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Western Reports Second Quarter 2008, Results Reflect Continued Depressed Markets DUNCAN, BRITISH COLUMBIA--(MARKET WIRE)--Jul 30, 2008 -- Western Forest Products Inc. (Toronto:WEF.TO - News) ("Western" or "the
Company") today announced results for the second quarter
of 2008. The Company reported a net loss for the quarter
of $19.3 million ($0.10 per share). The Second Interim Report for 2008 is available on SEDAR and on the Company's website at www.westernforest.com. TELECONFERENCE CALL: Friday, August 1, 2008 at 10:00 a.m. PST/1:00 p.m. EST On Friday, August 1, 2008, Western Forest Products Inc. will host a teleconference call at 10:00 a.m. PST (1:00 p.m. EST). To participate in the teleconference please dial 1-800-731-6941 in Canada and the U.S. (toll free) and in Toronto or Internationally, 416-644-3418 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 15, 2008. To hear a complete replay, please call 1-877-289-8525 in Canada and the U.S. (toll free), Passcode 21278792# or in Toronto and Internationally, 416-640-1917, Passcode 21278792#. 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 approximately 7.3 million cubic metres is from Crown lands and lumber capacity in excess of 1.5 billion board feet from eight sawmills and four remanufacturing plants. Principal activities conducted by the Company 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 30 countries worldwide. Western Forest Products Inc. 2008 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. ("Company", "Western", "us", "we", or "our"), on a consolidated basis, for the second interim period ended June 30, 2008 to help security holders and other readers understand our Company and the key factors underlying our financial results. This discussion and analysis should be read in conjunction with the audited annual consolidated financial statements and management's discussion and analysis ("MD&A") for the year ended December 31, 2007 (the "2007 Annual Report"), all of which can be found on the System for Electronic Document Analysis and Retrieval (SEDAR), at http://www.sedar.com. The Company has 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(1). 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. Western uses 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 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 Western 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 current intent, belief or expectations primarily with respect to market and general economic conditions, future costs, expenditures, available harvest levels and our future operating performance, objectives and strategies. Such statements and information may be indicated by words such as "estimate", "expect", "anticipate", "plan", "intend", "believe", "should", "may" and similar words and phrases. Readers are cautioned that it would be unreasonable to rely on any such forward-looking statements and information as creating any legal rights, and that the statements and information are not guarantees and may involve known and unknown risks and uncertainties, and that actual results and objectives and strategies may differ or change from those expressed or implied in the forward-looking statements or information as a result of various factors. Such risks and uncertainties include, among others: general economic conditions, competition and selling prices, changes in foreign currency exchange rates, labour disruptions, natural disasters, relations with First Nations groups, changes in laws, regulations or public policy, misjudgments in the course of preparing forward-looking statements or information, changes in opportunities and other factors referenced under the "Risk Factors" section in our Annual Information Form dated March 4, 2008 and under the "Risks and Uncertainties" section of our MD&A in our 2007 Annual Report. 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. Except as required by law, Western does not expect to update forward-looking statements or information as conditions change. Unless otherwise noted, the information in this discussion and analysis is updated to July 30, 2008. All financial references are in millions of Canadian dollars unless otherwise noted. (1) Earnings Before Interest, Tax, Depreciation and Amortization
Summary of Selected Quarterly Results
Three months ended Six months ended
------------------ --------------------
(millions of dollars June 30, June 30, June 30, June 30,
except where noted) 2008 2007 2008 2007
------------------ --------------------
Sales $ 237.8 $ 301.1 $ 441.5 $ 577.4
EBITDA (13.8) 21.1 (23.7) 44.4
EBITDA as % of sales (5.8)% 7.0% (5.4)% 7.7%
Operating income (loss) (22.7) 10.3 (40.4) 23.7
Net income (loss) from
continuing operations (18.0) 13.8 (34.2) 22.0
Net income (loss) and
comprehensive income (loss) (19.3) 17.6 (36.3) 24.8
------------------ --------------------
Basic and diluted net income
(loss) per share (dollars) $ (0.10) $ 0.08 $ (0.18) $ 0.12
------------------ --------------------Overview Second quarter, 2008 Through the second quarter, Western continued to experience the downturn in the forest products industry. The continuing decline in housing starts in the United States compounded by a continuing weak US dollar has reduced not only demand but also margins on sales particularly in one of the Company's major markets, the United States. Second quarter sales were 21.0% lower than in the comparable quarter in the prior year. The net loss of $19.3 million represented a negative swing in net income of $36.9 million when compared to net income of $17.6 million in the same quarter of 2007. The $36.9 million drop in second quarter net income was driven by a reduction in gross profit (defined as sales less cost of goods sold). Gross profit in the second quarter amounted to $10.6 million, a reduction of $35.1 million from the comparable period last year. Costs and expenses, comprising export tax, freight, and selling and administration, together amounted to $33.3 million, which was $2.1 million lower than in the second quarter of 2007. Other factors, both positive and negative, contributed the remaining amount of the swing in net income compared to the same quarter of 2007. Year to date, June 30, 2008 The Company incurred a net loss in the first half-year of $36.3 million on sales of $441.5 million. This represents a decline in net income of $61.1 million from the first half of 2007 on sales that were $135.9 million, or 23.5%, lower. The downturn in net income was driven by lower gross profits of $72.9 million. Partly offsetting the lower gross profits were net reductions in export tax, freight and selling and administration costs and expenses to the extent of $8.8 million and an accumulation of other factors discussed later in this interim report. The lower gross profits, net savings in costs and expenses, and other influences in the six-month period occurred under similar conditions as described in this MD&A pertaining to the second quarter of 2008. Operating Results
