TSX: WEF
DUNCAN, BC, Aug. 13 /CNW/ - Western Forest Products Inc. (TSX: WEF) ("Western") today announced its results for the second quarter of 2007. The Company reported net income of $17.6 million ($0.09 per share) and EBITDA of $21.1 million in the second quarter of 2007.
Q2 Highlights
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- Increased log and lumber production and sales.
- Reduced manufacturing costs through continued operational and capital
improvements and higher production levels.
- Advanced the marketing and sale of non-core assets which have a value
estimated at $150-$180 million realizing proceeds of $13.6 million
and a gain of $9.4 million on those assets sold during the quarter.
- Reduced interest expense to $5.9 million from $9.9 million in the
same period of 2006 following debt and interest rate reductions in
2006 and the first quarter of 2007.
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Second Quarter Results
The Company reported net income of $17.6 million ($0.09 per share) in the second quarter of 2007 compared to $7.2 million ($0.04 per share) in the first quarter of 2007 and a loss of $9.4 million ($0.06 per share) in the second quarter of 2006. The results benefited from a foreign exchange gain on the Company's U.S. dollar debt of $6.3 million and the gain on non-core asset sales of $9.4 million. Excluding the impact of these items, EBITDA and net income would have been $20.6 million and $1.9 million, respectively for the second quarter of 2007.
FINANCIAL SUMMARY
Three Three Three Six Six
Months Months Months Months Months
(millions of Ended Ended Ended Ended Ended
dollars except June 30, March 31, June 30, June 30, June 30,
per share amounts) 2007 2007 2006 2007 2006
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EBITDA $ 21.1 $ 23.3 $ 7.7 $ 44.4 $ 7.6
Net income (loss)
from continuing
operations $ 13.8 $ 8.2 $ (7.5) $ 22.0 $ (54.0)
Net income (loss)
from discontinued
operations $ 3.8 $ (1.0) $ (1.9) $ 2.8 $ (9.0)
Net income (loss) $ 17.6 $ 7.2 $ (9.4) $ 24.8 $ (63.0)
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Per share - basic
and diluted:
Net income (loss)
from continuing
operations $ 0.07 $ 0.04 $ (0.05) $ 0.11 $ (0.63)
Net income (loss) $ 0.09 $ 0.04 $ (0.06) $ 0.12 $ (0.74)
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Reference is made above to EBITDA, a non-GAAP measure defined as
operating income (loss) plus amortization of property, plant and
equipment and the write-down of property, plant and equipment and
operating restructuring costs. The Company uses EBITDA as a benchmark
measurement of its own operating results and as a benchmark relative
to competitors.
EBITDA increased to $21.1 million in the second quarter and $44.4 million in the first six months of 2007 compared to $7.7 million and $7.6 million, respectively in the comparable periods of 2006. EBITDA decreased from $23.3 million in the first quarter of 2007 primarily as a result of lower realized lumber and log prices as a result of the stronger Canadian dollar and product mix, an increase in lumber inventory period end lower-of-cost-and-market write-downs, and higher pulp log write-downs as pulp log production returned to more normalized levels. This was partially offset by: higher lumber and log sales volumes; lower sawmill conversion costs; and higher by-product revenues.
Lumber sales in the quarter increased to 273 million board feet from 251 million board feet in the first quarter of 2007 as a result of more product being available for sale. The average realized lumber price decreased to $769 per thousand board feet in the second quarter of 2007, compared to $818 per thousand board feet in the first quarter of 2007. Average realized log price also decreased to $77 per cubic metre from $86 per cubic metre in the first quarter of 2007 due to changes in product mix.
Reynold Hert, President and CEO commenting on the Company's performance noted, "The impact of the strengthening Canadian dollar on our realized lumber prices masked the improvements during the quarter following a return to more normalized log harvest levels and the resulting increase in lumber production and sales. Our ongoing work to improve productivity and reduce costs and our recent capital investments are also being reflected in our results."
Operations
Lumber production increased in the second quarter to 277 million board feet from 251 million board feet in the first quarter of 2007 as a result of the greater availability of logs as log harvesting returned to more normal levels. The Company harvested 2,016,000 cubic metres of logs in the second quarter, up from 1,601,000 cubic metres in the first quarter. Production of some of the Company's more valuable products, including cedar were hampered in the quarter by the lack of heavy lift helicopters to support the Company's helicopter-logging program.
Markets
The cedar market continued to be well-supported during the quarter with demand exceeding supply, resulting in higher average cedar lumber prices over the first quarter. Markets for the Company's cedar products are expected to remain strong over the balance of the year as a result of shortages in the market due to lack of supply and the normal seasonal demand.
Demand and pricing also remained firm in Japanese markets for most of the second quarter, although this market has since weakened due to oversupply as some U.S. Douglas fir production shifted to Japan, and an easing in housing starts. Prior to the strike, the Company had taken action to reduce the production of lumber products typically destined for the Japanese market in response to the changing market conditions.
The U.S. structural dimension market, which represents approximately 25% of the Company's lumber sales volumes, continues to be under pressure. Prices increased to some extent in the second quarter compared to the first quarter as supply was reduced, however both demand and pricing have since fallen back.
Outlook
On July 21, 2007 the United Steelworkers Union that represents the majority of the Company's hourly employees went on strike. The strike impacts most of the Company's operations other than one sawmill, the remanufacturing, value added and custom cut operations, and certain small contract logging operations. The outlook for the second half of 2007 is dependent on the duration of the strike action by the United Steelworkers Union. While the Company will sell lumber from inventory on hand to the extent possible and will continue operating at the locations not affected by the strike for as long as logs are available, the majority of its operations will be inactive and cash flow will be impacted accordingly.
Beyond the effect of the strike, current expectations are that the Company's results for the second half of the year will be influenced by a number of factors compared to the first half of the year including: the weaker Japanese markets noted above; the high value of the Canadian dollar relative to the U.S. dollar and Japanese Yen; higher stumpage rates; and the impact of normal down-time during the summer (forest fire hazard) and winter (snowfall curtailments) periods. Offsetting these negative factors to some extent are the Company's growing ability to quickly respond to market conditions as well as the continuing improvement in productivity, cost reduction initiatives and the positive effects of the recent investments in the Cowichan Bay and Saltair sawmills.
The Company is continuing to work on selling its non-core assets. With an estimated value of between $150.0 million and $180.0 million including the assets sold in the second quarter, these assets include approximately 4,000 hectares of the higher and better use component of the Company's private lands on Vancouver Island, which are being actively marketed with a potential sales horizon for a portion of the lands in late 2007 or early 2008. In addition, the site of the former New Westminster sawmill is being cleared and readied for sale.
TELECONFERENCE CALL NOTIFICATION: Tuesday, August 14, 2007 at
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10:00 a.m. PST/1:00 p.m. EST
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On Tuesday, August 14, 2007, 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 1-866-250-4877 in Canada and the U.S. (toll free) and in Toronto or Internationally, 416-644-3432 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 28, 2007. To hear a complete replay, please call 1-877-289-8525 in Canada and the U.S. (toll free), Passcode 21243001 followed by the number sign or in Toronto and Internationally, 416-640-1917, Passcode 21243001 followed by the number sign. This call will also be webcast from Western's website at www.westernforest.com.
