*

Unless otherwise indicated, all financial references are in U.S. dollars.

2021 Annual Management’s Discussion & Analysis			10
2021 Audited Consolidated Financial Statements			71
Directors and Officers			113
Glossary of Key Terms			114
Corporate Information			115

 

 

Message from our

Chief Executive Officer

 

		2021 was an exceptional year for West Fraser. Our long-term commitment to our values and business strategy guided significant growth, integration of our business and advancement of our sustainability goals, all during a period of significant change and transformation.

 

 

        

 

West Fraser’s renewable building products have an integral role to play as part of the solution to address climate change. At West Fraser, sustainability is more than just a commitment; it is the central principle upon which our business is predicated. The wood products we make are renewable, third-party certified, and from sustainably managed forest resources. Forest products are truly a natural solution and we contend this is now more important than ever, as the world needs sustainable, renewable building materials that sequester carbon in the fight against climate change.

We reached an important milestone this past summer with the planting of our two billionth tree, reflecting a 65-year commitment to reforestation in Western Canada, where we directly manage public forest land. It’s part of our commitment to the environment and sustainably managed forests that we couldn’t have done without decades of support from our employees, contractors, local stakeholders and the communities in which we operate.

West Fraser believes in making positive contributions to the economic, social and environmental well-being of the communities where our employees live and work while advancing the value wood products can make to a more sustainable world. Over 2021, we invested more than $3.3 million in our community investment program, supporting a wide array of initiatives such as the development of recreational facilities and important health care infrastructure, removing barriers to education through scholarships, and helping address pressing environmental and social needs in communities.

Recently, we announced that West Fraser has committed to science-based targets and the Science Based Targets Initiative (SBTi). Over 2021, our team undertook the necessary work across the integrated organization to support a credible plan to make material reductions by 2030 across our operations. This is an important step in our sustainability leadership journey and ESG performance strategy, and signals our commitment to global climate action, aligning with the Paris Agreement goals to materially reduce greenhouse gas emissions across our operations by 2030.

 

 

 

        

 

These actions have positioned us to create superior long-term value for our shareholders, and we have delivered an annualized total shareholder return of more than 12% since 2006.

OUR PATH FORWARD

Looking ahead, I am excited about our future. As we move past the integration phase of our transformative acquisition of a significant OSB producer, we are ready to execute on the combined strength of our company.

As part of our commitment to continuous improvement, our organization will continue to discover new, safer, and more efficient methods to conduct our business, which we believe improve our workplaces and long-term value creation. Therefore, we anticipate investing approximately $500 to $600 million in 2022. Our total capital budget consists primarily of various improvement projects and maintenance expenditures, projects focused on technology such as optimization and automation of the manufacturing process, and projects targeted to reduce greenhouse gas emissions, as well as strategic capital projects.

We also are investing in our people, furthering our commitment to being an employer-of-choice and creating an environment where employees can do their best work over the course of their career with us.

 

TEAMWORK IS KEY TO OUR SUCCESS

We have made tremendous progress in the past year while returning record safety and financial results along the way. On behalf of the entire executive team, we are grateful for the hard work, determination and resilience of our employees and what we were able to accomplish together in 2021.

I also recognize and appreciate the collaboration and cooperation of our customers and the communities in which we operate that are so vital. I am also grateful to our Board of Directors for their guidance and expertise in supporting our management team to build an even stronger West Fraser that is ready to embrace the future.

As we embark on 2022, I am proud of West Fraser’s position as a premier wood products company, committed to continuous improvement in all aspects of our business. We look forward to continuing to demonstrate our leading performance in the coming year.

 

Ray Ferris
President and Chief Executive Officer

 

        

Financial Performance

FIVE-YEAR FINANCIAL REVIEW

(in millions of U.S. dollars, except where indicated)

