar.
- Total liquidity at the end of the third quarter of $61.3 million
was comprised of cash of $3.9 million, cash in a working capital
reserve account of $48.5 million, and availability under our
operating line of credit of $8.9 million.
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Reynold Hert, President & CEO commenting on the results noted, "As
expected, market conditions have continued to be difficult with lower prices
and a higher exchange rate in the third quarter. During these tougher market
conditions we have improved our liquidity by being disciplined in our mill
operations, following through on our inventory reductions, and selling non
core assets. We continue to balance liquidity with making fundamental shifts
in the base business performance. As announced, the Silvertree sawmill was
closed with $7.2 million in severance being incurred, and the Saltair sawmill
has been indefinitely curtailed. When the markets and our inventory levels are
right, we will be implementing the third shifts at our remaining sawmills."
The Company is also in the process of reviewing its assets to determine
whether they remain core to its business and have concluded that the Company's
focus shall revolve around the solid wood business including logging from
Crown timberlands and manufacturing of lumber. Management has been considering
strategic options with respect to certain non-core assets including the
Squamish pulp operation and private timberlands and have engaged legal and
financial advisors to assist in this process. Advanced discussions with third
parties on potential transactions involving Squamish have been held although
there has been no agreement with respect to a transaction on acceptable terms.
The Company has also applied to the Minister of Forests of B.C. for the
removal of our private timberlands from the Crown TFLs. If successful the
Company will consider the sale of some or all of the private timberlands on
terms satisfactory to it. Proceeds from the sale of the private timberlands
would be applied to reduce the Company's debt burden pursuant to terms and
conditions under the proposed bridge term facility announced November 10,
2005.
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 over
25 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: Tuesday, November 15, 2005 at
---------------------------------------------------------------
10:00 a.m. PST/1:00 p.m. EST
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On Tuesday, November 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 1-866-249-5221 in Canada and the U.S. (toll free)
and in Toronto or Internationally, 416-644-3431 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 November 29, 2005. To hear a complete
replay, please call 1-877-289-8525 in Canada and the U.S. (toll free),
Passcode 21163096 followed by the number sign or in Toronto and
Internationally, 416-640-1917, Passcode 21163096 followed by the number sign.
This call will also be webcast from Western's website at
www.westernforest.com.
Western Forest Products Inc. - 2005 Third 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 third
quarter ended September 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 third
quarter ended September 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 www.sedar.com 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 third quarter and nine months ended September 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 November 11, 2005. All financial references are in Canadian
dollars unless otherwise noted.
<<
Summary of Selected Results for the Quarter and Nine Months
Three Three Nine Three Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
September June 30, September September September
(millions of 30, 2005 2005 30, 2005 30, 2004 30, 2004
dollars) Company Company Company Proforma(1) Proforma(1)
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Sales $ 156.7 $ 186.4 $ 505.8 $ 202.4 $ 594.0
Countervailing &
anti-dumping
duties $ (8.3) $ (13.6) $ (30.4) $ (13.8) $ (35.9)
EBITDA $ (9.8) $ (2.3) $ (3.4) $ 17.3 $ 80.1
Write-down of
property, plant
and equipment $ - $ (8.5) $ (8.5) $ - $ -
Operating earnings
(loss) $ (14.9) $ (21.1) $ (33.5) $ 7.4 $ 41.6
Interest expense $ (11.5) $ (12.0) $ (35.3) $ n/a $ n/a
Foreign exchange
gain (loss) on
long-term debt $ 13.3 $ (3.3) $ 8.4 $ n/a $ n/a
Net loss attributable
to common shares $ (12.5) $ (37.2) $ (55.0) $ n/a $ n/a
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Per share:
Basic $ (0.49) $ (1.45) $ (2.15) $ n/a $ n/a
Diluted $ (0.49) $ (1.45) $ (2.15) $ n/a $ n/a
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(1) Q3 and nine months of 2004 represent the results of our Predecessor
for the period from July 1, 2004 to July 27, 2004 and from January 1,
2004 to July 27, 2004, respectively, both restated for the sale of
the Port Alice pulp mill in May, 2004, added to the Company's results
for the period from July 28, 2004 to September 30, 2004.
Overview
The net loss for the third quarter and first nine months of 2005 was
$12.5 million ($0.49 per share) and $55.0 million ($2.15 per share),
respectively compared to a net loss of $37.2 million ($1.45 per share) in the
second quarter of 2005. The results for the quarter reflect weaker lumber and
pulp markets and a stronger Canadian dollar. In addition, the Company recorded
a $7.2 million charge in the quarter for severance costs with respect to the
previously announced closure of its Silvertree sawmill operation which took
effect in October 2005.
During the quarter the Company reached agreement with TimberWest Forest
Corp. to end a saw-log supply arrangement. TimberWest paid the Company
$15.0 million cash to end the agreement under which it had provided up to
330,000 cubic metres of saw-logs to the Company annually from its private
lands at Vancouver log market prices. We recorded a gain on the termination of
the agreement of $13.1 million.
On November 10, 2005 the Company reached a definitive agreement to
acquire Cascadia Forest Products Ltd. ("Cascadia") from Brookfield Asset
Management Inc., for approximately $120 million, subject to certain closing
adjustments plus Cascadia's net working capital, all payable in cash on
closing. Financing for the transaction has been secured from Tricap Management
Inc. ("Tricap"), which will provide both equity and debt financing sufficient
to fund the acquisition of Cascadia and to refinance Western's existing 15%
senior secured bonds. The acquisition is expected to close in the first
quarter of 2006, subject to the receipt of regulatory approvals. The
announcement marks the culmination of negotiations and due diligence to
acquire these assets that had been on going for nearly one year and reflects
the Company's strategy to be a major player in the consolidation of the
coastal industry.
The combined Western and Cascadia operations will have over 1.5 billion
board feet of annual lumber capacity and 6.8 million cubic meters of annual
allowable cut from Crown-owned tenures on Vancouver Island, the mainland coast
and the Queen Charlotte Islands. By combining resources and leveraging best
practices from both companies, Western expects to capture annual pre-tax
synergies of approximately C$65 million through marketing programs and
operating efficiencies, which are anticipated to be realized within about
48 months of the completion of the transaction.
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 June 30, 2005 $ (2.3)
Gain on termination of saw-log agreement 13.1
Silvertree severance costs (7.2)
Higher anti-dumping rate in second quarter 3.4
Impact of summer down-time (4.6)
Lower realised NBSK pulp prices (1.6)
Lower realised lumber prices (2.5)
Change in mix of lumber and logs sold (3.8)
Foreign exchange impact on sales and receivables (7.4)
Impact of less volume sold (2.3)
Other 5.2
-----------
EBITDA for the three months ended September 30, 2005 $ (9.8)
-----------
-----------
EBITDA for the current quarter changed compared to the previous quarter
due to:
- gain on the termination of the log supply agreement with
TimberWest.