Western Forest Products
Western is an integrated Canadian forest products company and the largest coastal British Columbia woodland operator and lumber producer with an annual available harvest of approximately 7.5 million cubic metres of timber of which 7.3 million cubic metres is from Crown lands and 0.2 million cubic metres from private timberlands and lumber capacity in excess of 1.5 billion board feet from eight sawmills and four remanufacturing plants. Principal activities conducted by the Company and its subsidiaries include timber harvesting, reforestation, sawmilling logs into lumber and wood chips, and value-added remanufacturing. Substantially all of Western's operations, employees and corporate facilities are located in the coastal region of British Columbia while its products are sold in over 20 countries worldwide.
Forward Looking Statements and Information
This press release contains forward-looking statements and forward-looking information within the meaning of applicable securities law. Those statements and information include statements or information regarding the intent, belief or current expectations of Western. Such statements or information may be indicated by words such as "approximately", "achieving", "estimated", "expect", "anticipate", "plan", "intend", "believe", "will", "should", "may" and similar words and phrases. Readers are cautioned that any such forward-looking statements or information are not guarantees and may involve known and unknown risks and uncertainties, and that the actual results may differ from those expressed or implied in the forward-looking statements or information as a result of various factors including, changes in government regulation, and misjudgments in the course of preparing forward-looking statements or information. The information contained under the "Risk Factors" section of Western's Annual Information Form and under the "Risks and Uncertainties" section of Western's Management's Discussion and Analysis identifies important factors that could cause such differences. All written and oral forward-looking statements or information 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 or information as conditions change.
Western Forest Products Inc.
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2007 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", "Western", "us", "we", or "our"), on a consolidated basis, for our second quarter ended June 30, 2007 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 unaudited interim consolidated financial statements and related notes thereto for the quarter ended June 30, 2007, and our audited annual consolidated financial statements and management's discussion and analysis ("MD&A") for the year ended December 31, 2006 (the "2006 Annual Report"), all of which can be found on the System for Electronic Document Analysis and Retrieval (SEDAR), at http://www.sedar.com.
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 income (loss) plus amortization of property, plant and equipment and the write-down of property, plant and equipment and operating restructuring costs. We use EBITDA as a benchmark measurement of our own operating results, and as a benchmark relative to our 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 vary widely from company to company in a manner that we consider largely independent of the underlying cost efficiency of their operating facilities. Further, operating restructuring costs are not expected to occur on a regular basis and may make comparisons of our operating results between periods more difficult. We also 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.
This management's discussion and analysis contains statements which constitute forward-looking statements and forward-looking information within the meaning of applicable securities laws. Those statements and information appear in a number of places in this document and include statements and information 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 and information 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 and information 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 or information 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 or information. The information contained under the "Risk Factors" section in our Annual Information Form and under the "Risks and Uncertainties" section of our Management's Discussion and Analysis identifies important factors that could cause such differences. All written and oral forward-looking statements or information attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements.
Unless otherwise noted, the information in this discussion and analysis is updated to August 13, 2007. All financial references are in millions of Canadian dollars unless otherwise noted.
Summary of Selected Quarterly Results
Three Three Three Six Six
Months Months Months Months Months
(millions of Ended Ended Ended Ended Ended
dollars except June 30, March 31, June 30, June 30, June 30,
per share amounts) 2007 2007 2006 2007 2006
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Sales $ 301.1 $ 276.3 $ 220.0 $ 577.4 $ 338.2
Export tax and
lumber duties
expensed $ (5.0) $ (4.4) $ (5.6) $ (9.4) $ (9.6)
EBITDA $ 21.1 $ 23.3 $ 7.7 $ 44.4 $ 7.6
EBITDA margin 7.0% 8.4% 3.5% 7.7% 2.2%
Operating income
(loss) $ 12.9 $ 13.4 $ (8.0) $ 26.3 $ (14.0)
Interest expense $ (5.9) $ (6.8) $ (9.9) $ (12.7) $ (21.0)
Foreign exchange
gain on long-term
debt $ 6.3 $ 0.7 $ 9.7 $ 7.0 $ 8.8
Premium and
unamortized
discount on bond
redemption $ - $ - $ - $ - $ (27.9)
Net income (loss)
from continuing
operations $ 13.8 $ 8.2 $ (7.5) $ 22.0 $ (54.0)
Net income (loss)
from discontinued
operations $ 3.8 $ (1.0) $ (1.9) $ 2.8 $ (9.0)
Net income (loss) $ 17.6 $ 7.2 $ (9.4) $ 24.8 $ (63.0)
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Per share - basic
and diluted:
Net income (loss)
from continuing
operations $ 0.07 $ 0.04 $ (0.05) $ 0.11 $ (0.63)
Net income (loss) $ 0.09 $ 0.04 $ (0.06) $ 0.12 $ (0.74)
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Cash flow from
continuing
operations $ (11.1) $ 28.8 $ (30.9) $ 17.7 $ (41.4)
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Overview
The results of operations for the quarter ended June 30, 2007 include the legacy Cascadia operations which were acquired on May 1, 2006 and accordingly, are not directly comparable to the comparative quarter ended June 30, 2006. In addition, the results are also not directly comparable as the Company changed its accounting policy for the costing of log and lumber inventories effective January 1, 2007 on a retroactive basis without restatement of prior periods as the detailed information required to restate is not available.
The Company recorded net income from continuing operations of $13.8 million ($0.07 per share) in the second quarter of 2007 compared to $8.2 million ($0.04 per share) in the first quarter of 2007, and a loss of $7.5 million ($0.05 per share) in the second quarter of 2006. Net income from continuing operations in the second quarter of 2007 benefited from gains from the sale of several non-core assets totaling $4.2 million and a foreign exchange gain of $6.3 million on the translation of the Company's long-term U.S. dollar denominated debt. EBITDA of $21.1 million in the second quarter of 2007 compared to $23.3 million in the first quarter of 2007 and $7.7 million in the second quarter of 2006.
The following key factors impacted the Company's EBITDA compared to the first quarter of 2007:
Negative impact:
- Lower realized lumber prices - the strengthening of the Canadian
dollar against both the U.S. dollar and Japanese Yen during the
quarter and changes in product mix resulted in lower realized prices
and an increase in period end lumber lower-of-cost-and-market
inventory write-downs.
- Lower realized log prices - changes in product mix during the quarter
to lower value logs as the proportion of pulp log sales increased and
cedar shingle log sales decreased.
- Increased pulp log production - pulp log production increased to more
normal levels compared to the first quarter as logging resumed at
higher elevations. Pulp logs are written down to market value as they
are produced.
Positive impact:
- Increased lumber sales volume - lumber sold increased to 273 million
board feet in the second quarter of 2007, compared to 251 million
board feet in the first quarter of the year. The increase is mainly
due to increased product available for sale, as operations recovered
from log supply issues that affected total lumber production in the
first quarter.
- Reduced mill conversion costs - conversion costs decreased from the
first quarter of 2007 primarily as a result of the impact of the 10%
increase in lumber production as well as the effect of ongoing cost
reduction efforts.
- Higher by-product revenues - increased lumber production during the
quarter resulted in higher by-product volumes and revenues. By-
product pricing was marginally lower in the quarter as a result of
lower Canadian dollar NBSK pulp prices.