		2021				2020				2019				2018				2017
Earnings
Sales			10,518				4,373				3,673				4,722				3,957
Cost of product sold			(4,645)				(2,559)				(2,750)				(2,789)				(2,408)
Freight and other distribution costs1			(846)				(529)				(538)				(565)				(488)
Export duties, net2			(146)				(57)				(122)				(156)				(37)
Amortization			(584)				(203)				(195)				(199)				(162)
Selling, general and administration1			(312)				(185)				(159)				(178)				(167)
Equity-based compensation			(40)				(9)				(4)				(5)				(25)
Restructuring and impairment charges			–				–				(25)				–				–
Operating earnings			3,945				831				(120)				830				671
Finance expense, net			(45)				(27)				(37)				(29)				(24)
Other			(2)				(14)				(8)				29				5
Tax (provision) recovery			(951)				(202)				52				(203)				(193)
Earnings			2,947				588				(113)				627				459
Adjusted EBITDA3			4,569				1,043				104				1,034				857
Cash flows from operating activities			3,552				968				87				702				695
Capital expenditures and acquisitions4			295				180				309				286				664
Financial position
Current assets			3,217				1,336				883				986				1,029
PPE and timber licenses			4,468				2,029				2,028				1,883				1,933
Goodwill and other intangibles			2,440				591				594				562				583
Export duty deposits5			242				178				61				55				29
Other assets			58				35				20				23				22
Deferred income tax assets			8				9				8				2				5
Total assets			10,433				4,178				3,594				3,511				3,601
Current liabilities			1,206				528				644				435				465
Long-term debt (including current portion)			499				500				500				508				507
Other liabilities			360				408				350				231				277
Deferred income tax liabilities			712				264				195				214				179
Shareholders’ equity			7,656				2,478				1,905				2,123				2,173
Total liabilities and equity			10,433				4,178				3,594				3,511				3,601

 

 

 

EPS		Adjusted EBITDA3		Cash flows from operating activities
per common share (dollars)		in millions of U.S. dollars		in millions of U.S. dollars

 

        

 

 

1.

For 2017, we reclassified approximately $15 million from freight and other distribution costs to selling, general and administration to conform to our current presentation.

 

2.

Export duties for 2021 are net of a $55 million recovery related to the USDOC finalization of the duty rates for the AR2 POI dated January 1, 2019 to December 31, 2019. Export duties for 2020 are net of a $95 million recovery related to the USDOC finalization of the duty rates for the AR1 POI dated April 28, 2017 to December 31, 2018.

 

3.

Adjusted EBITDA is a non-GAAP financial measure calculated as earnings before tax plus other, finance expense, amortization, equity-based compensation, and restructuring and impairment charges. Refer to the “Non-GAAP and Other Specified Financial Measures” section of our 2021 Management’s Discussion & Analysis for more information on this measure. Effective January 1, 2022, and for all comparative periods, export duties are no longer excluded from the definition of Adjusted EBITDA.

 

4.

Capital expenditures and acquisitions is presented net of cash acquired. 2021 includes acquired cash and short-term investments of $642 million from the Norbord Acquisition. The Norbord Acquisition was a non-cash share consideration transaction, and therefore, only the acquired cash is included in the capital expenditure and acquisitions number.

 

5.

Export duty deposits for 2021 include export duty receivable of $55 million related to the USDOC finalization of the duty rates for the AR2 POI dated January 1, 2019 to December 31, 2019. Export duty deposits for 2020 include export duty receivable of $95 million for the AR1 POI dated April 28, 2017 to December 31, 2018.

 

6.

Our common shares began trading on the NYSE under the symbol WFG on February 1, 2021.

 

7.

Return on capital employed is calculated as GAAP EBIT divided by total assets minus current liabilities.

 

8.

Net debt to capitalization is a non-GAAP financial measure calculated as net debt divided by total capital, expressed as a percentage. Net debt is calculated as total debt less cash and cash equivalents. Total capital is defined as the sum of net debt plus total equity. Refer to the “Non-GAAP and Other Specified Financial Measures” section of our 2021 Annual MD&A for more information on this measure.

 

 

 

		SPF Lumber shipments		SYP Lumber shipments		NA OSB shipments		EU OSB shipments
		in MMfbm		in MMfbm		in MMsf 3/8” basis		in MMsf 3/8” basis

 

        

 

        

MANAGEMENT’S DISCUSSION & ANALYSIS

INTRODUCTION

 

This discussion and analysis by management (“MD&A”) of West Fraser Timber Co. Ltd.’s (“West Fraser”, the “Company”, “we”, “us”, or “our”) financial performance for the year and three months ended December 31, 2021, should be read in conjunction with our annual audited consolidated financial statements and accompanying notes for the year ended December 31, 2021 (the “Annual Financial Statements”).

Unless otherwise indicated, the financial information contained in this MD&A is derived from our Annual Financial Statements, which have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). This MD&A uses various Non-GAAP and other specified financial measures, including “Adjusted EBITDA”, “Adjusted EBITDA by segment”, “available liquidity”, “total debt to capital ratio”, “net debt to capital ratio”, “expected capital expenditures”, and “expected potential synergies from Norbord acquisition”. An explanation with respect to the use of these Non-GAAP and other specified financial measures is set out in the section titled “Non-GAAP and Other Specified Financial Measures”.

This MD&A includes statements and information that constitute “forward-looking information” within the meaning of Canadian securities laws and “forward-looking statements” within the meaning of United States securities laws (collectively, “forward-looking statements”). Please refer to the cautionary note entitled “Forward-Looking Statements” below for a discussion of these forward-looking statements and the risks that impact these forward-looking statements.

