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West Fraser reports Q2-2020 operating income increase despite COVID-19 estimates

July 28, 2020  By West Fraser Timber Co.



As a result of the various impacts of COVID-19, we made a number of adjustments to our operating schedules starting in March of 2020 and continuing into the second quarter of 2020. The impact on 2020 production was a reduction of approximately 140 MMfbm of SPF lumber, 80 MMfbm of SYP lumber, 60 MMsf of plywood. As the second quarter progressed, demand for lumber and plywood proved to be more resilient than originally estimated at the start of the pandemic. The higher demand levels, coupled with low inventories in the supply channel and production curtailments, led to an increase in pricing during the quarter.

Ray Ferris, president and CEO of West Fraser stated, “The safety, health and well-being of our employees and the communities in which we operate remain our primary focus. I am proud of the efforts of all our employees to adapt and safely continue our operations, serve our customers,and preserve and enhance value through a very difficult period.”

Operational Results

Our lumber segment generated operating earnings in the quarter of $66 million (Q1-20 – $19 million) and Adjusted EBITDA of $156 million (Q1-20 – $106 million). The improvement was due primarily to higher SYP prices and SPF shipment volumes, partially offset by lower SPF prices. The price variance resulted in an increase in Adjusted EBITDA of $23 million compared to the previous quarter with the balance coming from volume, cost, and productivity improvements despite the unpredictable operating conditions. The current quarter included temporary curtailments of SPF and SYP production of 170 MMfbm compared to 50 MMfbm in the previous quarter.

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Our panels segment generated operating earnings in the quarter of $17 million (Q1-20 – $4 million) and Adjusted EBITDA of $20 million (Q1-20 – $8 million). Improved plywood pricing was offset by lower shipment volumes for plywood, MDF, and LVL, resulting in lower overall sales. We fully settled the West Pine insurance claim related to the 2016 fire at this MDF facility resulting in a $7 million benefit recorded in cost of products sold from business interruption insurance and an additional $7 million from proceeds on the involuntary disposal of equipment recorded in other income. These settlement amounts are in addition to insurance proceeds we received in earlier periods. The current quarter included temporary plywood curtailments of 50 MMsf compared to 10 MMsf in the previous quarter.

Administrative Review (“AR”) 1 Duty Rates

On July21, 2020, the U.S. Department of Commerce issued a new tolling memorandum, which extends the finalization of the AR1 duty rates until November 2020. The delay means we continue to remit cash deposits at a combined duty rate of 23.56 per cent instead of at the lower AR1 rate of 9.08 per cent that was published as preliminary on Feb. 3, 2020. The rates that will ultimately be finalized in November 2020 may be different.

Operating loans

Our revolving lines of credit consist of an $850 million committed revolving credit facility which matures August 25, 2024, a $150 million committed revolving credit facility with a two-year term, a $34 million (US$25 million) demand line of credit dedicated to our U.S. operations, and an $8 million demand line of credit dedicated to our jointly-owned newsprint operation. On June 30, 2020, $361 million was drawn under our revolving credit facility. Deferred financing costs of $3 million related to these facilities were deducted against the operating loans for balance sheet presentation.

Interest on the facilities is payable at floating rates based on Prime, Base Rate Advances, Bankers’ Acceptances or LIBOR Advances at our option plus an applicable margin.

In addition, we have credit facilities totaling $130 million dedicated to letters of credit, of which US$15 million is dedicated to our U.S. operations. On June 30, 2020, our letter of credit facilities supported $59 million of open letters of credit.

All debt is unsecured except the $8 million joint operation demand line of credit, which is secured by that joint operation’s current assets.

The fair value of the long-term debt at June 30, 2020, was $695 million (December 31, 2019 -$677 million) based on rates available to us at the balance sheet date for long-term debt with similar terms and remaining maturities.
On March 9, 2020, we extended the duration of our interest rate swap from August 2022 to August 2024 resulting in a change to the fixed interest rate on the swap from 2.47 per cent to 1.78 per cent through August of 2024. We continue to receive a floating interest rate equal to three-month LIBOR over the duration. The result is a fixed interest rate of 2.47 per cent for the period of May 28, 2019 to February 25, 2020 and 1.78 per cent for the period of February 25, 2020 to August 25, 2024. On April 15, 2020, we entered into additional interest rate swaps for a total notional amount of US$100 million. Under the agreements, we pay a combined fixed interest rate of 0.51 per cent and receive a floating interest rate equal to 3-month LIBOR.
The agreements are accounted for as a derivative and the gain or loss related to changes in the fair value is included in other income. For the six months ended June 30, 2020, a $7 million loss was recorded.
Risks and Uncertainties
Given the continuing and dynamic nature of the COVID-19 pandemic, it is challenging to predict the ongoing impact on the Company’s business. The extent of such impact will depend on future developments, which are highly uncertain, including the resurgence of COVID-19 as restrictions are eased or lifted, new information that may emerge concerning the spread and severity of COVID-19 and actions taken to address its impact, among others. It is difficult to predict how this virus may affect our business in the future, including the effect it may have (positive or negative; long or short term) on the demand and price for our products. The spread of such viruses among our employees or those of our suppliers, service providers or customers could result in lower production and sales, higher costs, and supply and transportation constraints. It is possible that COVID-19, particularly if it has a prolonged duration, could have a material adverse effect on our production levels, costs, supply chain, market pricing,customer demand, and distribution networks. These factors may further impact our operating plans, business, financial condition, liquidity, the valuation of long-lived assets, and operating results.

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