- reorganisation costs represents severance in connection with the
closure of the Silvertree sawmill.
- higher anti-dumping costs recorded in the second quarter when the
Company was subject to an 11.54% anti-dumping rate prior to the
Company's successful application to use the lower 3.78% rate of
its Predecessor.
- to reduce log and lumber inventories we took downtime during the
summer which had cash impact of $4.6 million of fixed cost
write-offs.
- NBSK prices realised in the quarter were approximately 6% lower
than the second quarter.
- Lumber prices realised were lower by approximately 7% than the
second quarter primarily in cedar and fir.
- We sold less high value lumber and more high value logs in the
quarter
- The Canadian dollar strengthened from an average of $0.806 in the
second quarter to $0.825 in the third quarter resulting in lower
Canadian dollar proceeds from US dollar denominated sales.
- Lumber, log and pulp sales all decreased in the third quarter
relative to the second quarter as a result of oversupplied
markets.
Some of the significant factors accounting for the decrease in EBITDA
from positive $17.3 million for the proforma three months ended September 30,
2004 to negative $9.8 million in the three months ended September 30, 2005 are
weaker lumber prices, lower log sales, and the mix of lumber and logs sold
(negative $20.1 million); lower pulp prices realised partially offset by
higher volumes (negative $6.5 million); a stronger Canadian dollar (negative
$10.9 million); and severance at the Silvertree mill (negative $7.2 million);
partially offset by the gain on the termination of the log supply agreement
(positive $13.1 million) and the deferral of the Squamish pulp mill annual
maintenance shutdown from the third quarter as part of moving to an 18 month
major maintenance program with 12 month mini-shutdowns (positive
$5.7 million).
Some of the significant factors accounting for the decrease in EBITDA
from positive $80.1 million for the proforma nine months ended September 30,
2004 to negative $3.4 million in the nine months ended September 30, 2005 are
weaker pulp and to a lesser extent lumber prices realised (negative
$12.9 million); a stronger Canadian dollar (negative $35.6 million); lower
external log sales partially offset by higher pulp sales (negative
$23.2 million); higher unit log production costs due to lower volumes
harvested (negative $14.6 million); the change in accounting to expense spur
roads (negative $9.9 million); severance at the Silvertree mill
($7.2 million); partially offset by the gain on the termination of the log
supply agreement (positive $13.1 million); the change in accounting policy to
consider pulp and saw logs separately in performing the lower of cost and
market test (positive $6.6 million) and the deferral of the Squamish pulp mill
annual maintenance shutdown from the third quarter as part of moving to an
18 month major maintenance program with 12 month mini-shutdowns (positive
$5.7 million).
Solid Wood Segment
Three Three Nine Three Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
(millions of September June 30, September September September
dollars except 30, 2005 2005 30, 2005 30, 2004 30, 2004
where noted) Company Company Company Proforma(1) Proforma(1)
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Lumber sales $ 88.2 $ 107.5 $ 293.0 $ 106.9 $ 324.4
Log sales 22.2 26.0 66.4 45.3 112.8
By-product sales 5.9 7.0 20.0 8.1 19.9
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$ 116.3 $ 140.5 $ 379.4 $ 160.3 $ 457.1
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EBITDA $ (2.2) $ 2.2 $ 11.0 $ 30.6 $ 85.3
EBITDA margin (1.9%) 1.6% 2.9% 19.1% 18.7%
Operating earnings
(loss) $ (6.7) $ (16.0) $ (17.2) $ 21.8 $ 52.7
Total assets
employed $ 546.3 $ 577.0 $ 546.3 $ 615.4 $ 615.4
Lumber production -
millions of
board feet 150 186 521 191 521
Lumber sales -
millions of
board feet 165 176 503 165 511
Log production -
thousands of
cubic metres 465 1,148 2,111 1,103 3,030
Log purchases -
thousands of
cubic metres 147 192 539 353 1,092
Log sales - thousands
of cubic metres 172 213 551 411 960
Internal Log
consumption -
thousands of
cubic metres 719 844 2,438 866 2,611
Average lumber sales
revenue per
thousand
board feet $ 535 $ 612 $ 583 $ 648 $ 635
Average log sales
revenue per cubic
metre $ 129 $ 122 $ 121 $ 110 $ 117
(1) Q3 and nine months of 2004 represent the results of our Predecessor
for the period from July 1, 2004 to July 27, 2004 and from January 1,
2004 to July 27, 2004, respectively added to the Company's results
for the period from July 28, 2004 to September 30,2004.
The solid wood segment had an operating loss of $6.7 million in the
quarter and a loss of $17.2 million in the nine months compared to an
operating loss of $16.0 million in the second quarter of 2005 and operating
earnings of $21.8 million and $52.7 million in the comparative periods of
2004. EBITDA for the solid wood segment decreased to negative $2.2 million in
the third quarter compared to positive $2.2 million in the second quarter and
$30.6 million in the third quarter of 2004. Operating earnings and EBITDA were
impacted by the $13.1 million gain recorded on the termination of the log
supply agreement with TimberWest and the $7.2 million reorganisation expense
recorded with respect to the closure of the Silvertree sawmill site that will
be effective October 28, 2005. Operating earnings for the year to date have
also been impacted by the second quarter $8.5 million non-cash write-down of
property plant and equipment for the closure of the Silvertree sawmill.
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 subsequently filed an application for an expedited
changed circumstances review and received a positive ruling from the US
Department of Commerce confirming we are entitled to use the "all others rate"
of 3.78% effective from August 19, 2005. For the period from April 26, 2005 to
August 19, 2005 we posted anti-dumping deposits at the higher rate of 11.54%.
Lumber sales of 165 million board feet in the third quarter of 2005 were
the same as the comparable period of 2004 and decreased 6% from 176 million
board feet in the second quarter. Lumber sales for the nine months ended
September 30, 2005 of 503 million board feet were comparable to the
511 million board feet sold in the same period of 2004. Overall average lumber
prices received in the third quarter of 2005, when translated into Canadian
dollars were $535 per thousand board feet compared to $612 in the second
quarter. For the first nine months of 2005 the average price received was
$583 per thousand board feet compared to $648 in the comparable period of
2004.
Log production of 0.465 million cubic metres in the third quarter
compares to 1.148 million cubic metres in the second quarter and 1.103 million
cubic metres in the third quarter of 2004 and reflects the previously
announced downtime taken at the logging operations during the summer to reduce
log inventories. Log production for the nine months ended September 30, 2005
of 2.111 million cubic metres compares to 3.030 million cubic metres in the
same period of 2004 and reflects both the summer downtime noted above as well
as the first quarter's delayed start up of logging operations due to higher
than optimum inventories.