Dollar amounts are expressed in the United States (“U.S.”) currency unless otherwise indicated and reflect the change in our functional and reporting currency from the Canadian dollar to the U.S. dollar effective February 1, 2021. Select unaudited historical financial information in U.S. dollars is available on our website at www.westfraser.com. This historical financial information presents selected financial information derived from our historical financial statements, which had been presented in Canadian dollars for financial periods through to our year ended December 31, 2020.

This MD&A uses capitalized terms, abbreviations and acronyms that are defined under “Glossary of Key Terms”.

The information in this MD&A is as at February 15, 2022 unless otherwise indicated.

OUR BUSINESS AND STRATEGY

 

 

West Fraser is a diversified wood products company with facilities in Canada, the U.S., the U.K. and Europe, manufacturing, selling, marketing and distributing lumber, engineered wood products (OSB, LVL, MDF, plywood, particleboard), pulp, newsprint, wood chips and other residuals and renewable energy. As a result of the Norbord Acquisition, we are now a leading producer of OSB. In addition to OSB, Norbord manufactured particleboard, MDF and related value-added products. Our business is comprised of 34 lumber mills, 15 OSB facilities, six renewable energy facilities, five pulp and paper mills, three plywood facilities, three MDF facilities, two particleboard facilities, one LVL facility, one treated wood facility, and one veneer facility.

Our goal at West Fraser is to generate strong financial results through the business cycle, relying on our committed workforce, the quality of our assets and our well-established people and culture. This culture emphasizes cost control in all aspects of the business and operating in a responsible, sustainable, financially conservative and prudent manner.

The North American wood products industry is cyclical and periodically faces difficult market conditions and serious challenges. Our earnings are sensitive to changes in world economic conditions, primarily those in North America, Asia and Europe and particularly to the U.S. housing market for new construction and repair and renovation spending. Most of our revenues are from sales of commodities for which prices are sensitive to variations in supply and demand. As many of our costs are denominated in Canadian dollars, British pounds sterling and Euros, exchange rate fluctuations of the

 

        

 

        

Canadian dollar, British pound sterling and Euro against the United States dollar can and are anticipated to be a significant source of earnings volatility for us.

West Fraser strives to make sustainability a central principle upon which our people operate, and we believe the Company’s sustainable, renewable building materials that sequester carbon are a truly natural solution in the fight against climate change. There are numerous government initiatives and proposals globally to address climate-related issues. Within the jurisdictions of West Fraser’s operations, some of these initiatives would regulate, and do regulate, and/or tax the production of carbon dioxide and other greenhouse gases to facilitate the reduction of carbon emissions, providing incentives to produce and use cleaner energy.

We believe that maintaining a strong balance sheet and liquidity profile, along with our investment-grade debt rating, enables us to execute a balanced capital allocation strategy. Our goal is to reinvest in our operations across all market cycles to strategically enhance productivity, product mix, and capacity and to maintain a leading cost position. We believe that a strong balance sheet also provides the financial flexibility to capitalize on growth opportunities, including the pursuit of opportunistic acquisitions and larger-scale strategic growth initiatives, and is a key tool in managing our business over the long term including returning capital to shareholders.

ACQUISITIONS

 

Norbord Acquisition

On February 1, 2021, we acquired all of the outstanding shares of Norbord. According to the terms of the acquisition, Norbord shareholders received 0.675 of a West Fraser Common share for each Norbord Common share held (the “Exchange Ratio”). The result was the issuance of 54,484,188 Common shares of West Fraser at a price of US$63.90 per share (CAD$81.94 per share) for $3,482 million. The price per Common share was based on the West Fraser Common share’s closing price as listed on the TSX on January 29, 2021, and a CAD-USD exchange rate of 0.7798.

The Norbord Acquisition included five OSB mills in Canada, seven OSB mills in the U.S., one OSB mill, one MDF plant, and two particleboard plants in the U.K., one OSB mill in Belgium, and their related corporate offices.

We have incorporated the North American operations of Norbord into our Panels segment and renamed that segment North America Engineered Wood Products (“NA EWP”). This segment includes the results from North American operations for OSB, plywood, MDF, and LVL. In addition, we have identified a Europe EWP segment, which includes the results from the U.K. and Belgium operations for the OSB, MDF and particleboard plants. The EWP segments have been separated due to differences in the operating region, customer base, profit margins and sales volumes. The EWP segments incorporate the operations and results of the Norbord operations from February 1, 2021.