The primary reasons for the increase in EBITDA from the second quarter of 2006 are the increased margins achieved on the Company's lumber sales due to a change in mix to higher value products and stronger cedar prices, higher by-product and certain log sort prices, higher volumes sold and the realization of operating efficiencies from the combined operations.
The contract with the United Steelworkers Union, which represents the majority of the Company's hourly work-force, expired on June 15, 2007. Negotiations between the Union and Forest Industrial Relations Ltd., an industry association which represents the Company and 30 other coastal forestry companies, ended after several months of talks and the Union commenced strike action on July 21, 2007. The majority of the Company's operations are impacted by the strike. A number of small contracted timberlands operations remain operational, and depending on fibre availability, one sawmill, the Company's remanufacturing, value-added, and custom cut operations will continue producing lumber.
Continuing Operations
Three Three Three Six Six
Months Months Months Months Months
(millions of Ended Ended Ended Ended Ended
dollars except June 30, March 31, June 30, June 30, June 30,
where noted) 2007 2007 2006 2007 2006
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Lumber sales $ 210.0 $ 205.2 $ 158.1 $ 415.2 $ 245.3
Log sales 72.9 55.6 49.0 128.5 72.7
By-product sales 18.2 15.5 12.9 33.7 20.2
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$ 301.1 $ 276.3 $ 220.0 $ 577.4 $ 338.2
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Lumber production
- millions of
board feet 277 251 250 528 403
Lumber sales -
millions of board
feet 273 251 243 524 407
Log production -
thousands of cubic
metres 2,016 1,601 1,898 3,617 2,560
Log purchases -
thousands of cubic
metres 359 194 143 554 243
Log sales -
thousands of cubic
metres 943 650 605 1,593 867
Internal log
consumption -
thousands of cubic
metres 1,176 1,081 1,031 2,257 1,681
Average lumber
sales revenue per
thousand board
feet $ 769 $ 818 $ 648 $ 792 $ 602
Average log sales
revenue per cubic
metre $ 77 $ 86 $ 81 $ 83 $ 83
Lumber production and sales volumes both increased by approximately 10% in the second quarter of 2007 compared to the first quarter as a result of increased fibre availability as log harvesting returned to more normal seasonal levels.
The average net lumber price realized in the second quarter decreased to $769 per thousand board feet compared to $818 per thousand board feet in the first quarter. The impact of the increase in the value of the Canadian dollar compared to the U.S. dollar and Japanese Yen more than offset pricing gains for cedar and cypress lumber products. The average U.S. dollar exchange rate in the second quarter of 2007 was $1.0983 compared to $1.1725 in the first quarter. In addition, changes in the mix of lumber sold to lower value products impacted the overall price realized. Sales volumes of higher-value cedar and hemlock lumber products were both negatively impacted by a shortage of the required log types. The Company's helicopter logging production program, which is required to reach some of the higher elevation timber stands where these logs are typically harvested, was less than planned due to the lack of availability of heavy-lift helicopters. There is currently a world-wide shortage of this type of helicopter and although our helicopter logging had increased subsequent to the second quarter and prior to the strike we may be vulnerable to future availability issues.
The cedar market continued to be well-supported during the quarter with demand exceeding supply, resulting in average cedar lumber prices increasing from the first quarter. Demand and pricing also continued to be firm in Japanese markets for most of the second quarter, although this market has since weakened due to oversupply as some U.S. Douglas fir production shifted to Japan, and an easing in housing starts. The U.S. structural dimension market, which represents approximately 25% of the Company's lumber sales volumes, continues to be under pressure. Prices increased to some extent in the second quarter compared to the first quarter as supply was reduced, however both demand and pricing have since fallen back.
The Company continued to pay Export tax at the 15% rate on its lumber shipments into the U.S. as a result of the weak prices. The export tax rate varies according to the price of lumber based on the "Random Lengths Framing Lumber Composite Index" (Index) and ranges from zero percent when the Index is above U.S.$355 per thousand board feet to 15% when the Index is under U.S.$315 per thousand board feet. The U.S. government has referred a number of disputes with the Canadian government relating to the interpretation of the Softwood Lumber Agreement to binding arbitration as provided for by the agreement. Included in the disputes referred to arbitration is a U.S. interpretation that the agreement provides for the application of the "surge look-back mechanism" to the B.C. interior and coastal regions based on comparing the actual U.S. consumption for the period to the expected U.S. consumption used to forecast the surge limits. If the arbitrator finds in favour of the U.S. position, while there would be no retroactive effect on the coastal region to date as the coast has not shipped in excess of the limits, it could result in changes to the volume of lumber the Company is able to ship in the future and increased exposure to the possibility of higher export taxes through the surge mechanism.
Log production increased to 2,016,000 cubic metres in the second quarter of 2007, a 26% increase over first quarter production of 1,601,000 cubic metres as log harvesting moved into the higher elevations that were largely inaccessible due to winter conditions during the first quarter.
Log sales volumes increased to 943,000 cubic metres at an average selling price of $77 per cubic metre in the second quarter compared to 650,000 cubic metres at $86 per cubic metre in the first quarter of 2007. The increase in volume is primarily due to higher purchases and subsequent re-sale of small saw logs and pulp logs to various pulp and paper companies under long-term fibre commitments. In addition, the percentage of small saw logs and pulp logs being produced by our timberlands operations increased as a result of harvesting more mature growth stands. The decrease in the average sales price of logs reflects the change in the mix of logs sold, with a lower percentage of higher-value cedar shingle logs and a higher percentage of pulp logs, and the impact of the increased re-sale of small saw and pulp logs.
Discontinued Operations
There was income from discontinued operations during the second quarter of 2007 of $3.8 million compared to a loss of $1.0 million in the first quarter of 2007 and a loss of $1.9 million in the second quarter of 2006. The income results from the sale of the majority of the former Squamish pulp mill equipment and spare parts for $5.5 million resulting in a gain of $5.2 million. Partly offsetting the gain is an additional provision for site clean-up costs and the continuing cost of maintaining the site. The Company is developing plans to remove the pulp mill and associated infrastructure and remediate the site while continuing to work with parties interested in acquiring the property.
Other Corporate Items
Selling and administration expense decreased to $10.5 million in the second quarter compared to $10.8 million in the first quarter of 2007, and $10.3 million in the second quarter of 2006. The decrease from the first quarter is primarily due to reduced corporate spending as integration activities near completion.
Interest expense decreased to $5.9 million in the second quarter of 2007 compared to $6.8 million in the first quarter of 2007 and $9.9 million in the second quarter of 2006. The decrease is attributable to the reduction in the Company's long-term debt outstanding as it paid down U.S.$88.0 million of the U.S. dollar-denominated debt in November 2006 and a further U.S.$21.8 million in March of 2007. In addition, the interest rate on the same debt was reduced in March 2007 to LIBOR plus 3% from LIBOR plus 8.15%.
The $6.3 million gain in the quarter on translation of the United States dollar-denominated portion of the Company's long-term debt compared to a gain of $0.7 million in the first quarter of 2007 and is the result of the strengthening of the Canadian dollar at the quarter-end. This compares to a gain of $9.7 million in the second quarter of 2006, when the U.S. denominated debt outstanding was U.S.$109.8 million higher.