Sales
Three months ended Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
(millions of dollars) 2008 2007 2008 2007
------------------- -------------------
Lumber $ 180.1 $ 210.0 $ 333.0 $ 415.2
Logs 43.4 72.9 77.9 128.5
By-products 14.3 18.2 30.6 33.7
------------------- -------------------
Total sales $ 237.8 $ 301.1 $ 441.5 $ 577.4
------------------- -------------------Second quarter, 2008 Lumber sales in the second quarter were 14.2% lower than in the second quarter of 2007. Lumber volume sold was 20.9% lower compared to the second quarter of 2007 while average prices in Canadian dollar terms increased by 8.5%. This increase in Canadian dollar average prices would have been greater, except for the impact of an 8.7% further weakening of the US dollar between the respective two quarters. Volume reductions reflected customer demand, particularly in the distressed U.S. dimension lumber market. Increases in average pricing include the impact of a shift in product mix, away from lower priced U.S. dimension lumber products in favor of other higher-priced products in all markets. Price increases were also secured on certain higher-end lumber products. While orders for cedar lumber held firm during the second quarter, demand in the third quarter has weakened. Sales of logs in the second quarter decreased by 40.5% compared to the comparable quarter of 2007. This included 34.0% lower volume sold to various pulp and paper companies, often under long-term fibre commitments. Average prices of logs sold retreated 9.1% as market demand for logs decreased with depressed lumber markets. By-product sales were impacted by Western's sawmill curtailments and consequently were 21.4% lower when compared to the same period in 2007. Year to date, June 30, 2008 Comparing year-to-date performance in 2008 to the equivalent period in 2007, sales of lumber, logs and by-products were 19.8%, 39.4% and 9.2% lower, respectively. The significant influences on sales performance in the first six months were similar to those applicable to the second quarter of 2008 as described in this interim report. Margins and Net Income (Loss) Second quarter, 2008 The margin of gross profit to sales reduced from 15.2% in the second quarter of 2007 to 4.5% in the second quarter of 2008, reflecting an increase in cost of goods sold relative to sales of 10.7%. This was driven by significant increases in stumpage and fuel rates impacting log harvesting and also by fixed costs incurred by harvesting and sawmilling operations after the curtailments undertaken in the second quarter of 2008. Increased stumpage primarily reflects the average market values of cedar logs, which have been driven higher by market participants seeking stronger sales associated with cedar lumber. The Company curtailed various harvesting and manufacturing operations in the second quarter in order to better match production levels with customer demands and avoid a buildup of inventories. The $2.1 million reduction in costs and expenses other than cost of goods sold compared to the second quarter of 2007 included $1.4 million lower export taxes, consistent with the reduced levels of lumber shipments to the United States. Reductions of $2.8 million in selling and administration expenses included lower levels of consulting and other activities. Partly offsetting the reductions were increases in freight costs of $2.1 million. This was driven by the significant acceleration of fuel rates and surcharges on shipments to customers coupled with decreased supply of break bulk shipping capacity, which shifted delivery of lumber products toward more expensive containerization services. The net accumulation of four factors described as follows contributed $3.4 million to net income, a level that was $3.9 million lower when compared to the contribution of these factors in the second quarter of the prior year. Net interest expense was $1.8 million lower than in the second quarter of 2007 due to lower average interest rates experienced in 2008. Foreign exchange gains were $4.9 million less when compared to the second quarter of 2007, which included gains on US dollar denominated debt outstanding in 2007 but since retired in the first quarter of 2008. Various asset dispositions as well as the finalization of an outstanding claim for government compensation associated with a timber tenure take-back netted additional other income of $4.3 million compared to the second quarter of 2007. Finally, in the second quarter of 2007, discontinued operations included income from the sale of equipment amounting to just over $5.1 million, which did not recur in 2008. Year to date, June 30, 2008 Gross profits fell to $19.4 million in the first half of 2008 from $92.3 million in the first half of the equivalent 2007 period, representing margins of 4.4% and 16.0%, respectively, or a decline of 11.6%. The drivers of this change were similar to those described regarding the second quarter of 2008. Costs and expenses other than cost of goods sold reached $59.8 million in the six months, $8.8 million lower than in the comparable period in 2007. The reductions comprised $4.8 million in selling and administration, $2.8 million in export tax and $1.2 million in freight. The first two reductions occurred in similar circumstances as described regarding the second quarter of 2008. The freight savings of $1.2 million are due to the reductions in volume shipped, substantially offset by rate increases for fuel and related surcharges as well as the shift to more expensive containerization. In addition, certain freight rate increases took effect only in the second quarter. The net of the following factors contributed $4.1 million to net income in the six months, $3.0 million more than the same factors contributed to net income in the same period of 2007. Interest expense was slightly higher in the 2008 period, as financing costs written off in the first quarter of 2008 upon refinancing more than offset lower expenses in the second quarter of 2008 due to lower interest rates. Foreign exchange gains were $5.4 million lower in the 2008 period, due mainly to gains recorded in the 2007 period relating to US dollar denominated debt outstanding in 2007 but repaid in the first quarter of 2008. A greater value of asset sales and gains thereon were realized in 2008 than in 2007. Income taxes were slightly lower in the first six months of 2008. Discontinued operations incurred a loss in 2008, representing an adverse change from the 2007 period, due to the inclusion in 2007 of gains on disposal of plant and equipment and an increase in the environmental remediation provision associated with restoration of the Squamish site.