The acquisition of Norbord by West Fraser has been accounted for as an acquisition of a business in accordance with IFRS 3, Business Combinations, with West Fraser as the acquirer. We have applied purchase price accounting to the acquisition resulting in a significant increase from the historical cost base of Norbord and $1,339 million of goodwill.

Factors contributing to goodwill include the Norbord workforce and assets that are geographically complementary to our existing facilities and offer close access to large markets and timber baskets. The Norbord Acquisition also provides increased scale and geographic diversification of manufacturing and markets. This was a rare opportunity to acquire an OSB producer with meaningful capacity, high-quality employees and facilities, and a complementary strategy and culture. Note 3 to our Annual Financial Statements provides details on the purchase price allocation.

The purchase price allocation has been finalized as at December 31, 2021. Purchase price accounting impacted the two EWP segments’ annual results, as discussed in the relevant sections below.

Angelina Acquisition

On December 1, 2021, we acquired the Angelina Forest Products lumber mill located in Lufkin, Texas for $302 million, net of cash acquired of $8 million. This acquisition has been accounted for as an acquisition of a business in accordance with IFRS 3, Business Combinations. Note 3 to our Annual Financial Statements provides details on the preliminary purchase price allocation as at December 31, 2021, which attributed $78 million to goodwill.

 

        

 

        

Financial Results

The following tables represent the actual results of Norbord and Angelina Forest Products included in our statement of earnings and the proforma results of operations for the year ended December 31, 2021. The proforma results assume the Norbord Acquisition and Angelina Acquisition occurred on January 1, 2021, and include proforma purchase price accounting for the acquisitions.

 

Results Attributable to Acquired Businesses   ($ millions)		Norbord Results for February 1 to December 31, 20211,3				Angelina Results for December 1 to December 31, 20212,3				Total
Sales		$	4,175			$	15			$	4,190
Operating earnings			1,915				1				1,916
Earnings			1,427				1				1,428

 

1.	Represents the results of the Norbord operations since the acquisition date that are included in our results.

2.	Represents the results of the Angelina Forest Products operations since the acquisition date that are included in our results.

3.	Operating earnings and earnings include purchase price accounting impacts of $93 million expense and $2 million expense for the one-time inventory adjustments in cost of products sold relating to the Norbord Acquisition and Angelina Acquisition, respectively.

 

Proforma 2021 Results   ($ millions)		West Fraser Actual Results2 2021				Norbord Proforma Results1 Jan-21				Angelina Proforma Results1 Jan-21 to Nov-21				West Fraser Proforma Results1,2 2021
Sales		$	10,518			$	277			$	163			$	10,958
Operating earnings			3,945				115				61				4,121
Earnings			2,947				86				57				3,090

 

1.	These unaudited proforma results have been provided as required per IFRS 3 - Business Combinations. West Fraser proforma YTD-21 presents West Fraser’s results as if the Norbord Acquisition and Angelina Acquisition were completed on January 1, 2021.

2.	Operating earnings and earnings include purchase price accounting impacts of $93 million expense and $2 million expense for the one-time inventory adjustment in cost of products sold relating to the Norbord Acquisition and Angelina Acquisition, respectively.

South Carolina OSB Asset Acquisition

On December 6, 2021, we completed the asset purchase of an idled OSB mill near Allendale, South Carolina for $280 million including working capital. We anticipate investing an additional estimated $70 million in capital during 2022 to upgrade and optimize the facility in preparation for a restart, subject to market conditions and hiring the requisite employees.

CHANGE IN FUNCTIONAL AND REPORTING CURRENCY

 

On February 1, 2021, West Fraser determined that as a result of the Norbord Acquisition, the functional currency of our Canadian operations had changed from CAD to USD. Management considered various factors when making this decision, the most significant being an increase in the levels of sales made in U.S. dollars, a portion of operating expenses incurred in U.S. dollars, and increased levels of U.S. dollar financing.

Concurrent with the change in functional currency, we also changed our reporting currency from Canadian dollars to U.S. dollars. This change in reporting currency is to better reflect the Company’s business activities, following the increased presence in the U.S. as a result of the Norbord Acquisition and in connection with the listing of West Fraser’s Common shares on the NYSE on February 1, 2021.

A change in functional currency is applied prospectively and must be based on a change in economic facts, events and conditions. In contrast, a change in reporting currency requires retroactive restatement. Both changes have specific transition rules under the International Accounting Standard (“IAS”) 21, The Effects of Changes in Foreign Exchange Rates.

As at and for the year ended December 31, 2020, and for all prior periods, the functional and reporting currency of the Company was the CAD as described in our 2020 audited annual consolidated financial statements. The currency remeasurement of West Fraser results applied the IAS 21 transitional rules.