Changes in Financial Position and Liquidity
Three Three Three Six Six
Months Months Months Months Months
(millions of Ended Ended Ended Ended Ended
dollars except June 30, March 31, June 30, June 30, June 30,
where noted) 2007 2007 2006 2007 2006
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Cash flow from
continuing
operations $ (11.1) $ 28.8 $ (30.9) $ 17.7 $ (41.4)
Cash provided (used)
by investing
activities $ (1.0) $ 8.7 $ (227.4) $ 7.7 $ (194.3)
Cash provided (used)
by financing
activities $ (1.0) $ (31.5) $ 281.6 $ (32.5) $ 242.1
Additions to
property, plant
and equipment $ (3.9) $ (4.1) $ (6.3) $ (8.0) $ (7.7)
Additions to
capitalized roads $ (4.3) $ (3.1) $ (4.8) $ (7.4) $ (7.0)
Change in revolving
credit facility $ - $ (3.6) $ (8.6) $ (3.6) $ (80.0)
Total liquidity(1) $ 175.0 $ 158.5 $ 116.6 $ 175.0 $ 116.6
Financial ratios:
Current assets to
current liabilities 1.74 1.67 2.90 1.74 2.90
Net debt to
shareholders
equity 0.30 0.29 1.58 0.30 1.58
Net debt to market
capitalization 0.32 0.32 1.35 0.32 1.35
(1) Total liquidity comprises cash and cash equivalents and available
credit under the Company's revolving credit facility.
Cash flow from continuing operations in the second quarter of 2007 was negative $11.1 million compared to positive $28.8 million in the first quarter of 2007 and negative $30.9 million in the second quarter of 2006. Cash flow from continuing operations before the change in non-cash working capital items was $16.3 million in the second quarter of 2007 compared to $18.5 million in the first quarter of 2007, and negative $5.2 million in the second quarter of 2006, the decrease being attributable to the decreased EBITDA. Cash flow from continuing operations has been impacted by the increase in inventory during the quarter and first six months of 2007 which has consumed cash of $27.5 million and $25.2 million, respectively, as logging and log inventories have returned to more normal levels.
Additions to property, plant and equipment of $3.9 million in the second quarter of 2007 primarily relate to upgrades at the Company's Cowichan Bay, Duke Point, Nanaimo and Saltair sawmills. Spending on capitalized logging roads in the first six months of 2007 has been lower than planned primarily as a result of the slow start to full logging operations caused by the snow pack. Depending on the length of the labour disruption, some of the under-spending in the first six months may be made up in the balance of the year.
During the quarter, the Company sold a number of its non-core assets, including its former log merchandiser, for cash proceeds of $8.2 million. It also received a $1.2 million advance payment for sale of pulp mill equipment and spare parts, which amount is included in discontinued operations. A further $4.3 million will be received from the sale of the pulp mill equipment as it is removed from the site.
Financing activities in the second quarter of 2006 include the receipt of the proceeds of the Company's rights offering through the issuance of 178.8 million subscription receipts plus interest for a total of $294.9 million. The subscription receipts were converted into 94.2 million Common Shares and 84.6 million Non-Voting Shares of the Company. Investing activities for the same period includes $216.3 million that was paid, net of the $3.8 million cash acquired, for the acquisition of Cascadia Forest Products Ltd.
At June 30, 2007 the Company had cash of $32.6 million and availability under its secured revolving credit facility of $142.4 million.
Selected Quarterly Information
To assist shareholders and other readers in understanding our business, we have included as Appendix A to the MD&A a table of the financial results and operating data for the Company for the last eight quarters.
In a normal operating year, there is some seasonality to the Company's operations with higher lumber sales in the second and third quarters as construction activity, particularly in the U.S., has historically tended to be higher. Logging activity may also vary depending on weather conditions due to rain, snow and ice in the winter and the threat of forest fires in the summer.
Changes in Accounting Policies
Inventories
On January 1, 2007 the Company changed its accounting policy for the costing of log and lumber inventories to better reflect its new management operating philosophy. Under the new policy, costs of production for products produced jointly as a result of the same production process are allocated according to the value of those products. This compares to the former policy which allocated costs based on volumes produced. Given the variety of products produced by the Company from similar raw materials and processes, the new approach better recognizes the contribution to the Company's earnings of the underlying products produced.
Under the new policy, log production costs are allocated to logs produced based on their relative market values, except for pulp logs that will continue to be carried at market due to the significant difference between the market value of pulp logs compared to production costs. Previously, the Company carried all saw logs at the same actual unit production cost which was based on the total costs of production divided by the total volume of production. Under the new policy, lumber production costs will now also be allocated to production units based on their relative market values. Lumber was previously carried at an average cost of production which was determined by actual production costs divided by production volumes. For both logs and lumber, inventories are valued at the lower of cost determined under the new policy and net realizable value, which is consistent with the previous policy.
This new accounting policy was implemented effective January 1, 2007 on a retrospective basis without restatement of prior periods and results in inventory increasing by $11.9 million to $227.6 million from $215.7 million and the deficit decreasing to $100.1 million from $112.0 million as at December 31, 2006. Prior periods have not been restated as the detailed information required to implement the new policy on a retrospective basis is not available. The change in policy has increased inventory carrying amounts as higher value cedar and to a lesser extent cypress lumber and log inventories are now carried at higher amounts than they would have been under the previous policy. Conversely, hemlock lumber and log inventories are carried at relatively similar amounts compared to what they were carried at under the previous policy as they were generally already written down to market values.
Financial instruments
During the quarter the Company adopted the following new recommendations of the Canadian Institute of Chartered Accountants ("CICA"):
- Section 1530 - Comprehensive Income
- Section 3251 - Equity
- Section 3855 - Financial instruments - Recognition and Measurement
- Section 3861 - Financial instruments - Disclosure and Presentation;
and
- Section 3865 - Hedges
Section 3855 provides guidance on costs incurred upon issuance of financial liabilities. Transaction costs are now deducted from the financial liability and amortized using the effective interest method over the expected life of the related liability. Accordingly, $4.8 million of unamortized financing costs at December 31, 2006 have been reclassified against long-term debt, reducing other assets to $9.0 million from $13.8 million and reducing long-term debt to $205.7 million from $210.5 million. The remaining CICA handbook sections adopted have not had a material impact on the Company's consolidated financial statements.
Internal Control over Financial Reporting
In 2006, following the acquisitions of Cascadia and Englewood, the Company initiated projects to consolidate and standardize its business systems and processes including its log, lumber, payroll and general ledger accounting systems. This process was largely completed with respect to the log and payroll systems during 2006. The new general ledger accounting system was implemented on January 1, 2007 and replaces three general ledger systems previously used by the Company. In addition to the new general ledger system the Company implemented a new accounting policy with respect to the costing of its inventories and a new chart of accounts covering all of its operations. These system implementations have been accompanied by new processes and procedures. The process is ongoing with respect to the new lumber systems. The Company identified weaknesses in internal controls during the first quarter relating to the implementation of the new systems and related accounting processes and procedures. Management has implemented additional manual procedures to compensate for the weaknesses and corrective actions are now being implemented to provide reasonable assurance that the controls operate effectively in future periods. Other than these system and process changes, the CEO and CFO confirm that there were no changes in the controls which materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Risks and Uncertainties
Our business is subject to a number of risks and uncertainties, including those described in our 2006 Annual Report and Annual Information Form, all of which can be found on the System for Electronic Document Analysis and Retrieval (SEDAR), at http://www.sedar.com. Any of the risks and uncertainties described in the above-noted documents could have a material adverse affect on our operations and financial condition and cash flow and, accordingly, should be carefully considered in evaluating our business.