Financial Position and Liquidity
Three months ended Six months ended
------------------- -------------------
(millions of dollars June 30, June 30, June 30, June 30,
except where noted) 2008 2007 2008 2007
------------------- -------------------
Cash provided (used) by
continuing operations (23.3) (11.1) (21.5) 17.7
Cash provided (used) by
investing activities 5.9 (1.0) 41.1 7.7
Cash provided (used) by
financing activities 14.0 (1.0) (18.1) (32.5)
Additions to property, plant
and equipment 1.0 3.9 2.5 8.0
Additions to capitalized roads 2.4 4.3 5.5 7.4
Total liquidity(1) 67.0 175.0 67.0 175.0
Financial ratios:
Current assets to current
liabilities 1.74 1.74 1.74 1.74
Net debt(2) to shareholders
equity 0.56 0.30 0.56 0.30
------------------- -------------------
(1) Total liquidity comprises cash and cash equivalents and available
credit under the Company's revolving credit line.
(2) Net debt defined as the sum of long-term debt, current portion of
long-term debt, revolving credit line, less cash and cash equivalents.Cash used by continuing operations in the second quarter of $23.3 million included the net loss for the period of $18.0 million and, among other items, higher disbursements for expenses such as property taxes paid in advance. Year to date, cash used amounted to $21.5 million and comprised mainly the net loss of $34.2 million, partially offset by a decrease in working capital of $12.6 million. The change in working capital includes an increase in accounts payable such as for stumpage and fuel, a large portion of which the Company disbursed in early July. Cash provided by investing activities in the second quarter amounted to $5.9 million. This included $9.3 million received from sales of various assets and other receipts. This was partially offset by expenditures on capital assets, which comprised $1.0 million for plant and equipment and $2.4 million for capital roads, both reflecting the Company's current restraint exercised over expenditures. In the six months to date, investing activities provided $41.1 million, largely comprising receipts from asset sales, which were partially offset by expenditures on capital roads and plant and equipment. Financing activities in the second quarter provided $14.0 million, which were mainly comprised of a further $15.2 million draw from the revolving credit line, partially offset by a payment of $3.0 million against term debt. In the six months to June 30, cash used in financing activities totaled $18.1 million. The principal components of this were $43.0 million used to retire long-term debt, partially offset by draws on the revolving credit line amounting to $24.1 million. Liquidity as at June 30, 2008 amounted to $67 million, which was $108 million less than the amount available as at June 30, 2007. Liquidity a year ago reflected prior periods of better market conditions for the forest products industry and marked a point in time that was just before the commencement of a three-month strike by the members of the United Steelworkers Union in the British Columbia coastal region. During the year to June 30, 2008, the Company drew significant cash resources to fund losses induced by the strike as well as those associated with the forest products market downturn and the weakened US dollar. Due to the aforementioned significant draws on cash resources, partly offset by proceeds from asset sales, the Company's net debt has increased from $141.6 million as at June 30, 2007 to $198.4 million as at June 30, 2008, or an increase of $56.8 million. Accordingly, the ratio of net debt to shareholders' equity has increased from 0.30 to 0.56, indicating some deterioration of the financial position of the Company. Western has forecasted results over the current fiscal year using best estimates of economic conditions and other factors as well as expected sales of non-core assets which should add to liquidity. Based on these forecasts, management believes that the Company will continue to operate as a going concern and fund its current operations without additional financial support. However, any material strengthening of the Canadian dollar, further decline in U.S. housing or other markets, negative impact of possible timber tenure reductions, absence of asset sales or other unexpected material adverse developments could impact the Company's liquidity in the short-term potentially requiring support from the Company's lenders, shareholders or others. There can be no assurance that such support will be available if required. Selected Quarterly Information To assist shareholders and other readers in understanding our business, we have included as Appendix A to this MD&A a table of the financial results and operating data for the Company for the last eight quarters. This includes a reconciliation of EBITDA to net income or loss and a discussion of significant non-seasonal influences on certain quarters where appropriate. Changes in Accounting Policies Inventories Effective January 1, 2008, the Company adopted, on a prospective basis, the new recommendations of the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3031 - Inventories. Section 3031 requires that inventories be valued at lower of cost and net realizable value. Under the new standard, logs designated for lumber production are recorded at the lower of cost and net realizable value ("NRV") with NRV determined on the basis of the logs converted into lumber. Under the former policy, logs designated for lumber production were valued at the lower of cost and net realizable value with NRV determined from log market prices. This change recognizes any forecasted losses on future lumber sales upon the purchase or production of logs that remain in inventory, and accordingly future changes in NRV may produce fluctuations in cost of sales. Upon the adoption of these new recommendations inventory decreased by $8.0 million due to increased provisions required to value certain inventory products at NRV. Upon adoption of the new standard, the Company discontinued costing inventory based on a rolling six month average, and commenced costing using actual costs. This change had no material impact on the carrying value of total inventory as at January 1, 2008. Consequently inventory decreased by $8.0 million to $245.2 million and the deficit increased by the same amount to $163.9 million as at January 1, 2008. Risks and Uncertainties The business of the Company is subject to a number of risks and uncertainties, including those described in the 2007 Annual Report and the Annual Information Form dated March 4, 2008, both 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 Western's business. The Company has the following additional comments as at the date of this report. As discussed in the Company's Annual Information Form and Annual Report both dated March 4, 2008, from time to time claims against the Company may be made by various