 

        

 

        

To prepare our December 31, 2020 and January 1, 2020 consolidated balance sheets, all assets and liabilities were translated into U.S. dollars at the closing exchange rate on December 31, 2020, and December 31, 2019, respectively. Equity items were retroactively restated at historical exchange rates to give effect to the change in reporting currency. The accounting policy used to translate the equity items prior to 2020, was to use the annual average exchange rate for each equity transaction that occurred in the year. For 2020, equity items were translated quarterly using the average exchange rate for each quarter.

To prepare our 2019 and 2020 consolidated statement of earnings, all revenues and expenses were translated into U.S. dollars at the average exchange rate for each quarter, with no adjustments to the measurement of or accounting for previously reported results. To prepare our 2020 consolidated statement of cash flow, all items were translated into U.S. dollars at the average exchange rate for each quarter, with no adjustments to the measurement of or accounting for previously reported results.

RECENT DEVELOPMENTS

 

Markets

In North America, changes in new home construction activity in the U.S. are a significant driver of lumber and OSB demand. In the fourth quarter, industry supply chains for many building products remained challenged. These supply constraints continued to make it difficult for home builders to convert housing starts to completions, impacting short-term demand for our lumber and panel products. According to the U.S. Census Bureau, the seasonally adjusted annualized rate of U.S. housing starts averaged 1.70 million units in December 2021, with permits issued averaging 1.87 million units. U.S. housing starts were 1.60 million units for the full year, up 16% from 1.38 million units in 2020. In comparison, U.S. housing completions were 1.34 million units in 2021, up just 4% from the prior year. We believe low mortgage rates, low availability of homes for sale and changes in home ownership trends stemming from the COVID-19 pandemic continue to provide a supportive backdrop for home construction activity.

Demand for our products used in repair and remodelling applications had begun to improve late in the third quarter after lumber and OSB prices retreated from record highs earlier in the year. That recovery continued through the fourth quarter.

Severe Weather and Flooding in B.C.

In the fourth quarter of 2021, B.C. was impacted by heavy rain and flooding caused by one of the most extreme natural weather disasters to hit the province in a generation. The multiple weather systems prompted a state of emergency in the province, with severe precipitation causing significant damage to transportation infrastructure, resulting in multiple highway closures, disruptions of rail links, and limited access to ports for overseas shipments. While West Fraser is utilizing alternative transportation routes and methods to the extent they are available to continue servicing customers, these weather events have had an adverse impact on shipments.

As a result of the road and rail closures caused by the severe weather, our Q4-21 western Canadian lumber and pulp shipment volumes declined by approximately 15 to 20% compared to the rates in the first nine months of the year. We reduced operating schedules at multiple western Canadian locations to manage inventory levels, raw material supplies and our integrated fibre supply chain.

At the current time, it is not possible to estimate when full transportation services will resume or when the backlogs resulting from the interruptions will be cleared.

Second Administrative Review (“AR2”) Duty Rates

On November 24, 2021, the USDOC, issued its final duty rates for the AR2 POI for January 1, 2019 to December 31, 2019. The details on the final rates and the impact on our earnings are under the section “Discussion & Analysis of Annual Results by Product Segment - Lumber Segment - Softwood Lumber Dispute”. The cash deposit rate for SPF lumber shipments from Canada to the U.S. on or after December 2, 2021 is a combined 11.12%, and on or after January 10, 2022 is a combined 11.14%. These are the cash deposit rates until the USDOC finalizes AR3 and AR4 for the POIs dated January 1, 2020 to December 31, 2020 and January 1, 2021 to December 31, 2021, respectively.

 

        

 

        

B.C. Old-Growth Deferrals

In November 2021, the government of British Columbia announced its intention to defer logging in 2.6 million hectares of what it described as “old growth” forests. The deferrals were based on recommendations provided by a Technical Advisor Panel that the B.C. government had appointed. B.C. Indigenous Nations were given 30 days to respond to the deferrals, during which time most indicated they would engage in further discussion with the government over the coming months before rendering their decision. This process will likely continue through 2022. The impact on West Fraser’s timber supply is contingent on the outcomes of these discussions. Our preliminary estimate of the impact on the B.C. AAC is a reduction of up to 15%. The specific impact to us at this time is not determinable given ongoing negotiations with multiple stakeholders.