Proposed Regulatory and First Nations Land Claims Developments
On May 24, 2007 the Forest Minister for British Columbia stated in a press interview that policy changes to improve the competitiveness of the Coastal British Columbia forest industry would be announced. Amongst the potential policies stated were a faster shift to second growth logging from old growth logging including more intensive management of second growth stands, additional restrictions on exporting old growth logs from public lands, and possible changes to export policies affecting private land logs. The Company is not in a position to analyze the impact of the proposed policy changes on its operations until they are announced.
On May 31, 2007 the government of British Columbia announced that it had initialed a draft Strategic Land Use Agreement ("SLUA") with the Council of the Haida Nation dealing with land use and resource management issues in the Haida Gwaii or Queen Charlotte Islands. Amongst other things, the draft agreement recommends permanent protection for approximately 225,000 hectares of land on the Islands for natural, cultural, spiritual and recreational values and a timber harvest of at least 800,000 cubic metres annually. The SLUA is the result of ongoing negotiations between the Province and the Haida Nation. The provincial government and the Haida intend to hold public meetings and consultations before assembling final recommendations for ratification. As previously disclosed, the Company currently has an Allowable Annual Cut in the Queen Charlotte Islands of 510,000 cubic metres, having been temporarily reduced from 803,000 cubic metres by the provincial Chief Forester. The Company is not able to determine the nature or extent of the final recommendations, whether they will be ratified and the impact on the Company. (See - Risk Factors - First Nations Land Claims in Western's 2006 Annual Information Form for further information on the risk of First Nations Land Claims).
Outlook and Strategy
The outlook for the second half of 2007 is dependent on the duration of the strike action by the United Steelworkers Union. While the Company will sell lumber from inventory on hand to the extent possible and will continue operating at locations not affected by the strike for as long as logs are available, the majority of its operations will be inactive and cash flow will be impacted accordingly.
Markets for the Company's cedar products are expected to remain strong over the balance of the year. Shortages in the market due to lack of supply and the normal seasonal demand are the primary factors. The Company has seen a weakening in the Japanese market over the last two months due to an easing in housing starts and continuing high lumber inventory levels. Prior to the strike, the Company had taken action to reduce the production of lumber products typically destined for the Japanese market. The U.S. dimension lumber market is not expected to show any improvement over the rest of the year. The decision by the U.S. government to send the dispute over the interpretation of the Softwood Lumber Agreement relating to the retroactive application of the surge mechanism to arbitration would, if ruled in the U.S.'s favour, could result in changes to the volume of lumber the Company is able to ship in the future and increased exposure to the possibility of higher export taxes through the surge mechanism.
The rate of stumpage paid to the British Columbia government as compensation for harvesting on Crown land, which is adjusted quarterly, increased on July 1, 2007 in response to higher log prices during the second quarter. A revised Coast market-based pricing system was introduced on June 1, 2007 and will be effective for all new cutting permits. The new system is considered to be more statistically accurate, better reflecting market reaction and bidding behaviour for logs, and should provide a more accurate stumpage charge in times of changing market conditions.
Beyond the effect of the strike, current expectations are that the Company's results for the second half of the year will be influenced by a number of factors compared to the first half of the year including: the weaker Japanese markets noted above; the high value of the Canadian dollar relative to the U.S. dollar and Japanese Yen; the higher stumpage rates; and the impact of normal down-time during the summer (forest fire hazard) and winter (snowfall curtailments) periods. Offsetting these negative factors to some extent is the Company's growing ability to quickly respond to market conditions as well as the continuing improvements in productivity, cost reduction initiatives and the positive effects of the recent investments in the Cowichan Bay and Saltair sawmills.
The Company is continuing to work on selling its non-core assets. With an estimated value of between $150.0 million and $180.0 million including the assets sold in the second quarter, these assets include approximately 4,000 hectares of the higher and better use component of the Company's private lands on Vancouver Island, which are being actively marketed with a potential sales horizon for a portion of the lands in late 2007 or early 2008. In addition, the site of the former New Westminster sawmill is being cleared and readied for sale.
Outstanding Share Data
As of August 13, 2007, there are 119,842,359 Common Shares and 84,571,206 Non-Voting Shares issued and outstanding.
In addition, the Company has 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") outstanding. The Company has reserved up to 2,847,262 Common Shares for issuance upon the exercise of the Class C Warrants. It has also reserved 10,000,000 Common Shares for issuance upon the exercise of options granted under the Company's incentive stock option plan. As of August 13, 2007, 2,288,060 options have been granted under the Company's incentive stock option plan.
Other Matters
As a result of the rights offering of subscription receipts to all shareholders and their subsequent conversion to Common Shares and Non-Voting Shares, Tricap Management Limited ("Tricap") owns 49% of the Company's Common Shares and 100% of the Non-Voting Shares. By virtue of the Brookfield Asset Management Inc. ("BAM") voting arrangements with Tricap, BAM is related to the Company. In addition to the transactions identified elsewhere in this report, the Company has certain arrangements with entities related to BAM to acquire and sell logs, lease certain facilities, provide access to roads and other areas, and acquire other services including insurance, all in the normal course and at market rates or at cost. During the period from March 31, 2007 to June 30, 2007, the Company paid and charged entities related to BAM $8.5 million and received $3.7 million in connection with these arrangements.