groups, including the First Nations of British Columbia. In April 2008 the Kwakiutl First Nation filed a lawsuit against the B.C. Government, Western and the Federal Government of Canada seeking, amongst other things, orders to set aside the B.C. Government's decision to remove Western's private lands from a Tree Farm License and the B.C. Government's approval of the Company's Forest Stewardship Plan on the Crown lands within their area of interest, based on alleged infringements of their treaty rights and unextinguished aboriginal title and rights. The Company is currently unable to predict the outcome of this lawsuit on Western's ongoing operations or the sale or management of its private forestry lands. As described in the Annual Information Form, the Company is subject to market fluctuations for products brought about by influences such as foreign exchange rates, competition and economic conditions in the various industries that purchase Western's products, such as housing. From time to time, when these influences cause significant reductions in demand for forest products or prices to fall to uneconomic levels, the Company will reduce production with temporary logging and/or sawmilling curtailments. In extreme cases, such curtailments may become permanent closures. In the second quarter of 2008, Western's eight sawmills took approximately 14 weeks of market-related downtime including the indefinite closure of the sawmill at Ladysmith on Vancouver Island. In June 2008, in view of continuing challenging market conditions particularly the depressed state of the U.S. dimension lumber market and softening of the cedar lumber market, the Company announced further curtailments designed to better align log supply and lumber production with anticipated sales volumes. Outlook and Strategy U.S. dimension lumber markets remain extraordinarily weak with approximately one million anticipated housing starts in 2008 compared to levels prior to this downturn ranging from about 1.6 million to just over two million annual housing starts in the period from 1998 to 2006. The Japanese housing market has also slowed, and there is greater competition in Japan as U.S., European and Canadian producers look for alternate markets to the United States. Western does not anticipate improved conditions at least for the remainder of 2008. To the extent possible and prudent, Western has not only focused on alternate and higher-margin products and markets but has also curtailed harvesting and manufacture of products exhibiting reduced demand. The Company continues to carefully evaluate production capacity in relation to market requirements and will continue to take appropriate harvesting and/or manufacturing down-time. Accordingly, strategies are designed to better position Western for any recovery of markets in which the Company maintains significant participation. Additionally, the ongoing initiative to market certain properties should better utilize Company assets. Asset Sales Initiative Early in 2007, the Company commenced an initiative to market specific non-core assets with an estimated value of between $150 million and $180 million. In excess of $50 million of sale proceeds has been realized from these assets as at June 30, 2008. Processes have been initiated regarding potential sale of other non-core assets included in the original initiative. These include Higher and Better Use lands situated in the south of Vancouver Island and the gravel holdings in the Port McNeill area of Vancouver Island. The Company will market the remaining non-core assets from this initiative at the appropriate time. Furthermore, the Company has engaged professional advisors to assess the marketability of approximately 26,500 hectares of private forestry lands located in various regions throughout Vancouver Island. If a transaction is possible that offers sufficient added value to Western, the lands may be sold. Any proceeds from the sale of these forestry lands, if any sale is finalized, will be in addition to proceeds realized from the aforementioned non-core asset sales. There is no assurance that any of these potential sales will be completed, or when they may ultimately be completed. Any proceeds provided by these asset sales are expected to be applied primarily against the Company's outstanding long-term debt. The removal of lands that were privately owned prior to combination with Tree Farm Licenses, including forestry lands, certain of the non-core assets and other properties, from the Tree Farm Licenses in January 2007 has led to some local controversy. In July 2008 the Auditor General of British Columbia released a report concerning the removal of certain of the Company's private lands from Tree Farm Licenses. There is no indication in the report that any action is contemplated by the provincial government regarding the removal that would impact Western's ability to market any of the private lands or otherwise affect the Company, but there can be no assurance in that regard. Furthermore, the Capital Regional District has changed certain zoning bylaws to significantly increase the minimum permitted lot size of the Higher and Better Use lands in the south of Vancouver Island, which could reduce the land value. Regulations provide that if there is a subdivision application in place prior to the zoning change, the new zoning does not apply to that subdivision application for a period of one year. As a result, and prior to the change in zoning, the Company proceeded with subdivision applications based on the prior zoning. The Company now has one year from the date of the zoning changes to complete the subdivisions. There is a risk that some or all of the subdivision applications could be denied or not approved in time or be frustrated for other reasons. There is no assurance that the Ministry of Transportation or any other interested regulatory body will approve Western's subdivision application. Outstanding Share Data As of July 30, 2008, there were 119,842,359 Common Shares and 84,571,206 Non-Voting Shares issued and outstanding. The Company may convert the Non-Voting Shares into Common Shares on a one-for-one basis, in whole or in part, at any time in its sole discretion, provided that the Board of Directors is at that time of the opinion that to do so would not have a material adverse effect on the Company's business, financial condition or business prospects. 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. Western has also reserved 10,000,000 Common Shares for issuance upon the exercise of options granted under the Company's incentive stock option plan. In May 2008, 170,000 options were cancelled, and 2,710,000 options were issued to key management personnel. An additional 20,000 options were cancelled in July. As of July 30, 2008, 6,478,060 options were outstanding under the Company's incentive stock option plan. 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. Western 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 second quarter of 2008, the Company paid entities related to BAM $6.5 million in connection with these arrangements and received $0.4 in payments for the sale of logs. Public Securities Filings Readers may access other information about the Company, including the Annual Information Form and additional disclosure documents, reports, statements and other information that are filed with the Canadian securities regulatory authorities, on SEDAR at www.sedar.com. On behalf of the Board of Directors John MacIntyre, Chairman Reynold Hert, President and Chief Executive Officer Duncan, BC July 30, 2008