A combination of the lower third quarter log production and a weak
Vancouver log market also resulted in lower third party log sales compared to
the previous quarter. However, average log prices received increased to
$129 per m3 compared to $122 per m3 in the second quarter of 2005 and
benefited from the sale of higher quality logs and higher prices achieved for
cedar poles offset the overall decrease in sales prices for other species. The
average price realised in the third quarter of 2005 of $129 per m3 compares to
the $110 per m3 in the comparable period of 2004. The 2004 sales represent a
mix of saw-logs which realised an average of $151 per m3 and pulp logs which
realised an average of $54 per m3.
Pulp Segment
Three Three Nine Three Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
(millions of September June 30, September September September
dollars except 30, 2005 2005 30, 2005 30, 2004 30, 2004
where noted) Company Company Company Proforma(1) Proforma(1)
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Sales $ 40.4 $ 45.9 $ 126.4 $ 42.2 $ 136.9
EBITDA $ (4.2) $ (0.7) $ (3.0) $ (10.2) $ 2.1
EBITDA margin (10.4%) (1.5%) (2.4%) (24.2%) 1.5%
Operating earnings
(loss) $ (4.8) $ (1.4) $ (4.9) $ (11.3) $ (3.8)
Total assets
employed $ 82.2 $ 86.4 $ 82.2 $ 94.5 $ 94.5
Pulp production -
thousands of tonnes 69 72 208 57 193
Pulp sales -
thousands of tonnes 71 73 206 61 188
Average pulp revenue
per tonne $ 573 $ 624 $ 615 $ 692 $ 728
Average pulp price
delivered to
Northern Europe -
(US$ per tonne)(2) $ 587 $ 620 $ 616 $ 640 $ 626
Average pulp price
delivered to
Northern Europe -
(C$ equivalent
per tonne)(2) $ 712 $ 769 $ 755 $ 849 $ 833
(1) Q3 and nine months of 2004 represent the results of our Predecessor
for the period from July 1, 2004 to July 27, 2004 and from January 1,
2004 to July 27, 2004, respectively, both restated for the sale of
the Port Alice pulp mill in May, 2004, added to the Company's results
for the period from July 28, 2004 to September 30,2004.
(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
$4.8 million compared to operating losses of $1.4 million in the second
quarter of 2005 and $11.3 million in the comparative quarter of 2004. EBITDA
for the pulp segment in the quarter was negative $4.2 million compared to
negative $0.7 million in the second quarter and primarily results from both a
weaker US$ pulp price realised in the quarter and the stronger Canadian
dollar. The third quarter results are an improvement over the negative
$10.2 million recorded in the third quarter of 2004 primarily because the
third quarter of 2004 includes the annual maintenance shutdown costs and
corresponding lower production and sales whereas the 2005 shutdown was
deferred to November, 2005 as part of the program to move to an 18 month major
maintenance cycle with 12 month mini-shutdowns as part of a cost reduction
effort. The annual maintenance shutdown will now likely be delayed to early
2006 as a result of possible labour disruption by certain of the maintenance
contractors represented by the Boiler Makers Union who are in a legal strike
situation. Partially offsetting this are the impacts of lower realised pulp
prices and the stronger Canadian dollar.
For the nine months ended September 30, 2005 the pulp segment recorded an
operating loss of $4.9 million and negative EBITDA of $3.0 million compared to
the proforma operating loss of $3.8 million and positive EBITDA of
$2.1 million recorded by our Predecessor. The negative impacts of the lower
US$ sales prices realised and the stronger Canadian dollar more than offset
the deferral in the annual maintenance shutdown costs and higher production
levels.
Other Corporate Items
Selling and administration expense of $5.4 million in the quarter was
similar to the $5.5 million in the second quarter and the $5.5 million
recorded by the Company and our Predecessor in the comparable period of 2004.
For the nine months ended September 30, 2005 the selling and administration
expense was $17.1 million compared to the $16.4 million total recorded by the
Company and our Predecessor. Included in selling and administration expense
for the nine months is approximately $1.9 million for legal and consulting
services in connection with due diligence and other procedures performed with
respect to strategic initiatives including work on the recently announced
acquisition of Cascadia and related financing.
Interest expense decreased to $11.5 million in the quarter from
$12.0 million in the second quarter as a result of the stronger Canadian
dollar. The Company recorded a foreign exchange gain in the quarter of
$13.3 million on the translation of its US dollar denominated secured bonds as
a result of the strengthening of the Canadian dollar from $1.2411 at June 30,
2005 to $1.2122 at September 30, 2005. This compares to a loss recorded in the
second quarter of $3.3 million when the Canadian dollar weakened compared to
the March 31 quarter end. Interest expense and the foreign exchange gain or
loss on the translation of long-term debt recorded in 2005 is 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 Three Nine Three Nine
Months Months Months Months Months
Ended Ended Ended Ended Ended
(millions of September June 30, September September September
dollars except 30, 2005 2005 30, 2005 30, 2004 30, 2004
where noted) Company Company Company Proforma(1) Proforma(1)
-------------------------------------------------------------------------
Cash flow from
operations $ 17.8 $ (15.8) $ 17.2 $ (4.9) $ (8.3)
Capital additions $ (7.0) $ (8.8) $ (18.3) $ (13.0) $ (31.8)
Change in bank
indebtedness $ (7.0) $ 12.0 $ (5.9) $ 9.5 $ 23.5
Financial ratios:
Current assets to
current liabilities 1.67 1.80 1.67 n/a n/a
Debt to shareholders
equity 2.29 2.25 2.29 n/a n/a
Debt to market
capitalization 6.24 4.41 6.24 n/a n/a
(1) Q3 and nine months of 2004 represent the results of our Predecessor
for the period from July 1, 2004 to July 27, 2004 and from January 1,
2004 to July 27, 2004, respectively, both restated for the sale of
the Port Alice pulp mill in May, 2004, added to the Company's results
for the period from July 28, 2004 to September 30, 2004.
Cash flow from operations in the third quarter of 2005 of $17.8 million
compares to negative cash flow of $15.8 million in the second quarter and is
attributable to the decrease in both accounts receivable and inventories. The
decrease in inventories is a direct result of the Company's previously
announced plan to take down time at its logging and sawmill operations during
the summer. The decrease in receivables is primarily attributable to the lower
sales recorded in the third quarter compared to the second quarter and the
timing of shipments and cash receipts.