On behalf of the Board of Directors
John MacIntyre Reynold Hert
Chairman President and Chief Executive Officer
Duncan, BC
August 13, 2007
Management's Discussion and Analysis - Appendix A
Summary of Selected Results for the Last Eight Quarters (Unaudited)
2007 2006
------------------------------------------------------
(millions of
dollars except
per share amounts
and where noted) 2nd 1st 4th 3rd 2nd 1st
------------------------------------------------------
------------------------------------------------------
Average Exchange
Rate - Cdn $
to purchase one
U.S. $ $1.0983 1.1725 1.1277 1.1178 1.1292 1.1462
Sales
Lumber $ 210.0 205.2 217.8 214.0 158.1 87.2
Logs 72.9 55.6 44.6 44.8 49.0 23.7
By-Products 18.2 15.5 16.7 20.7 12.9 7.3
------------------------------------------------------
$ 301.1 276.3 279.1 279.5 220.0 118.2
------------------------------------------------------
------------------------------------------------------
Lumber
Production -
millions of
board feet 277 251 271 326 250 153
Sales - millions
of board feet 273 251 278 291 243 164
Logging
Production -
m3 (000's) 2,016 1,601 1,585 1,617 1,898 662
Purchases -
m3 (000's) 359 194 242 169 143 100
Sales -
m3 (000's) 943 650 625 592 605 262
Internal
consumption -
m3 (000's) 1,176 1,081 1,138 1,350 1,031 650
Sales prices
Lumber - per
thousand
board feet $ 769 818 782 739 648 533
Logs - per
cubic metre $ 77 86 71 76 81 90
Net income (loss)
from continuing
operations $ 13.8 8.2 109.3 (11.4) (7.5) (46.5)
Discontinued pulp
operations
Sales $ - - - - (0.1) 20
Income (loss) $ 3.8 (1.0) (1.0) (0.8) (1.9) (7.1)
Pulp production -
tonnes (000's) - - - - - 18
Pulp sales -
tonnes (000's) - - - - - 34
Pulp sales price
per tonne $ - - - - - 586
Net income (loss) $ 17.6 7.2 108.3 (12.2) (9.4) (53.6)
Net income (loss)
per share from
continuing
operations $ 0.07 0.04 0.53 (0.06) (0.05) (1.81)
Net income (loss)
per share - basic
and diluted $ 0.09 0.04 0.53 (0.06) (0.05) (2.09)
Reconciliation of
EBITDA to net
income (loss)
from continuing
operations:
EBITDA before
lumber duty refund $ 21.1 23.3 10.1 10.2 7.7 (0.1)
Lumber duty refund - - 110.3 - - -
------------------------------------------------------
EBITDA 21.1 23.3 120.4 10.2 7.7 (0.1)
Amortization of
property, plant
& equipment (10.8) (9.9) (9.7) (10.3) (10.8) (5.9)
Restructuring &
other items 2.6 - (2.4) (0.7) (4.9) -
Interest expense (5.9) (6.8) (9.2) (10.9) (9.9) (11.1)
F/X on long-term
debt 6.3 0.7 (6.0) (0.3) 9.7 (0.9)
Premium &
unamortized
discount - - - - - (27.9)
Interest and other
income (expense) 0.5 1.2 16.7 0.9 0.5 (0.4)
Income taxes - (0.3) (0.5) (0.3) 0.2 (0.2)
------------------------------------------------------
Net income (loss)
from continuing
operations $ 13.8 8.2 109.3 (11.4) (7.5) (46.5)
------------------------------------------------------
------------------------------------------------------
2005
------------------
(millions of
dollars except
per share amounts
and where noted) 4th 3rd
------------------
------------------
Average Exchange
Rate - Cdn $
to purchase one
U.S. $ 1.1703 1.2122
Sales
Lumber 91.3 88.2
Logs 25.5 22.2
By-Products 3.6 5.9
------------------
120.4 116.3
------------------
------------------
Lumber
Production -
millions of
board feet 127 150
Sales - millions
of board feet 166 165
Logging
Production -
m3 (000's) 822 465
Purchases -
m3 (000's) 87 147
Sales -
m3 (000's) 212 172
Internal
consumption -
m3 (000's) 590 719
Sales prices
Lumber - per
thousand
board feet 549 535
Logs - per
cubic metre 120 129
Net income (loss)
from continuing
operations (10.5) (8.2)
Discontinued pulp
operations
Sales 40.6 40.4
Income (loss) (74.1) (4.3)
Pulp production -
tonnes (000's) 71 69
Pulp sales -
tonnes (000's) 69 71
Pulp sales price
per tonne 582 573
Net income (loss) (84.6) (12.5)
Net income (loss)
per share from
continuing
operations (0.41) (0.32)
Net income (loss)
per share - basic
and diluted (3.30) (0.49)
Reconciliation of
EBITDA to net
income (loss)
from continuing
operations:
EBITDA before
lumber duty refund (5.3) (11.5)
Lumber duty refund - -
------------------
EBITDA (5.3) (11.5)
Amortization of
property, plant
& equipment (5.9) (4.5)
Restructuring &
other items 0.6 5.9
Interest expense (11.5) (11.2)
F/X on long-term
debt (0.1) 13.3
Premium &
unamortized
discount - -
Interest and other
income (expense) 1.1 -
Income taxes 10.6 (0.2)
------------------
Net income (loss)
from continuing
operations (10.5) (8.2)
------------------
------------------
Consolidated Balance Sheets (Unaudited)
(Expressed in millions of Canadian dollars)
-------------------------------------------------------------------------
June 30, December 31,
2007 2006
--------------------------
(Restated-
note 2)
Assets
Current assets:
Cash and cash equivalents $ 32.6 $ 41.6
Accounts receivable 98.9 102.4
Inventory 252.8 227.6
Prepaid expenses and other assets 10.7 12.4
--------------------------
395.0 384.0
Property, plant and equipment 489.0 505.4
Other assets 8.4 9.0
--------------------------
$ 892.4 $ 898.4
--------------------------
--------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Revolving credit facility (note 3) $ - $ 3.6
Accounts payable and accrued liabilities 122.1 110.8
Current portion of long-term debt (note 4) 99.9 -
Discontinued operations (note 9) 5.3 6.4
--------------------------
227.3 120.8
Long-term debt (note 4) 74.3 205.7
Other liabilities 37.5 42.6
Deferred revenue 77.4 78.4
--------------------------
416.5 447.5
Shareholders' equity
Common shares 410.6 410.6
Non-voting shares 139.6 139.6
Contributed surplus 1.0 0.8
Deficit (75.3) (100.1)
--------------------------
475.9 450.9
--------------------------
$ 892.4 $ 898.4
--------------------------
--------------------------
Commitments and contingencies (note 5)
Subsequent events (notes 5 (c))
See accompanying notes to consolidated financial statements
Approved on behalf of the Board:
"Reynold Hert" Director
"John MacIntyre" Director
Consolidated Statements of Operations, Deficit and Comprehensive
Income (Unaudited)
(Expressed in millions of Canadian dollars except for share and
per share amounts)
-------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
2007 2006 2007 2006
-----------------------------------------------
Sales $ 301.1 $ 220.0 $ 577.4 $ 338.2
Cost and expenses
Cost of goods sold 245.4 179.5 465.3 274.8
Export tax 5.0 - 9.4 -
Anti-dumping and
countervailing duties - 5.6 - 9.6
Freight expenses 19.1 16.9 37.0 29.6
Selling and administration 10.5 10.3 21.3 16.6
Amortization of property,
plant and equipment 10.8 10.8 20.7 16.7
-----------------------------------------------
290.8 223.1 553.7 347.3
-----------------------------------------------
Operating income (loss)
before operating
restructuring income
(costs) 10.3 (3.1) 23.7 (9.1)
Operating restructuring
income (costs) (note 8) 2.6 (4.9) 2.6 (4.9)
-----------------------------------------------
Operating income (loss) 12.9 (8.0) 26.3 (14.0)
Interest expense (5.9) (9.9) (12.7) (21.0)
Foreign exchange gain
on long-term debt 6.3 9.7 7.0 8.8
Premium and unamortized
discount on bond
redemption - - - (27.9)
Interest and other income 0.5 0.5 1.7 0.1
-----------------------------------------------
Income (loss) before
income taxes 13.8 (7.7) 22.3 (54.0)
Income tax recovery
(expense) - 0.2 (0.3) -
-----------------------------------------------
Net income (loss) from
continuing operations 13.8 (7.5) 22.0 (54.0)
Net income (loss) from
discontinued operations
(note 9) 3.8 (1.9) 2.8 (9.0)
-----------------------------------------------
Net income (loss) and
comprehensive income
(loss) 17.6 (9.4) 24.8 (63.0)
Deficit, beginning
of period (92.9) (198.7) (112.0) (145.1)
Change in accounting
policy for costing of
inventories (note 2) - - 11.9 -
-----------------------------------------------
Deficit, beginning of
period as restated (92.9) (198.7) (100.1) (145.1)
-----------------------------------------------
Deficit, end of period $ (75.3) $ (208.1) $ (75.3) $ (208.1)
-----------------------------------------------
-----------------------------------------------
Net income (loss) per
share - basic and
diluted:
From continuing
operations $ 0.07 $ (0.05) $ 0.11 $ (0.63)
From discontinued