Management's Discussion and Analysis - Appendix A
--------------------------------------------------------------------------
Summary of Selected Results for the Last Eight Quarters (Unaudited)
(millions of
dollars except
per share 2008 2007 2006
amounts and ------------ -------------------------- ------------
where noted) 2nd 1st 4th 3rd 2nd 1st 4th 3rd
------------ -------------------------- ------------
Average Exchange
Rate - Cdn $ to
purchase one US $ 1.010 1.005 0.981 1.045 1.098 1.173 1.128 1.118
Sales
Lumber 180.1 152.9 93.3 141.6 210.0 205.2 217.8 214.0
Logs 43.4 34.5 29.6 26.5 72.9 55.6 44.6 44.8
By-products 14.3 16.3 13.7 8.4 18.2 15.5 16.7 20.7
------------ -------------------------- ------------
Total sales 237.8 203.7 136.6 176.5 301.1 276.3 279.1 279.5
------------ -------------------------- ------------
------------ -------------------------- ------------
Lumber
Shipments -
millions of
board feet 216 188 131 174 273 251 278 291
Price - per
thousand
board feet 834 815 712 814 769 818 782 739
------------ -------------------------- ------------
Logs
Shipments -
thousands of
cubic metres 622 455 412 364 943 650 625 592
Price - per
cubic metre 70 76 72 73 77 86 71 76
------------ -------------------------- ------------
Selling and
administration 8.5 8.9 9.9 10.2 11.3 10.9 12.5 11.9
------------ -------------------------- ------------
EBITDA (13.8) (9.9) (28.4) (29.8) 21.1 23.3 120.4 10.2
Amortization of
capital assets (8.9) (7.8) (7.9) (6.8) (10.8) (9.9) (9.7) (10.3)
Net interest
expense (3.6) (8.4) (5.8) (5.8) (5.4) (6.2) 5.1 (10.9)
Foreign exchange
gain (loss) 1.4 0.2 0.1 5.6 6.3 0.7 (6.0) (0.3)
Other income
(expense) 6.9 9.8 0.8 (0.3) 2.6 0.6 - 0.2
Income taxes - (0.1) (0.7) (0.1) - (0.3) (0.5) (0.3)
------------ -------------------------- ------------
Net income (loss)
from continuing
operations (18.0) (16.2) (41.9) (37.2) 13.8 8.2 109.3 (11.4)
Net income
(loss) from
discontinued
operations (1.3) (0.8) (1.0) (0.5) 3.8 (1.0) (1.0) (0.8)
------------ -------------------------- ------------
Net income (loss) (19.3) (17.0) (42.9) (37.7) 17.6 7.2 108.3 (12.2)
------------ -------------------------- ------------
------------ -------------------------- ------------
EBITDA as %
of sales -5.8% -4.9% -20.8% -16.9% 7.0% 8.4% 43.1% 3.6%
Earnings per share:
Net income
(loss) basic
and diluted (0.10) (0.08) (0.21) (0.18) 0.08 0.04 0.53 0.06
Net income
(loss) from
continuing
operations basic
and diluted (0.09) (0.08) (0.21) (0.18) 0.07 0.04 0.53 0.06In a normal operating year, there is some seasonality to the Company's operations with higher lumber sales in the second and third quarters when construction activity, particularly in the United States, has historically tended to be higher. Logging activity may also vary depending on weather conditions of rain, snow and ice in the winter and the threat of forest fires in the summer. The following were unusual events that influenced results other than for seasonal reasons. In the fourth quarter of 2006, the Company received a lumber duty refund and interest thereon from the United States. In the third and fourth quarter of 2007, net income was influenced by strike action by most of the Company's unionized employees. The first two quarters of 2008 were influenced by a significant downturn in the forest products industry as well as associated production curtailments by Western.
Western Forest Products Inc.
--------------------------------------------------------------------------
Unaudited Consolidated Financial Statements
For the three and six months ended June 30, 2008
Consolidated Balance Sheets (Unaudited)
(Expressed in millions of Canadian dollars)
Jun 30, 2008 Dec 31, 2007
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 4.5 $ 4.9
Accounts receivable 65.8 55.9
Inventory (Note 2) 242.4 253.2
Prepaid expenses and other assets 14.9 8.4
------------ ------------
327.6 322.4
Property, plant and equipment 443.1 484.4
Other assets 9.7 8.9
------------ ------------
$ 780.4 $ 815.7
------------ ------------
------------ ------------
Liabilities and Shareholders' Equity
Current liabilities:
Revolving credit line $ 72.7 $ 48.6
Accounts payable and accrued liabilities 111.7 85.7
Current portion of long-term debt (Note 5) - 101.1
Discontinued operations (Note 10) 4.3 4.1
------------ ------------
188.7 239.5
Long-term debt (Note 5) 130.2 69.7
Other liabilities 33.9 34.1
Deferred revenue 75.4 76.4
------------ ------------
428.2 419.7
Shareholders' equity:
Common shares 410.6 410.6
Non-voting shares 139.6 139.6
Contributed surplus 2.2 1.7
Deficit (200.2) (155.9)
------------ ------------
352.2 396.0
------------ ------------
$ 780.4 $ 815.7
------------ ------------
------------ ------------
See accompanying notes to these consolidated financial statements
Approved on behalf of the Board:
"Reynold Hert" Director
"John MacIntyre" Director
Consolidated Statements of Operations, Comprehensive Income (Loss)
and Deficit (Unaudited)
(Expressed in millions of Canadian dollars except for share and per
share amounts)
Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
------------------ ------------------
Sales $ 237.8 $ 301.1 $ 441.5 $ 577.4
Cost and expenses:
Cost of goods sold 227.2 255.4 422.1 485.1
Export tax 3.6 5.0 6.6 9.4
Freight 21.2 19.1 35.8 37.0
Selling and administration 8.5 11.3 17.4 22.2
------------------ ------------------
260.5 290.8 481.9 553.7
------------------ ------------------
Operating income (loss) (22.7) 10.3 (40.4) 23.7
Net interest expense (3.6) (5.4) (12.0) (11.6)
Foreign exchange gain (loss) 1.4 6.3 1.6 7.0
Other income (Note 7) 6.9 2.6 16.7 3.2
------------------ ------------------
Income (loss) before income
taxes (18.0) 13.8 (34.1) 22.3
Income tax expense - - (0.1) (0.3)
------------------ ------------------
Net income (loss) from
continuing operations (18.0) 13.8 (34.2) 22.0
Net income (loss) from
discontinued operations (1.3) 3.8 (2.1) 2.8
------------------ ------------------
Net income (loss) and
comprehensive income (loss) (19.3) 17.6 (36.3) 24.8
Deficit, beginning of period as
previously reported (180.9) (92.9) (155.9) (112.0)
Adoption of new accounting
policy (Note 2) - - (8.0) 11.9
------------------ ------------------
Deficit, beginning of period as
adjusted (180.9) (92.9) (163.9) (100.1)