Cash flow from operations before the non-cash changes in working capital
items was negative $33.3 million in the quarter compared to negative
$12.8 million in the second quarter and results from the same factors
impacting EBITDA as previously discussed except that the proceeds received on
the termination of the saw-log supply agreement is classified as a cash inflow
under investing activities instead of from operations. Excluding one-off items
incurred during the quarter such as the severance paid for the closure of the
Silvertree saw mill and the write-off of fixed costs during the summer
down-time at the logging and sawmill operations cash flow from operations
before the changes in non-cash working capital would have been approximately
negative $20 million.
Capital additions in the third quarter of $7.0 million include additions
to property, plant and equipment of $3.7 million compared to $2.9 million in
the second quarter. Expenditures on logging roads totalled $6.5 million in the
third quarter ($22.5 million for the nine months) of which $3.3 million
relating to intermediate and mainline logging roads was capitalised in the
quarter ($11.2 million for the year to date) with the balance of $3.2 million
relating to spur roads expensed in accordance with the Company's accounting
policy. The decrease in total road cost during the quarter compared to the
second quarter total of $11.4 million was due to the scheduled down time.
Capital additions in the quarter are $6.0 million lower than the proforma
amount in the comparative period of 2004 primarily due to the change in
accounting policy to expense spur roads (they would have been capitalised for
one third of the comparative period) and due to the impact of the scheduled
down time on road construction in 2005.
As previously discussed, the Company realised proceeds of $15 million on
the termination of its saw-log supply agreement with TimberWest and deposited
the proceeds in the Working Capital Reserve. For the nine months ended
September 30, 2005 the Company has received $51.2 million in cash proceeds
from surplus asset sales and the Bill 28 take back settlement of which
$45.6 million has been deposited in the Working Capital Reserve account as
required under the terms of the Secured Bond indenture. At September 30, 2005
the total funds held in the Working Capital Reserve and available to the
Company for operational purposes amounted to $48.5 million.
At September 30, 2005 the Company had a cash balance of $3.9 million, the
working capital reserve of $48.5 million and available credit of $18.9 million
under its credit facility to meet its operational requirements. The amount of
the credit facility available to the Company at September 30, 2005 was
$10.0 million higher than would normally result from the availability
calculation due to a temporary reduction in the reserve base used in those
calculations. The temporary reduction ended on October 8, 2005. As a result of
the Cascadia transaction, the lender under our credit facility has agreed to
adjust the availability calculation to increase our availability under the
credit facility by $10 million through to the closing of the transaction,
expected in the first quarter of 2006. 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.
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 Predecessor's 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 have been facing is our cash flow and
liquidity position. 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.
As at September 30, 2005, we had approximately $319.4 million of
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.
We have taken certain steps to improve our liquidity in the short-term,
including taking down-time at our logging and sawmill operations during the
summer of 2005, deferral of the payment of 50% of the interest due on June 30,
2005 on our Secured Bonds, and the opportune termination of our saw log supply
contract with TimberWest.
With respect to the longer-term, the acquisition of Cascadia and related
equity and debt financing as well as the combined Company's secured revolving
credit facilities in the total amount of $200.0 million should improve the
Company's liquidity and balance sheet structure. We believe, given time, the
acquisition should significantly strengthen the Company's ability to reduce
costs and increase cash flow. The acquisition is expected to close in the
first quarter of 2006, subject to the receipt of regulatory approvals.
Although we believe the steps we have taken to date to ensure short-term
liquidity should sustain our current operations until the closing of the
Cascadia acquisition and related financing transactions in 2006, there can be
no assurance that we will be successful in our efforts to implement our plan.
Further, it is anticipated that it may take up to 48 months to achieve the
estimated $65 million of pre tax annual synergies arising from the acquisition
of Cascadia. 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 during this period.
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.
Measurement Uncertainty
The Company reviews the carrying values of long-lived assets when events
or changes in circumstances indicate that the carrying value of the assets may
not be recoverable through future operations. During the third quarter, as a
result of continued losses by the Company, the potential impact of its
restructuring activities and the potential impact on operations of a weaker
U.S. dollar and reduced lumber and pulp prices in the market, the Company
commenced an impairment review of all of its long-lived assets.
The impairment review is being performed by determining whether projected
undiscounted future cash flows from operations exceed the net carrying amount
of the assets. Key assumptions in performing this review include lumber
prices, pulp prices and the U.S. dollar exchange rate. Other significant
assumptions include the useful life of the assets (for example, curtailment
decisions) and the effect of the ongoing softwood lumber dispute with the U.S.
In determining the appropriate assumptions we have analyzed external data,
including RISI, and sought advice from our advisors.
Although we have not completed our analysis, by performing certain
sensitivity tests on a range of pricing and exchange rate assumptions, we have
determined that the Squamish pulp mill operations are particularly sensitive
to the key assumptions. If our final analysis indicates an impairment of this
asset, then it will be necessary to write it down to its fair value. As
discussed further under "Outlook", we are considering a number of strategic
options for the pulp mill including its continued operation, sale or closure.
In determining the appropriate fair value of the pulp mill using discounted
future cash flows we will need to consider these strategic options. The pulp
mill has a carrying value of $38.1 million at September 30, 2005.
As previously noted, we closed our Silvertree sawmill in October and
recorded an impairment charge of $8.5 million in the second quarter. On the
basis of the preliminary findings of the impairment review of the Solid Wood
segment, we do not consider that any further write down of these assets is
necessary at September 30, 2005.
Given the inherent imprecision of such impairment testing and the
sensitivity of results to the key assumptions used, it is possible that
changes in future conditions may lead management to use different assumptions
in the future which could require a material change in the carrying values of
its long-lived assets.
Outlook and Strategy
The agreement to acquire Cascadia represents a significant milestone in
the Company's long-term strategy to be a key participant in the consolidation
of the British Columbia coastal forest industry. Through this transaction,
Western will acquire:
- 3.6 million cubic meters of associated annual Crown harvest rights
located in coastal British Columbia.
- Four sawmills and four remanufacturing facilities on Vancouver
Island and the lower Mainland with total production capacity of
approximately 600 million board feet of lumber, as well as the
leased Island Phoenix division sawmill on Vancouver Island.
- A custom-cut business, contract sawing high value lumber products
to order for customers in Asia; and
- A global marketing and sales organization, including offices in
Canada, Japan, Australia and China with agency relationships
worldwide.
The combined Western and Cascadia operations will have over 1.5 billion
board feet of annual lumber capacity and 6.8 million cubic meters of annual
allowable cut from Crown-owned tenures on Vancouver Island, the mainland coast
and the Queen Charlotte Islands. By combining resources and leveraging best
practices from both companies, Western expects to capture annual pre-tax
synergies of approximately C$65 million through marketing programs and
operating efficiencies, which are anticipated to be realized within about
48 months of the completion of the transaction.