ANNUAL RESULTS

 

 

 

Summary Annual Results   ($ millions, except as otherwise indicated)		2021				2020				2019
Earnings
Sales		$	10,518			$	4,373			$	3,673
Cost of products sold			(4,645)				(2,559)				(2,750)
Freight and other distribution costs			(846)				(529)				(538)
Export duties, net			(146)				(57)				(122)
Amortization			(584)				(203)				(195)
Selling, general and administration			(312)				(185)				(159)
Equity-based compensation			(40)				(9)				(4)
Restructuring and impairment charges			—				—				(25)
Operating earnings			3,945				831				(120)
Finance expense, net			(45)				(27)				(37)
Other			(2)				(14)				(8)
Tax (provision) recovery			(951)				(202)				52
Earnings		$	2,947			$	588			$	(113)
Adjusted EBITDA1		$	4,569			$	1,043			$	104
Basic earnings per share ($)			27.03				8.56				(1.64)
Diluted earnings per share ($)			27.03				8.56				(1.76)
Cash dividends declared per share ($)2		$	0.76			$	0.59			$	0.60
Total assets			10,433				4,178				3,594
Long-term debt, non-current			499				500				500
Long-term debt, total			499				507				507

 

1.	This is a non-GAAP financial measure. Refer to the “Non-GAAP and Other Specified Financial Measures” section of this document for more information on this measure.

2.

Cash dividends of CAD$0.80 per share were declared during the years ended December 31, 2020 and December 31, 2019. Cash dividends declared during the year ended December 31, 2021 were comprised of CAD$0.70 per share in aggregate for the first three quarters and USD$0.20 per share for the fourth quarter. The CAD amounts have been translated to USD for presentation purposes using the average exchange rate during the quarter that the dividends were declared.

Our 2021 annual results reflect the inclusion of the operations of Norbord from February 1, 2021. In 2021, our revenues increased to $10,518 million and we generated earnings of $2,947 million, or $27.03 per share. This compares with revenues of $4,373 million and earnings of $588 million, or $8.56 per share, in 2020, and revenues of $3,673 million and a loss of ($113) million, or ($1.64) per share in 2019. The increase in revenue and earnings over the three years relates primarily to increased pricing and demand for our products due to increased home construction and repair and remodelling activity in North America and the acquisition of Norbord on February 1, 2021. Western Canada log costs, particularly in B.C., increased significantly over the three years, offsetting some of the pricing gains.

 

        

 

        

Discussion & Analysis of Annual Results by Product Segment

Lumber Segment

($ millions unless otherwise indicated)

 

		2021				2020
Lumber Segment Earnings
Sales
Lumber		$	4,520			$	2,983
Wood chips and other residuals			289				273
Logs and other			101				100
			4,910				3,356
Cost of products sold			(2,241	)			(1,871	)
Freight and other distribution costs			(404	)			(361	)
Export duties, net			(146	)			(57	)
Amortization			(164	)			(151	)
Selling, general and administration			(146	)			(128	)
Operating earnings			1,809				788
Finance expense, net			(17	)			(17	)
Other			2				(2	)
Earnings before tax		$	1,794			$	769
Adjusted EBITDA1, 2		$	1,973			$	939
Capital expenditures			146				149
SPF (MMfbm)
Production			3,182				3,157
Shipments			3,176				3,214
SYP (MMfbm)
Production			2,675				2,801
Shipments			2,649				2,861

 

1.

This is a non-GAAP financial measure. Refer to the “Non-GAAP and Other Specified Financial Measures” section of this document for more information on this measure. Q4-21 Adjusted EBITDA was decreased by a one-time charge of $2 million related to inventory purchase price accounting on the Angelina Acquisition.

2.	Effective January 1, 2021, and for all comparative periods, export duties are no longer excluded from the definition of Adjusted EBITDA.

Sales and Shipments

Lumber sales for 2021 increased compared to 2020 due to higher product pricing, offset in part by lower shipments.

2021 was another year of significant lumber price variability, with lumber market pricing hitting highs in the second quarter before dropping in the third quarter and recovering in the fourth quarter. We believe the higher lumber market pricing in 2021 resulted from low inventory volumes in the supply chain, improved new home construction levels, and strong demand from repair and remodelling activity. The price variance resulted in an increase in earnings before tax and Adjusted EBITDA of $1,715 million compared to 2020.

Shipment volumes were lower for SPF and SYP in 2021 than in 2020. SPF shipment volumes were lower in 2021 due primarily to disruptions to rail and truck services due to wildfires in B.C. in the third quarter and severe weather and flooding in B.C. in the fourth quarter. This decrease in shipment volume was offset in part by improvements in product demand compared to 2020, which was impacted by COVID-19 related market conditions. SYP shipment volumes were lower in 2021 due primarily to disruptions to supply chain activity due to extreme winter weather conditions in the U.S. South in the first quarter and reduced production discussed further in the section below. The volume variance resulted in a decrease in earnings before tax and Adjusted EBITDA of $100 million compared to the previous year.