operations 0.02 (0.01) 0.01 (0.11)
-----------------------------------------------
Net income (loss) $ 0.09 $ (0.06) $ 0.12 $ (0.74)
-----------------------------------------------
-----------------------------------------------
Weighted average number
of shares outstanding
(thousands of shares) 204,414 144,821 204,414 85,229
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
2007 2006 2007 2006
-----------------------------------------------
Cash provided by
(used in):
Operating activities:
Net income (loss) from
continuing operations $ 13.8 $ (7.5) $ 22.0 $ (54.0)
Items not involving cash:
Amortization of property,
plant and equipment 10.8 10.8 20.7 16.7
Foreign exchange (gain)
loss on long-term debt (6.3) (9.7) (7.0) (8.8)
Premium and unamortized
discount on bond
redemption - - - 27.9
Other (2.0) 1.2 (0.9) 0.8
-----------------------------------------------
16.3 (5.2) 34.8 (17.4)
-----------------------------------------------
Changes in non-cash
working capital items:
Accounts receivable (4.4) 20.8 (5.0) 26.0
Inventory (27.5) (32.8) (25.2) (13.5)
Prepaid expenses (0.5) (1.2) 1.0 (1.5)
Accounts payable and
accrued liabilities 5.0 (12.5) 12.1 (35.0)
-----------------------------------------------
(27.4) (25.7) (17.1) (24.0)
-----------------------------------------------
Cash provided (used) by
continuing operations (11.1) (30.9) 17.7 (41.4)
-----------------------------------------------
Investing activities:
Additions to property,
plant and equipment (3.9) (6.3) (8.0) (7.7)
Additions to capitalized
roads (4.3) (4.8) (7.4) (7.0)
Proceeds on disposals
of property, plant and
equipment 8.2 0.2 10.0 0.2
Restricted cash - - 0.6 8.9
Acquisition of Cascadia
Forest Products Ltd.,
net of cash acquired - (216.3) 12.5 (216.3)
Acquisition of Englewood
Logging Division - (0.4) - (3.4)
Price premium prepayment
on long-term fibre
agreement - - - 35.0
Other (1.0) 0.2 - (4.0)
-----------------------------------------------
(1.0) (227.4) 7.7 (194.3)
-----------------------------------------------
Financing activities:
Proceeds from (repayment
of) revolving credit
facility - (8.6) (3.6) (80.0)
Redemption of 15%
Secured Bonds - - - (275.9)
Proceeds from term loans - - - 307.8
Repayment of term loans - (4.7) (25.5) (4.7)
Proceeds from share
issuance - 294.9 - 294.9
Other (1.0) - (3.4) -
-----------------------------------------------
(1.0) 281.6 (32.5) 242.1
-----------------------------------------------
Cash provided by (used in)
discontinued operations
(note 9) 0.6 (2.8) (1.9) (3.7)
-----------------------------------------------
Increase (decrease) in
cash and cash equivalents (12.5) 20.5 (9.0) 2.7
Cash and cash equivalents,
beginning of period 45.1 11.8 41.6 29.6
-----------------------------------------------
Cash and cash equivalents,
end of period $ 32.6 $ 32.3 $ 32.6 $ 32.3
-----------------------------------------------
-----------------------------------------------
Supplementary information:
Non-cash item -
Acquisition of Englewood
Logging Division $ - $ - $ - $ 45.0
See accompanying notes to the consolidated financial statements
Notes to Unaudited Interim Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars)
The business of Western Forest Products Inc. (the Company or Western)
is timber harvesting and lumber manufacturing for worldwide markets.
Western's operations are located in the coastal region of British
Columbia.
1. 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, 2006 and for the year then ended except
that the Company has adopted new accounting policies with respect to
financial instruments and inventory costing as described below.
2. Adoption of New Accounting Policies
(a) Financial Instruments
Effective January 1, 2007 the Company adopted the new recommendations
of the Canadian Institute of Chartered Accountants ("CICA") Handbook
Sections 1530, Comprehensive Income, Section 3251, Equity, Section
3855, Financial Instruments - Recognition and Measurement, Section
3861 Financial Instruments - Disclosure and Presentation, and Section
3865, Hedges. Other than the reclassification of transaction costs
discussed below, the adoption of these new recommendations has not
impacted the Company's financial statements.
Section 1530, Comprehensive Income, requires that changes in equity
from transactions and other events and circumstances from non-owner
sources be recorded and reported in the statement of comprehensive
income. Comprehensive income is comprised of the traditional concept
of 'net income' as well as the income effect of derivative
instruments ('other comprehensive income'). Section 3251, Equity,
requires that the accumulation of other comprehensive income be
presented as a component of the equity section. Section 3855,
Financial Instruments - Recognition and Measurement and Section 3861,
Financial Instruments - Disclosure and Presentation requires that all
financial instruments be recognized on the balance sheet using the
appropriate measurement model and disclosed in the notes to the
financial statements. Section 3865, Hedges, requires that all
financial assets and liabilities be presented in accordance with the
recommendations of the financial instruments recommendations except
where the derivative instrument has been designated as a hedge by
management.
Section 3855 provides guidance on costs incurred upon issuance of
financial liabilities. Transaction costs are now deducted from the
financial liability and amortized using the effective interest method
over the expected life of the related liability. Accordingly,
$4.8 million of unamortized financing costs at December 31, 2006 have
been reclassified against long-term debt reducing other assets to
$9.0 million from $13.8 million and reducing long-term debt to $205.7
million from $210.5 million.
(b) Inventory Costing
On January 1, 2007 the Company changed its accounting policy for the
costing of log and lumber inventories to better reflect its new
management operating philosophy. Under the new policy, costs of
production for products produced jointly as a result of the same
production process are allocated according to the value of those
products. This compares to the former policy which allocated costs
based on volumes produced.
Under the new policy, log production costs are allocated to logs
produced based on their relative market values, except for pulp logs
that will continue to be carried at market due to the significant
difference between the market value of pulp logs compared to
production costs. Previously, the Company carried all saw logs at the
same actual unit production cost which was based on the total costs
of production divided by the total volume of production. Under the
new policy, lumber production costs will now also be allocated to
production units based on their relative market values. Lumber was
previously carried at an average cost of production, which was
determined by actual production costs divided by production volumes.
For both logs and lumber, inventories are valued at the lower of cost
determined under the new policy and net realizable value, which is
consistent with the previous policy.
This new accounting policy was implemented effective January 1, 2007
on a retroactive basis without restatement of prior periods and
results in inventory increasing by $11.9 million to $227.6 million
from $215.7 million and the deficit decreasing to $100.1 million from
$112.0 million as at December 31, 2006. Prior periods have not been
restated as the detailed information required to implement the new
policy on a retroactive basis is not available.
3. Revolving Credit Facility
The Company has a three-year revolving credit facility, secured by
receivables and inventory and bearing interest at prime plus 0.5%
that expires on July 12, 2009. The size of this asset-backed facility
is determined by the level of outstanding receivables and inventory,
but cannot exceed $150.0 million with provision for further
extensions up to $200.0 million, subject to lender approval. At June
30, 2007 of the $144.5 million of the credit facility available to
the Company, $2.1 million was used to support standby letters of
credit, leaving a balance of $142.4 million available for future use.