Since emergence from CCAA, we have been reviewing our assets to determine
whether they remain core to our business. On the basis of this review we have
determined that the Company's core business activities revolve around the
solid wood business and include logging from Crown timberlands and
manufacturing of lumber for sale in Canada, the U.S. and Asian markets. We
have been considering strategic options with respect to the non-core assets
including the Squamish pulp operation and private timberlands. We have engaged
legal and financial advisors to assist in this process.
The Company and its advisors have been in advanced discussions with third
parties on potential transactions that involve the Squamish pulp mill
operation. To date, the Company has not entered into a definitive agreement
with any third party and will only do so if economic terms and values are
satisfactory to the Company. At this time, there is no certainty that the
Company's process will result in a transaction that will impact the Squamish
pulp mill. For accounting purposes, the Company is in the process of reviewing
its assets for impairment and will be completing this process in the fourth
quarter. There can be no certainty that this review, or any transaction if
completed, would not result in a write-down or loss on sale of the pulp mill
operations.
The Company has been in discussions with the Minister of Forests of B.C.
on the removal of the Company's private timberlands from its TFLs. To the
extent the Company is successful in these discussions we will consider the
sale of some or all of the private timberlands if economic terms and values
are satisfactory to the Company. Proceeds from the sale of the private
timberlands would be applied to reduce the Company's debt burden pursuant to
terms and conditions under the proposed bridge term facility announced
November 10, 2005.
Lumber prices in the North American markets have been weakening in the
last month with key commodity items falling by US$20-$25 per thousand board
feet. Kiln dried lumber, an increasing focus for us, has maintained a
US$10-$15 per thousand board feet premium to green lumber. Western Red Cedar
activity is relatively buoyant although most of the activity is targeted at
the first quarter of 2006. Sales to the Japanese market have been relatively
firm although prices are coming under pressure with the drop in the value of
the Yen. We are expecting to see the usual seasonal slow down in sales with a
pick up early in the New Year.
NBSK Pulp prices are currently showing slight upward movement. We remain
cautious with respect to the short-term outlook and do not forecast
significant changes at this time.
Outstanding Share Data
As of November 14, 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
November 14, 2005 we have granted 399,590 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 www.sedar.com 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 www.sedar.com 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
November 14, 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)
--------------------------
2005
--------------------------
3rd 2nd 1st
--------------------------
--------------------------
Company
--------------------------
Average Exchange
Rate - Cdn $ to
purchase one
U.S. $ $1.2122 $1.2411 $1.2259
Net sales
Lumber $ 88.2 $ 107.5 $ 97.3
Logs 22.2 26.0 18.2
By-Products 5.9 7.0 7.1
--------------------------
Solid wood segment 116.3 140.5 122.6
Pulp segment 40.4 45.9 40.1
--------------------------
$ 156.7 $ 186.4 $ 162.7
--------------------------
--------------------------
Lumber
Lumber production
- millions of
board feet 150 186 185
Lumber sales -
millions of
board feet 165 176 162
Logging
Log production
- thousands of
cubic metres 465 1,148 498
Log purchases -
thousands of
cubic metres 147 192 200
Log sales -
thousands of
cubic metres 172 213 166
Internal Log
consumption -
thousands of
cubic metres 719 844 875
NBSK Pulp
Pulp production -
thousands of
tonnes 69 72 67
Pulp sales -
thousands of
tonnes 71 73 62
Sales prices
Lumber - per
thousand board
feet $ 535 $ 612 $ 599
Logs - per cubic
metre $ 129 $ 122 $ 110
Pulp - per tonne $ 573 $ 624 $ 651
EBITDA
Solid wood
segment $ (2.2) $ 2.2 $ 11.0
Pulp segment (4.2) (0.7) 1.9
General corporate (3.4) (3.8) (4.2)
--------------------------
$ (9.8) $ (2.3) $ 8.7
--------------------------
--------------------------
Net earnings (loss) $ (12.5) $ (37.2) $ (5.3)
Net earnings loss
per share - basic
and diluted $ (0.49) $ (1.45) $ (0.21)
Reconciliation of
EBITDA to net
earnings (loss)
EBITDA $ (9.8) $ (2.3) $ 8.7
Amortization of
property, plant
and equipment (5.1) (10.3) (6.2)
Restructuring and
other items (8.5) -
Interest expense (11.5) (12.0) (11.8)
Foreign exchange
gain (loss) on
translation of
long-term debt 13.3 (3.3) (1.6)
Other income /
expense 0.8 (0.4) 5.8
Financial restruc-
turing costs - - (3.1)
Income taxes (0.2) (0.3) (0.3)
Net loss from
discontinued
operations - -
Provision for
preferred dividends - -
--------------------------
Net earnings (loss)
attributable to
common shares $ (12.5) $ (37.2) $ (5.3)
--------------------------
--------------------------
Quarter
-----------------------------------------------------
2004 2004 2003
----------------- -------------------------- --------
4th 3rd 3rd 2nd 1st 4th
----------------- -------------------------- --------
(July 28- (July 1-
Sept 30) July 27)
-------- --------------------------------------------
Predecessor (restated for sale of
Port Alice pulp mill in May, 2004)
-----------------------------------------------------
Average Exchange
Rate - Cdn $ to
purchase one
U.S. $ $1.2219 $1.3227 $1.3338 $1.3489 $1.3190 $1.3226
Net sales
Lumber $ 87.8 $ 85.5 $ 21.4 $ 116.4 $ 101.1 $ 81.3
Logs 27.7 31.8 13.5 53.4 14.1 25.9
By-Products 5.7 5.2 2.9 6.5 5.3 6.2
----------------- -------------------------- --------
Solid wood segment 121.2 122.5 37.8 176.4 120.5 113.4
Pulp segment 44.6 35.8 6.4 52.2 42.4 43.4
----------------- -------------------------- --------
$ 165.8 $ 158.3 $ 44.2 $ 228.5 $ 163.0 $ 156.8
----------------- -------------------------- --------
----------------- -------------------------- --------
Lumber
Lumber production
- millions of
board feet 158 132 59 175 155 165
Lumber sales -
millions of
board feet 158 135 30 171 175 156
Logging
Log production -
thousands of
cubic metres 894 681 422 1,158 769 709
Log purchases -
thousands of
cubic metres 257 254 99 421 318 227
Log sales -
thousands of
cubic metres 236 291 120 449 100 176
Internal Log
consumption -
thousands of
cubic metres 768 605 261 936 809 907
NBSK Pulp
Pulp production -