 

        

 

        

SPF Sales by Destination

 

		2021								2020
		MMfbm				%				MMfbm				%
U.S.			2,098				66				1,975				61
Canada			753				24				678				21
China			189				6				419				14
Other			136				4				142				4
Total			3,176								3,214

We ship SPF to several export markets, while our SYP sales are almost entirely in the U.S. The proportion of shipments of SPF to China in 2021 was lower compared to 2020 due primarily to pricing differentials between the North America and overseas markets.

2021 wood chip and other residual sales were higher than 2020 due to higher pricing as the pricing formula follows the NBSK price, which increased in 2021, offset in part by decreases in SPF and SYP chip production. Chip production decreased in line with lumber production year over year.

Costs and Production

SPF production volumes were comparable between 2021 and 2020. 2021 production volumes were impacted by reductions in operating schedules at our B.C. SPF operations in response to disruptions to rail and truck services due to wildfires, flooding, and other severe weather, whereas 2020 production volumes were impacted by temporary production curtailments in response to COVID-19.

SYP production volumes decreased in 2021 compared to 2020 due to log shortages in certain operating areas in the second half of the year, market-related downtime in the third quarter, and the impact of extreme winter conditions in the U.S. South in the first quarter. These factors were partially offset by increases in production from removing temporary production curtailments in place in 2020 in response to COVID-19.

Costs of products sold were higher in 2021 compared to 2020 due to increased raw materials and manufacturing costs offset by decreases in shipment volumes.

SPF stumpage costs tied to the price of lumber increased significantly year over year. Most of our SPF log requirements are harvested from crown lands owned by the B.C. or Alberta provincial governments. B.C.’s stumpage system is tied to published lumber prices, with a time lag, and publicly auctioned timber harvesting rights. Alberta’s stumpage system is correlated to published lumber prices with a shorter time lag. B.C. fibre shortages, which increased competition for logs available through the B.C. Timber Sales log market, also increased B.C. SPF purchase log costs. Lumber results were also adversely impacted by the strengthening of the Canadian dollar compared to 2020. This increased the U.S. dollar equivalent of our SPF manufacturing and input costs, which are primarily incurred in Canadian dollars.

SYP log costs increased in 2021, but to a lesser degree than SPF log costs. Log supply was impacted by wet weather and supply chain disruptions. Compared to 2020, our U.S. South SYP operations had higher costs due primarily to input cost inflation and increased employee costs, including costs associated with managing through COVID-19 impacts and temporary curtailments.

Freight and other distribution costs generally increased in 2021 compared to 2020 as the transportation network adjusted to the post-COVID-19 demand levels. Higher costs resulted from truck and driver shortages in the U.S., and costs were also adversely impacted by transportation issues related to the wildfires and flooding in B.C. These increases were offset in part by reduced shipment volumes, including lower shipments to Asia.

Export duties for 2021 were higher than 2020. Export duties for 2021 are net of a $55 million recovery related to the USDOC finalization of the AR2 duty rates. In contrast, export duties for 2020 are net of a $95 million recovery related to the USDOC finalization of the AR1 duty rates. The effective duty expense for the period, as disclosed in the section “Softwood Lumber Dispute” below, was $201 million compared to $152 million in 2020. The increase in effective export duty expense was due to a higher value and volume of sales to the U.S.

 

        

 

        

Amortization expense and finance expense for 2021 were comparable to the prior year.

Selling, general, and administration costs increased compared to 2020 due primarily to higher salaries and wages as a result of tightening labour markets. The strengthening of the Canadian dollar compared to 2020 also increased the U.S. dollar equivalent of salaries and wages and administration costs incurred in Canadian dollars.

Fluctuations in other income compared to 2020 were mostly due to foreign exchange revaluations on our Canadian operation’s Canadian dollar monetary assets and liabilities.

Earnings before tax for the Lumber Segment increased by $1,025 million compared to 2020 due to the reasons explained above.

Adjusted EBITDA for the Lumber Segment increased by $1,034 million compared to 2020. The following table shows the Adjusted EBITDA variance for the period.

 

Adjusted EBITDA ($ millions)		YTD-20 to YTD-21
Adjusted EBITDA - comparative period		$	939
Price			1,715
Volume			(100)
Changes in export duties			(89)
Changes in costs			(447)
Other			(45)
Adjusted EBITDA - current period		$	1,973

Softwood Lumber Dispute

On November 25, 2016, a coalition of U.S. lumber producers petitioned the USDOC and the USITC to investigate alleged subsidies to Canadian softwood lumber producers and levy CVD and ADD duties against Canadian softwood lumber imports. The USDOC chose us as a “mandatory respondent” to both the countervailing and antidumping investigations, and as a result, we have received unique company-specific rates.