4. Long-Term Debt
---------------------------------------------------------------------
As at As at
June 30, December 31,
(millions of dollars) 2007 2006
---------------------------------------------------------------------
Current portion of long-term debt:
Canadian facility $ 101.8 $ -
Associated transaction costs (1.9) -
-----------------------
$ 99.9 $ -
-----------------------
-----------------------
Long-term portion of long-term debt:
U.S. facility (U.S. $73.5 million; 2006
U.S. $95.3 million) $ 78.5 $ 111.0
Canadian facility - 99.5
-----------------------
78.5 210.5
Associated transaction costs (4.2) (4.8)
-----------------------
$ 74.3 $ 205.7
-----------------------
-----------------------
On March 7, 2007, the Company renegotiated its U.S. dollar
denominated term-debt with the Brookfield Bridge Lending Fund
("BBLF"), paying down U.S. $21.6 million to reduce the principal
outstanding from U.S. $95.3 million to U.S. $73.7 million and
reducing the interest rate from floating one-month LIBOR plus 8.15%
to floating one-month LIBOR plus 3%. On March 29, 2007 a further U.S.
$0.2 million was paid against the outstanding principal.
The Company also exercised its option to extend the maturity date of
the Canadian term-debt with BBLF to March 10, 2008 on payment of an
extension fee of $2.0 million. The Company began paying cash interest
on $45.0 million of the Canadian term-debt effective March 1, 2007
and on the total Canadian term-debt effective April 1, 2007.
Previously interest was being deferred and added to the principal
outstanding as permitted by the agreement.
BBLF is related to the Company by virtue of a common relationship
with Brookfield Asset Management ("BAM").
5. Commitments and Contingencies
(a) 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.
The Company has a number of claims filed against it from logging
contractors with respect to various operating issues. Certain of the
claims are pending arbitration, mediation or appeal, while others
have not yet reached this formal stage. Where the Company is not able
to determine the outcome of these disputes no amounts have been
accrued in these financial statements.
(b) Indemnity Agreement
The Company has an obligation to indemnify an entity related to BAM
if that entity incurs liability under a guarantee (the Guarantee)
provided by it to a third party relating to the purchase by the
Company of certain assets from that third party. The Guarantee is
limited to $100 million. As security for its performance under this
indemnity the Company has issued a debenture in favour of the related
entity in the amount of $100 million which results in a charge over
all of the Company's real property and all of the Company's present
and after-acquired personal property. In the absence of any claims,
the Guarantee terminates on May 30, 2011 and if there is no liability
accruing to the guarantor there under at that time, the Company may
require that the debenture be discharged.
(c) Long-Term Fibre Supply Agreements
The Company has a number of long-term commitments to supply fibre to
third parties. Certain of these agreements have minimum periodic
volume requirements and may, in the case of a failure to supply the
minimum volume, require the Company to source the deficiency from
third parties at additional cost to the Company or pay the party to
the fibre supply agreement a penalty calculated based on the
provisions contained in the agreements.
(d) Allowable Annual Cut Reductions
Allowable annual cuts continue to be revised pursuant to earlier
announced provincial orders-in-council that temporarily put various
coastal areas off-limits to forest development through Part 13 of the
Forest Act. The AAC reductions were made to ensure that harvest rates
remain at a sustainable level until land use planning is completed in
the areas affected by the Part 13 orders.
The Company has considered the Part 13 orders and the temporary AAC
reductions and has factored them into the Company's short-term
harvesting and mill production plans. If the Part 13 orders extend
for more than four years from the date of issue or the Province's
land use planning process results in these reductions becoming
permanent, then the Company will have the ability to seek
compensation from the Province for the reduced cutting rights
thereafter.
(e) The Forest Revitalization Plan
In January 2005, pursuant to terms of a settlement framework
agreement negotiated in late 2004, the Company received $16.5 million
in compensation for the loss of 685,216 cubic meters of AAC and 827
hectares of timber licenses. Under this agreement, the Company also
received an advance payment of $5.0 million towards compensation for
improvements the Company and its predecessor made to Crown land in
the take-back areas. Negotiations are continuing to finalize
compensation payments for improvements.
6. Pension Expense
The Company has defined benefit and defined contribution pension
plans that cover substantially all salaried and certain hourly
employees. The Company also contributes to hourly paid employee union
pension plans and has health care plans covering certain hourly and
retired salaried employees. In the three months ended June 30, 2007
the Company recorded pension expense with respect to continuing
operations of $6.2 million (2006 - $ 3.8 million).
7. Segmented Information
The Company is an integrated Canadian forest products company
operating in one industry segment comprising the Company's timber
harvesting, reforestation, sawmilling, value-added lumber
remanufacturing and lumber marketing operations. Until January 26,
2006 the Company also operated in the pulp segment that comprised the
Company's NBSK pulp manufacturing and sales operations (note 9 -
discontinued operations).
8. Operating Restructuring Income (Costs)
Operating restructuring income (costs) for 2007 comprises the gain on
the sale of the Company's log merchandiser facility offset by
timberlands restructuring costs. For 2006 it comprises severance and
other costs associated with the closure of the Company's log
merchandiser facility, severance costs and the restructuring of
certain timberlands operations.
9. Discontinued Operations
On December 15, 2005 the Company announced the closure of its
Squamish pulp mill and its exit from the pulp business. On
January 26, 2006 production at the pulp mill ceased and on March 9,
2006 the majority of the workforce completed their employment with
the Company. The Company continues to incur ongoing costs for
supervision, security, property taxes and other costs. These costs
will be expensed as incurred.
The following table provides additional information with respect to
the discontinued operations:
Three months ended Six months ended
June 30 June 30
---------------------------------------------------------------------
(millions of dollars) 2007 2006 2007 2006
---------------------------------------------------------------------
Sales $ - $ - $ - $ 19.9
-------------------------------------------------
-------------------------------------------------
Net income (loss)
from discontinued
operations before
income taxes 3.8 (1.9) 2.8 (9.0)
-------------------------------------------------
-------------------------------------------------
Net income (loss)
from discontinued
operations $ 3.8 $ (1.9) $ 2.8 $ (9.0)
-------------------------------------------------
-------------------------------------------------
Cash provided (used)
by:
Operating
activities $ (0.6) $ (2.8) $ (3.1) $ (3.7)
Investing
activities 1.2 - 1.2 -
-------------------------------------------------
-------------------------------------------------
Cash provided (used)
by discontinued
operations $ 0.6 $ (2.8) $ (1.9) $ (3.7)
-------------------------------------------------
-------------------------------------------------
During the quarter, the Company negotiated the sale of the majority
of the pulp mill equipment and certain spare parts for proceeds of
$5.5 million resulting in a gain of $5.2 million. Included in the net
loss from discontinued operations for the six months ended June 30,
2006 is $4.5 million with respect to the cost to terminate certain
long-term contracts.
Head Office
435 Trunk Road Financial Statements on the Internet
Duncan, British Columbia www.westernforest.com
Canada V9L 2P9 www.sedar.com
Tel: (250) 748-3711
Fax: (250) 748-6045
E-mail: info@westernforest.com