thousands of
tonnes 73 46 11 72 64 62
Pulp sales -
thousands of tonnes 75 51 9 66 61 67
Sales prices
Lumber - per
thousand board
feet $ 557 $ 633 $ 712 $ 681 $ 577 $ 521
Logs - per cubic
metre $ 117 $ 109 $ 113 $ 119 $ 141 $ 147
Pulp - per tonne $ 601 $ 694 $ 734 $ 797 $ 697 $ 648
EBITDA
Solid wood
segment $ (10.3) $ 19.7 $ 10.9 $ 37.0 $ 17.7 $ (1.1)
Pulp segment (1.8) 0.5 (10.7) 12.2 0.1 (2.2)
General corporate (3.7) (2.4) (0.7) (2.1) (2.1) (2.6)
----------------- -------------------------- --------
$ (15.8) $ 17.8 $ (0.5) $ 47.1 $ 15.7 $ (5.9)
----------------- -------------------------- --------
----------------- -------------------------- --------
Net earnings (loss) $ (19.6) $ 14.1
Net earnings loss
per share - basic
and diluted $ (0.76) $ 0.55
Reconciliation of
EBITDA to net
earnings (loss)
EBITDA $ (15.8) $ 17.8 $ (0.5) $ 47.1 $ 15.7 $ (5.9)
Amortization of
property, plant
and equipment (8.7) (5.5) (4.4) (17.1) (11.5) (12.2)
Restructuring and
other items - - - (1.1)
Interest expense (11.2) (8.6) (8.7) (31.5) (28.9) (22.2)
Foreign exchange
gain (loss) on
translation of
long-term debt 12.6 14.8 0.6 (16.1) (11.0) 34.1
Other income /
expense - (0.1) (5.5) (0.4) 0.1 0.7
Financial restruc-
turing costs - - (3.1) (5.0) (3.3) (2.5)
Income taxes 3.5 (4.3) 0.7 (0.4) (0.3) (0.4)
Net loss from
discontinued
operations - - (1.6) (5.7) (5.1) (5.0)
Provision for
preferred dividends - - (0.4) (1.2) (1.2) (1.2)
-----------------------------------------------------
Net earnings (loss)
attributable to
common shares $ (19.6) $ 14.1 $ (22.9) $ (30.3) $ (45.6) $ (15.7)
-----------------------------------------------------
-----------------------------------------------------
Consolidated Balance Sheets
(Expressed in millions of Canadian dollars)
-------------------------------------------------------------------------
September 30, 2005 December 31, 2004
---------------------------------------
(Unaudited) (Audited)
Assets
Current assets
Cash $ 3.9 $ 5.0
Accounts receivable 56.9 78.0
Inventory 150.3 176.7
Restricted cash (note 5) 48.5 -
Prepaid expenses 8.7 5.2
---------------------------------------
268.3 264.9
Restricted assets (note 5) - 24.4
Investments 7.2 7.1
Property, plant and equipment 366.8 395.6
Other assets 1.0 1.4
---------------------------------------
$ 643.3 $ 693.4
---------------------------------------
---------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Bank indebtedness (note 4) $ 72.2 $ 78.1
Accounts payable and accrued
liabilities 88.3 72.2
---------------------------------------
160.5 150.3
Long-term debt (note 5) 247.2 253.5
Future income taxes 10.5 10.5
Other liabilities 30.1 29.4
---------------------------------------
448.3 443.7
Shareholders' equity
Common Shares 255.2 255.2
Contributed surplus 0.3 -
Deficit (60.5) (5.5)
---------------------------------------
195.6 249.7
---------------------------------------
$ 643.3 $ 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)
July 1, July 28, July 1, January 1, January 1,
to to to to to
September September July 27, September July 27
30, 2005 30, 2004 2004 30, 2005 2004
------------------------------------------------------
Company Company Predecessor Company Predecessor
(Restated) (Restated)
Sales $ 156.7 $ 158.3 $ 44.2 $ 505.8 $ 435.8
Cost and expenses
Cost of goods sold 143.0 112.8 39.0 421.0 306.6
Anti-dumping and
countervailing
duties 8.3 11.9 1.9 30.4 24.0
Freight expenses 15.7 11.9 2.2 46.6 30.4
Amortization of
property, plant
and equipment 5.1 5.5 4.4 21.6 33.0
Restructuring and
other items
(note 10) (5.9) - - 2.6 -
Selling and
administration 5.4 3.9 1.6 17.1 12.5
-----------------------------------------------------
171.6 146.0 49.1 539.3 406.5
-----------------------------------------------------
Operating earnings
(loss) (14.9) 12.3 (4.9) (33.5) 29.3
Interest expense (11.5) (8.7) (9.0) (35.3) (71.4)
Foreign exchange
gain (loss) on
translation of
long-term debt 13.3 14.9 0.9 8.4 (24.2)
Other income/expense 0.8 (0.1) (5.5) 6.1 (5.9)
Financial restruc-
turing costs - - (3.1) - (11.4)
-----------------------------------------------------
Earnings (loss)
before income taxes (12.3) 18.4 (21.6) (54.3) (83.6)
Income taxes (0.2) (4.3) 0.7 (0.7) -
-----------------------------------------------------
Net earnings (loss)
from continuing
operations (12.5) 14.1 (20.9) (55.0) (83.6)
Net loss from
discontinued
operations - - (1.6) - (12.4)
-----------------------------------------------------
Net earnings (loss) (12.5) 14.1 (22.5) (55.0) (96.0)
Provision for
dividends on
preferred shares - - (0.4) - (2.8)
-----------------------------------------------------
Net earnings (loss)
attributable to
common and non-
voting shares $ (12.5) $ 14.1 $ (22.9) $ (55.0) $ (98.8)
-----------------------------------------------------
-----------------------------------------------------
Loss per share:
Basic $ (0.49) $ 0.55 $ (0.54) $ (2.15) $ (2.33)
Diluted $ (0.49) $ 0.55 $ (0.54) $ (2.15) $ (2.33)
Weighted average
number of common
and non-voting
shares outstanding
(thousands of
shares) 25,636 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)
July 1, July 28, July 1, January 1, January 1,
to to to to to
September September July 27, September July 27
30, 2005 30, 2004 2004 30, 2005 2004
------------------------------------------------------
Company Company Predecessor Company Predecessor
(Restated) (Restated)
Cash provided by
(used in):
Operations:
Net loss from
continuing
operations $ (12.5) $ 14.1 $ (20.9) $ (55.0) $ (83.6)
Items not
involving cash:
Amortization of
property, plant
and equipment 5.1 5.5 4.4 21.6 33.0
Future income taxes - 3.9 - - -
Amortization and
write-down of
deferred charges 0.1 0.1 0.3 0.2 2.3
Write-down of
property, plant
and equipment - - - 8.5 -
Foreign currency
translation
(gain)loss (13.3) (14.9) 0.9 (8.4) 24.2
Accretion of debt
discount 0.6 - - 2.0 -
(Gain) loss on
property, plant
and equipment
disposals (13.1) - 0.8 (12.8) 0.4
Other (0.2) 0.2 4.7 1.0 (0.2)
------------------------------------------------------
(33.3) 8.9 (11.6) (42.9) (23.9)
------------------------------------------------------
Changes in non-cash
working capital
items:
Accounts receivable 20.3 (15.5) 26.9 21.0 (14.2)
Inventory 30.1 (1.4) (22.3) 26.4 (51.7)
Prepaid expenses (1.7) 0.3 0.1 (3.5) (4.0)
Accounts payable and
accrued liabilities 2.4 1.4 48.1 16.2 94.1
Accounts payable and
accrued liabilities
subject to compromise - - (41.2) - -
------------------------------------------------------
51.1 (15.2) 11.6 60.1 24.2
------------------------------------------------------
Cash provided (used)
by continuing
operations 17.8 (6.3) 0.0 17.2 0.3