------------------ ------------------
Deficit, end of period $ (200.2) $ (75.3) $ (200.2) $ (75.3)
------------------ ------------------
------------------ ------------------
Earnings per share (in dollars):
Basic and diluted earnings
(loss) per share $ (0.10) $ 0.08 $ (0.18) $ 0.12
------------------ ------------------
------------------ ------------------
Basic and diluted earnings
(loss) per share from
continuing operations $ (0.09) $ 0.07 $ (0.17) $ 0.11
------------------ ------------------
------------------ ------------------
Weighted average number of
shares outstanding
(thousands of shares) 204,414 204,414 204,414 204,414
See accompanying notes to these 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
2008 2007 2008 2007
------------------ ------------------
Cash provided by (used in):
Operating activities:
Net income (loss) from
continuing operations $ (18.0) $ 13.8 $ (34.2) $ 22.0
Items not involving cash:
Amortization of capital assets 8.9 10.8 16.7 20.7
Foreign exchange (gain) loss (1.4) (6.3) (1.6) (7.0)
(Gain) loss on disposal of
capital assets (3.3) (8.7) (13.1) (9.2)
Other (4.7) 6.7 (1.9) 8.3
------------------ ------------------
(18.5) 16.3 (34.1) 34.8
------------------ ------------------
Changes in non-cash working
capital items:
Accounts receivable (3.8) (4.4) (9.9) (5.0)
Inventory 0.4 (27.5) 2.9 (25.2)
Prepaid expenses (5.9) (0.5) (6.5) 1.0
Accounts payable and accrued
liabilities 4.5 5.0 26.1 12.1
------------------ ------------------
(4.8) (27.4) 12.6 (17.1)
------------------ ------------------
Cash provided (used) by
continuing operations (23.3) (11.1) (21.5) 17.7
------------------ ------------------
Investing activities:
Additions to capital assets (3.4) (8.2) (8.0) (15.4)
Disposal of assets and other
receipts 9.3 8.2 49.1 10.0
Acquisition working capital
adjustment - - - 12.5
Other - (1.0) - 0.6
------------------ ------------------
5.9 (1.0) 41.1 7.7
------------------ ------------------
Financing activities:
Changes in revolving credit line 15.2 - 24.1 (3.6)
Proceeds from refinancing of
debt (Note 5) - - 175.0 -
Repayment of term debt (Note 5) (3.0) - (43.0) (25.5)
Repayment of pre-existing debt
(Note 5) - - (174.3) -
Other 1.8 (1.0) 0.1 (3.4)
------------------ ------------------
14.0 (1.0) (18.1) (32.5)
------------------ ------------------
Cash provided (used) by
discontinued operations (1.0) 0.6 (1.9) (1.9)
------------------ ------------------
------------------ ------------------
Increase (decrease) in cash and
cash equivalents (4.4) (12.5) (0.4) (9.0)
Cash and cash equivalents,
beginning of period 8.9 45.1 4.9 41.6
------------------ ------------------
Cash and cash equivalents, end
of period $ 4.5 $ 32.6 $ 4.5 $ 32.6
------------------ ------------------
------------------ ------------------
Supplementary information:
Cash interest paid $ 1.9 $ 4.6 $ 7.2 $ 8.2
See accompanying notes to these consolidated financial statementsWestern Forest Products Inc. 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 quarterly 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 quarterly consolidated financial statements follow the same accounting policies, methods of application and disclosures used in the Company's consolidated financial statements as at December 31, 2007 and for the year then ended except that the Company has adopted new accounting policies as required by the new accounting pronouncements as described below. Certain of the comparative numbers have been reclassified to conform to the presentation adopted in the current period. 2. Adoption of New Accounting Policies a) Inventories Effective January 1, 2008, the Company adopted, on a prospective basis, the new recommendations of the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3031 - Inventories. Section 3031 requires that inventories be valued at lower of cost and net realizable value. Under the new standard, logs designated for lumber production are recorded at the lower of cost and net realizable value (NRV) with NRV determined on the basis of the logs converted into lumber. Under the former policy, logs designated for lumber production were valued at the lower of cost and net realizable value with NRV determined from log market prices. This change recognizes any forecasted losses on future lumber sales upon the purchase or production of logs that remain in inventory, and accordingly future changes in NRV may produce fluctuations in cost of sales. Upon the adoption of these new recommendations inventory decreased by $8.0 million due to increased provisions required to value certain inventory products at NRV. Upon adoption of the new standard, the Company discontinued costing inventory based on a rolling six month average, and commenced costing using actual costs. This change had no material impact on the carrying value of total inventory as at January 1, 2008. Consequently inventory decreased by $8.0 million to $245.2 million and the deficit increased by the same amount to $163.9 million as at January 1, 2008. b) Capital disclosures Effective January 1, 2008, the Company adopted the new recommendations of the CICA Handbook Section 1535, Capital Disclosures. Under the recommendations additional disclosure is provided with respect to the Company's capital. Adoption of the recommendations had no impact on the Company's financial statements. The additional disclosures are included in Note 8. c) Financial instruments - disclosure and presentation Effective January 1, 2008, the Company adopted the new recommendations of the CICA Handbook Sections 3862 and 3863, Financial Instruments - Disclosures and Presentation. Under the recommendations the Company is required to provide additional information pertaining to the use of financial instruments irrespective of whether or not those financial instruments are recognized in the financial statements. Adoption of the recommendations had no impact on the Company's financial statements. The additional disclosures are included in Note 9. d) Going concern In June 2007, Section 1400 of the CICA Handbook was amended to require management to assess and disclose an entity's ability to continue as a going concern. This section applies for interim and annual periods beginning on or after January 1, 2008. The Company has adopted this section on January 1, 2008. The Company has forecasted results over the current fiscal year using best estimates of economic conditions and other factors. Based on these forecasts, management believes that the Company will continue to operate as a going concern and fund its current operations without additional financial support. The Steelworkers strike that occurred in 2007 significantly curtailed the Company's operations and weakened the Company's financial position as overall liquidity was reduced. The strong Canadian dollar and the weak U.S. housing markets experienced over the second half of 2007 and through the second quarter of 2008 are expected to continue during the remainder of 2008 and into 2009. However, expected sales of non-core assets should add to liquidity. These factors are included in the Company's forecasts. However, any material strengthening of the Canadian dollar, further decline in U.S. housing or other markets, negative impact of possible timber tenure reductions, absence of asset sales or other unexpected material adverse developments could impact the Company's liquidity in the short-term potentially requiring support from the Company's lenders, shareholders or others. There can be no assurance that such support will be available if required. 