Cash used by discon-
tinued operations - 1.4 - (2.3)
------------------------------------------------------
17.8 (6.3) 1.4 17.2 (2.0)
------------------------------------------------------
Investments:
Additions to property,
plant and equipment (3.7) (3.9) (1.4) (7.1) (3.5)
Additions to
capitalized roads (3.3) (3.3) (4.4) (11.2) (21.1)
Disposals of property,
plant and equipment 15.3 - - 29.7 1.1
Restricted cash (15.4) - - (45.6) -
Bill 28 take back
proceeds and infra-
structure advance
(note 6(a)) - - - 21.5 -
Other 0.1 - (2.2) 0.3 1.2
------------------------------------------------------
(7.0) (7.2) (8.0) (12.4) (22.3)
------------------------------------------------------
Financing:
Bank indebtedness (7.0) 4.2 5.3 (5.9) 19.3
------------------------------------------------------
(7.0) 4.2 5.3 (5.9) 19.3
------------------------------------------------------
Increase (decrease)
in cash 3.8 (9.3) (1.3) (1.1) (5.0)
Cash, beginning of
period 0.1 12.7 17.9 5.0 21.6
------------------------------------------------------
Cash, end of period $ 3.9 $ 3.4 $ 16.6 $ 3.9 $ 16.6
------------------------------------------------------
------------------------------------------------------
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 September 30, 2005, of the $94.9 million of the facility that was
available to the Company, $72.2 million had been drawn down and
$3.8 million was used to support standby letters of credit leaving a
balance of $18.9 million available for future use. The amount of the
facility available to the Company at September 30, 2005 was
$10 million higher than would normally result from the availability
calculation due to a temporary reduction in the reserve base used in
those calculations. The temporary reduction ended on October 8, 2005.
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 September 30, 2005, the balance in the working capital
reserve account was $48.5 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 for the nine months is
$4.6 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. 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 $8.3 million for the third quarter of 2005. Cumulative
duties from May 22, 2002, when cash deposits were made necessary for
shipments of Canadian lumber into the US, until September 30, 2005,
total US$98.5 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 subsequently
filed an application for an expedited changed circumstances review
and received a positive ruling from the US Department of Commerce
confirming we are entitled to use the "all others rate" of 3.78%
effective from August 19, 2005. For the period from April 26, 2005 to
August 19, 2005 we posted anti-dumping deposits at the higher rate of
11.54%.
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 appealed this ruling to an
Extraordinary Challenge Committee ("ECC") Panel. On August 10, 2005
the ECC Panel upheld this finding by the NAFTA Panel. However, the US
authorities have not complied 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
December 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.
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 September 30, 2005
------------------------------------------
Solid
wood Pulp Corporate Total
---------------------------------------------------------------------
Sales to external
customers $ 116.4 40.3 - 156.7
Sales to other segment $ 6.2 - - 6.2
Operating Loss $ (6.6) (4.8) (3.5) (14.9)
Amortization of property,
plant and equipment $ (4.5) (0.6) - (5.1)
Silvertree severance $ (7.2) - - (7.2)
Gain on Saw log supply
agreement termination $ 13.1 13.1
Capital expenditures $ (7.0) - - (7.0)
Nine months ended September 30, 2005
------------------------------------------
Solid
wood Pulp Corporate Total
---------------------------------------------------------------------
Sales to external
customers $ 379.5 126.3 - 505.8
Sales to other segment $ 21.1 - - 21.1
Operating Loss $ (17.2) (4.9) (11.4) (33.5)
Amortization of property,
plant and equipment $ (19.7) (1.9) - (21.6)
Write-down of property,
plant and equipment $ (8.5) - - (8.5)
Silvertree severance $ (7.2) (7.2)
Gain on Saw log supply
agreement termination $ 13.1 - - 13.1
Capital expenditures $ (17.9) (0.4) - (18.3)
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 September 30, 2005 with respect to these
defined benefit plans and a further $2.6 million with respect to the
contributions to the hourly paid employee union pension plans
($2.7 million and $6.8 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 nine months ended September 30, 2005. The accounts receivable
balance from the same customer comprised 24% of the Company's
outstanding receivables at September 30, 2005 and was insured through
the Export Development Corporation as to approximately 87% 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. Restructuring and Other Items
July 1, July 28, July 1, January January
to to to 1, to 1, to
September September July 27 September July 27
30 2005 30 2004 2004 30 2005 2004
------------------------------------------------------
Pre- Pre-
Company Company decessor Company decessor
Silvertree
severance (a) $ 7.2 $ - $ - $ 7.2 $ -
Write-down of
property,
plant and
equipment (a) - - - 8.5 -
Gain on
termination
of sawlog
supply
agreement (b) (13.1) - - (13.1) -
------------------------------------------------------
$ (5.9) $ - $ - $ 2.6 $ -
------------------------------------------------------
------------------------------------------------------
(a) On August 4, 2005 the Company announced the restructuring of
its sawmill operations. The Silvertree sawmill was closed at
the end of October, and the buildings will be dismantled, the
site sold and production transferred to the Duke Point sawmill.
Production at the Saltair sawmill has been indefinitely
curtailed also effective at the end of October pending
determination on future opportunities for profitable production
and its current production will be transferred to the Cowichan
Bay and Ladysmith sawmills. The Company wrote down the
Silvertree sawmill to its estimated recoverable value and took
a charge of $8.5 million in the second quarter. The Company has
recorded an additional charge in the third quarter of
approximately $7.2 million with respect to severance 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 September 30, 2005 was $10.0 million.
(b) The Company terminated its saw-log supply arrangement with
TimberWest Forest Corp in September and received cash proceeds
of $15 million which were deposited into the Working Capital
Reserve account. The Company recorded a gain of $13.7 million
on the termination.
11. Measurement Uncertainty
The Company reviews the carrying values of long-lived assets when
events or changes in circumstances indicate that the carrying value
of the assets may not be recoverable through future operations. It
does this by determining whether projected undiscounted future cash
flows from operations exceed the net carrying amount of the assets
(Step I test). Impaired assets are recorded at fair value, determined
principally by using discounted future cash flows expected from their
use and eventual disposition (Step II test). Estimates of future cash
flows and of fair values require judgment by management and may
change over time.
During the third quarter, as a result of continued losses by the
Company, the potential impact of its restructuring activities and the
potential impact on operations of a weaker U.S. dollar and reduced
lumber and pulp prices in the market, the Company commenced an
impairment review of its long-lived assets.
This Step I test is being carried out on its pulp mill and solid wood
facilities (i.e. sawmills and logging operations). Key assumptions in
performing this test of recoverability include lumber prices, pulp
prices and the U.S. dollar exchange rate. Other significant
assumptions include the useful life of the assets (for example,
curtailment decisions) and the effect of the ongoing softwood lumber
dispute with the U.S. Management is analyzing external data,
including RISI, and seeking advice from its advisors in determining
appropriate assumptions.
The Company has not yet finalized its Step I test. However, based on
the analysis performed to date and by performing certain sensitivity
tests on a range of pricing and exchange rate assumptions, management
has determined that the Company's pulp mill operations are
particularly sensitive to the key assumptions.
The pulp mill has a carrying value of $38.1 million at September 30,
2005. If the final results of the Step I test do indicate an
impairment of this asset, then it will be necessary to write it down
to its fair value. The Company is currently seeking to determine the
appropriate fair value of its pulp mill using discounted future cash
flows and by considering the impact of a number of strategic options
in relation to the future of its pulp operations in the context of
its overall restructuring activities. Options being considered
include the continued operation, sale or closure of the mill. The
assumptions being used to determine the discounted future cash flows
of the pulp mill include those used in the Step I test, except that
future cash flows are to be discounted at the risk-adjusted weighted
average cost of capital.
As noted in note 10, the Company has closed its Silvertree sawmill
and it recorded an impairment charge of $8.5 million in the second
quarter. The asset is recorded at its estimated recoverable amount of
$12.1 million. Operations at the Saltair sawmill have been curtailed,
with no decision yet taken as to its future. The carrying value at
September is $10.0 million. On the basis of the preliminary findings
of the incomplete Step 1 test on the long-lived assets in the Solid
Wood segment, the Company does not consider that any further write
down of these assets is necessary at September 30, 2005. The Company
intends to complete its Step 1 and Step II impairment testing in the
fourth quarter.
Given the inherent imprecision of such impairment testing and the
sensitivity of results to the key assumptions used, it is possible
that changes in future conditions may lead management to use
different assumptions in the future which could require a material
change in the carrying values of its long-lived assets.
12. Subsequent Events
On November 10, 2005 the Company reached a definitive agreement to
acquire Cascadia Forest Products Ltd. ("Cascadia") from Brookfield
Asset Management Inc., for approximately $120 million, subject to
certain closing adjustments plus Cascadia's net working capital, all
payable in cash on closing. Financing for the transaction has been
secured from Tricap Management Inc. ("Tricap"), which will provide
both equity and debt financing sufficient to fund the acquisition of
Cascadia and to refinance Western's existing 15% senior secured
bonds. The acquisition is expected to close in the first quarter of
2006, subject to the receipt of regulatory approvals.
The rights offering will raise a total of $295.0 million of equity by
way of a rights offering to all shareholders pursuant to a prospectus
expected to be filed in early December, 2005. Under the terms of the
rights offering common shareholders will receive rights to subscribe
for common share subscription receipts of Western. At the time of
closing the acquisition of Cascadia, each subscription receipt will
be automatically exchanged for one Western common share. The
subscription price shall be determined at the time the final
prospectus for the offering is filed. The subscription price for each
common share subscription receipt will be fixed at 85% of the volume
weighted average trading price of the Western common shares on the
TSX for the 10 day period ending on the day prior to the date of
filing of the final prospectus, provided that the subscription price
will not be less than C$1.65 per common share subscription receipt
nor greater than C$2.75 per common share subscription receipt. The
rights are expected to be listed for trading on the TSX and will be
exercisable for at least 21 days following the date of mailing of the
final prospectus. Tricap has committed to purchase any common share
subscription receipts not otherwise purchased by rightholders under
the rights offering. In addition, Tricap has been granted an option,
which may be exercised for up to 10 business days following the
completion of the Rights Offering, to acquire sufficient additional
common share subscription receipts at the same issue price as under
the rights offering in order to ensure that Tricap, or its individual
investors in total owns, or exercises control or direction over, 45%
of the Western common shares if, following the exchange of all common
share subscription receipts for common shares, Tricap, or its
individual investors in total, would own less than 45% of the Western
common shares.
Subscription funds will be refunded to investors if the Cascadia
acquisition does not close within six months, or if either the
Cascadia acquisition agreement or the Tricap debt facilities are
terminated.
Net proceeds from the issuance of equity under the rights offering
totalling C$295 million (plus the proceeds of the subscription
receipts issued pursuant to Tricap's option, if any) less transaction
costs will be used to fund the acquisition of Cascadia and working
capital.
In addition, Western has obtained a secured term-loan of
approximately $310 million arranged by Tricap. The loan consists of
two term facilities, a four year US$187.5 million facility, and a
one-year Cdn $90 million facility, which may be extended for a second
year at the option of Western. The proceeds from these facilities
will be used to redeem the Company's existing US$221 million 15%
senior secured notes. The secured loan is non-amortizing and is pre-
payable, in whole or in part, at any time. Interest on amounts drawn
under the US facility will be charged at the floating US one-month
LIBOR rate plus 8.15%. Interest on the Canadian facility will be
charged at the Canadian prime rate plus 5.25%.
Western will use the facility to fund the redemption of the senior
secured bonds not later than the completion of the acquisition of
Cascadia. Pursuant to the terms of the existing senior secured bond
indenture, Western is required to provide notice to bondholders at
least 30 days prior to the redemption date.
In addition to the above financings, the current revolving credit
lender to both Western and Cascadia, has agreed to maintain its
existing working capital facilities in the aggregate amount of
$200.0 million.
Head Office
435 Trunk Road
Duncan, British Columbia
Canada V9L 2P9
E (250) 748-3711
Fax: (250) 748-6045
E-mail: info(at)westernforest.com
Financial Statements on the Internet
www.westernforest.com
www.sedar.com
>>