3. Pension Expense The Company has defined benefit and defined contribution pension plans and other pension arrangements 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. During the second quarter ended June 30, 2008, the Company incurred costs of $3.0 million (2007 - $3.9 million) with respect to these plans. During the six months ended June 30, 2008, the Company incurred costs of $6.7 million (2007 - $7.6 million). 4. Stock-Based Compensation Plan In the second quarter 170,000 employee stock options were cancelled and 2,710,000 options were issued to key management personnel. At June 30, 2008, 6,498,060 options were outstanding with a weighted average exercise price of $1.97 per Common Share. An additional 20,000 options were cancelled subsequent to June 30, 2008. 5. Long-Term Debt On March 14, 2008, the Company closed a new financing providing $175 million in term facilities. The proceeds retired the prior existing facilities which amounted to $72.5 (US$73.5 million) and $101.8 million, both provided by the Brookfield Bridge Lending Fund, a lender related to Tricap Management Ltd, the Company's largest shareholder. The new financing agreement provides for two secured term facilities: a $75 million revolving term facility due in three years and a $100 million non-revolving term facility repayable within 18 months. At the discretion of the Company, interest on the facilities is based either on the Canadian prime or the bankers acceptance rate plus a margin of 1.75 percent or 2.75 percent, respectively. At the time of concluding the new financing agreement the Company paid $2.4 million in transaction costs, which have been deferred and will be amortized over the term of the facilities using the effective interest rate method. During the second quarter, the Company extended the term of the revolving credit line. The line, which is secured against cash, accounts receivable and inventory, now terminates on March 14, 2011, co-terminus with the new term facilities previously discussed in this note 5. During the first half of 2008, the Company paid down a total of $43.0 million in term debt. The following table provides additional information with respect to the Company's long term debt:
June 30, 2008 Dec 31, 2007
------------- -------------
US dollar debt $ - $ 72.9
Associated transaction costs - (3.2)
------------- -------------
$ - $ 69.7
------------- -------------
Canadian dollar debt $ 132.0 $ 101.8
Associated transaction costs (1.8) (0.7)
------------- -------------
$ 130.2 $ 101.1
------------- -------------
------------- -------------
$ 130.2 $ 170.8
Less current portion - 101.1
------------- -------------
$ 130.2 $ 69.7
------------- -------------
------------- -------------6. Segmented Information The Company is an integrated Canadian forest products company operating in one industry segment comprising timber harvesting, reforestation, log and by-product sales, sawmilling, value-added lumber remanufacturing as well as lumber marketing and distribution. 7. Other Income In June 2008, the Company sold for cash a parcel of land on southern Vancouver Island, British Columbia. In the same month, the Company received proceeds of final compensation from the Province of British Columbia associated with a timber tenure take-back. The two transactions, along with certain other insignificant asset sales, provided a net gain of $6.9 million in the three months ended June 30, 2008. On March 20, 2008, the Company sold for cash the site of the former sawmill in New Westminster, British Columbia. Sale proceeds, less commission and other fees, totaled $39.8 million and generated a gain on sale of $9.8 million, which is included in other income for the six months ended June 30, 2008. 8. Capital Requirements The Company's policy for managing capital is to maintain a strong capital position to provide financial flexibility, achieve growth and to maximize long-term shareholder value. Western's capital requirements typically include major new investments designed to grow net income and disbursements for other new equipment and ongoing enhancements, efficiency improvements, safety, and protection or extension of the life of equipment. Finally, significant expenditures are also required to fund new capital roads allowing access to timber stands for harvesting purposes. The Company seeks to achieve a balance between the higher returns that may arise with higher levels of borrowing and the advantages and security provided by a sound capital position. The Company monitors the ratio of net debt to capitalization, targeting a ratio in the range of 30% to 45%. Net debt is defined as long-term debt plus amounts drawn on revolving credit lines, less cash and cash equivalents. Capitalization comprises net debt and shareholders' equity. Changes to the capital structure may be made as strategic opportunities arise. In order to maintain or adjust the capital structure, the Company may issue new shares, source new debt, or sell assets to reduce debt. The Company has internal controls to ensure changes to the capital structure are properly reviewed and approved. On March 14, 2008, the Company refinanced its term debt facilities (Note 5). Since refinancing the debt, the Company has repaid a total of $43.0 million of the long-term portion of the debt facility substantially from the cash proceeds of disposition of assets (Note 7). Pursuant to the financing agreement, term debt repayments will continue as asset sales are realized. Under the new financing agreement, the Company is subject to financial covenants including maintaining a certain ratio of debt to capitalization. As at June 30, 2008, this ratio was within the limit prescribed in the agreement. The Company is not subject to any statutory capital requirements. Under the Company's stock-based compensation plan, commitments exist to issue common shares. There were no changes to the Company's approach to managing capital during the period. 9. Financial Instruments The Company's financial assets include its cash and cash equivalents and accounts receivable. Cash and cash equivalents are designated as held-for-trading and measured at fair value. Accounts receivable are designated as loans and receivables and are measured at amortized cost using the effective interest rate method. The Company's financial liabilities comprise accounts payable and accrued liabilities and long-term debt. All financial instrument liabilities are designated as other financial liabilities and are measured at amortized cost using the effective interest rate method. The Company does not have any financial instruments classified as held for sale or available-for-sale. The Company utilizes financial instruments in the normal course of business and takes action to mitigate the associated risks. The Company does not currently engage directly in any hedging or derivative activities. However, the Company is considering the use of currency hedges to mitigate foreign currency exposure risk, and should it do so, would consider hedge accounting. The use of financial instruments exposes the Company to credit risk, liquidity risk, and market risk. Other than described below, management does not consider the risks to be significant to the Company. The Board of Directors has overall responsibility for the oversight of the Company's risk management framework. The Company identifies, analyzes and actively manages the financial market risks associated with changes in foreign exchange rates, interest rates and commodity prices. The Company has established risk management policies and controls to identify and analyze the risks faced by the Company, to set appropriate risk limits and to monitor risks and adherence to limits. The Company is exposed to credit risk in connection with its receivables from customers. The carrying amount of the Company's accounts receivable represents the maximum credit exposure. The Company is also exposed to currency risk in connection with its foreign currency denominated receivables from customers, predominantly in US dollars and to a lesser extent in Japanese yen, Australian dollars, and the Euro. Sales transactions are made through the extension of credit to customers and are recorded at the point in time the sale is recognized. Accordingly, fluctuations in collectability may affect the carrying value of the underlying accounts receivable. Management balances the credit risk through rigorously and continually reviewing customer credit profiles. The Company has established policies and controls to review the creditworthiness of new customers, including review of credit ratings. A significant majority of lumber sales conducted under standard industry terms and conditions are insured by the Export Development Corporation. The Company regularly reviews the collectability of accounts receivable and makes provisions where the collectability is uncertain. Historically the Company's bad debts have been minimal and as at June 30, 2008, the Company had an allowance for doubtful accounts of $1.1 million. This allowance relates mainly to a receivable from Pope & Talbot Ltd. that has been claimed by Western in CCAA proceedings. As described in the Company's Annual Information Form dated March 4, 2008, certain sales transactions are denominated in foreign currencies, principally, the US dollar. Accordingly, fluctuations in foreign exchange rates may affect the carrying value of the underlying accounts receivable. As of June 30, 2008, the Company's accounts receivable denominated in US dollars totaled US$23.9 million. The Company estimates that, excluding the effect of long-term debt, an increase or decrease of one cent in the value of the Canadian dollar per US$1.00 would decrease or increase, respectively, operating earnings by approximately $4 million to $6 million annually, depending on the mix of foreign currencies in total sales. The Company is also exposed to market risk in connection with the pricing for its products. On an annualized basis, the Company estimates that an increase or decrease of one per cent in selling prices would increase or decrease, respectively, operating earnings by $8 to $12 million annually. At this time, the Company has elected not to actively manage its exposure to commodity price risk. Long-term debt is recorded at the principal amount less the net value of the associated financing fees. Financing fees are deferred and amortized over the life of the debt using the effective interest rate method. Accordingly, fluctuations in market interest rates may affect the carrying value of the debt. Management mitigates the interest rate risk associated with the long term debt through the utilization of floating interest rates. Based on the Company's average debt during the first six months of 2008, a change of 1% in interest rates would have increased or decreased annual net income by approximately $1.0 million. From time to time the Company may recognize liabilities for the settlement of certain obligations. The amount recognized in the financial statements is based on management's best estimate given the facts available at the time the obligation was incurred. Accordingly, fluctuations in pricing and interest rates will affect the ultimate cost to settle a given obligation. Management mitigates the associated pricing risk through regularly reviewing the assumptions used in the generation of the estimate. Liabilities for ongoing operations are recorded in the financial statements at cost accrued to that point in time. Management mitigates any liquidity risk associated with the subsequent payment of these liabilities through the continual monitoring of expenditures and forecasting of liquidity resources. 10. Discontinued Operations In March 2006, the Company closed its Squamish mill located on 213 acres on the mainland coast of British Columbia and exited the pulp business. Subsequent to the closure, the Company sold substantially all of the productive assets of the mill. Ongoing costs such as for supervision, security and property taxes continue to be expensed as incurred. The property is one of a portfolio of non-core assets held for sale. While site remediation is ongoing, the Company has listed the property for sale. The following table provides additional information with respect to the discontinued operations:
Three months ended Six months ended
------------------ ------------------
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
------------------ ------------------
Net income (loss) from
discontinued operations (1.3) 3.8 (2.1) 2.8
Cash provided (used) by
discontinued operations $ (1.0) $ 0.6 $ (1.9) $ (1.9)
------------------ ------------------
Western Forest Products Inc.
Third Floor
435 Trunk Road
Duncan, B.C., Canada
V9L 2P9
(250) 748-3711
http://www.westernforest.com
info@westernforest.com
Trading on the TSX as "WEF".Contact: Contacts:
Western Forest Products Inc.
Reynold Hert
President & CEO
(250) 715-2207
Western Forest Products Inc.
Murray Johnston
Vice President & CFO
(250) 715-2209
Email: info@westernforest.com
Website: http://www.westernforest.com
Source: Western Forest Products Inc.
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