Developments in CVD and ADD rates

We began paying CVD and ADD duties in 2017 based on the USDOC’s determination of duties payable. The CVD and ADD cash deposit rates are updated based on the USDOC’s AR for each POI, as summarized in the tables below. Following year-end, the USDOC amended the CVD cash deposit rate for ministerial errors from 5.06% to 5.08%, effective January 10, 2022.

The USDOC finalized the CVD and ADD duty expense rates for the AR1 and AR2 POIs in 2020 and 2021 respectively, as summarized in the tables below. Finalization of administrative reviews relating to active POIs are expected approximately two years after the POI in question.

AR3 (POI January 1 to December 31, 2020) commenced in April 2021, and the rates are expected to be finalized in August 2022. AR4 (POI January 1 to December 31, 2021) is expected to commence in 2022 with the results finalized in 2023. We have been selected as a mandatory respondent for AR3, which will result in West Fraser continuing to be subject to a company-specific rate.

On January 31, 2022, the USDOC released the preliminary results from AR3 POI covering the 2020 calendar year, which indicated a rate of 8.46% for CVD and 4.63% for ADD for West Fraser. The duty rates are subject to an appeal process, and we will record an adjustment once the rates are finalized. If the AR3 rates were to be confirmed, it would result in a U.S. dollar recovery of $43 million for the POI covered by AR3. This adjustment would be in addition to the amounts already recorded on our balance sheet. If these rates are finalized, our combined cash deposit rate would be revised to 13.09%.

The respective Cash Deposit Rates, the AR POI Final Rate, and the West Fraser Estimated ADD Rate for each period are as follows:

 

        

 

        

Effective dates for CVD		Cash Deposit Rate				AR POI Final     Rate
AR1 POI
April 28, 2017 - August 24, 20171			24.12	%		6.76% 3
August 25, 2017 - December 27, 20171			—			—
December 28, 2017 - December 31, 20172			17.99	%		6.76% 3
January 1, 2018 - December 31, 2018			17.99	%		7.57% 3
AR2 POI
January 1, 2019 - December 31, 2019			17.99	%		5.08% 5
AR3 POI
January 1, 2020 - November 30, 2020			17.99	%		n/a 6
December 1, 2020 - December 31, 20204			7.57	%		n/a 6
AR4 POI
January 1, 2021 - December 1, 2021			7.57	%		n/a 7
December 2, 2021 - December 31, 20218			5.06	%		n/a 7

 

1.	On April 24, 2017, the USDOC issued its preliminary rate in the CVD investigation. The requirement that we make cash deposits for CVD was suspended on August 24, 2017, until the USDOC published the Revised Rate.

2.	On December 4, 2017, the USDOC revised our CVD Cash Deposit Rate effective December 28, 2017.

3.	On February 3, 2020, the USDOC issued a preliminary CVD rate and, on November 24, 2020, a final CVD rate for the AR1 POI. This table only reflects the final rate.

4.	On November 24, 2020, the USDOC revised our CVD Cash Deposit Rate effective December 1, 2020.

5.	On May 20, 2021, the USDOC issued a preliminary CVD rate and, on November 24, 2021, a final CVD rate for the AR2 POI. Following year-end, the USDOC amended the final CVD rate for the AR2 POI from 5.06% to 5.08% for ministerial errors. This table only reflects the final rate.

6.	The CVD rate for the AR3 POI will be adjusted when AR3 is complete, and the USDOC finalizes the rate, which is not expected until 2022.

7.	The CVD rate for the AR4 POI will be adjusted when AR4 is complete, and the USDOC finalizes the rate, which is not expected until 2023.

8.	On November 24, 2021, the USDOC revised our CVD Cash Deposit Rate effective December 2, 2021. Following year-end, the USDOC amended the CVD cash deposit rate for ministerial errors from 5.06% to 5.08%, effective January 10, 2022.

 

Effective dates for ADD		Cash Deposit Rate				AR POI Final Rate				West Fraser     Estimated Rate
AR1 POI
June 30, 2017 - December 3, 20171			6.76%				1.40%	3		1.46%
December 4, 2017 - December 31, 20172			5.57%				1.40%	3		1.46%
January 1, 2018 - December 31, 2018			5.57%				1.40%	3		1.46%
AR2 POI
January 1, 2019 - December 31, 2019			5.57%				6.06%	5		4.65%
AR3 POI
January 1, 2020 - November 29, 2020			5.57%				n/a	6		3.40%
November 30, 2020 - December 31, 20204			1.40%				n/a	6		3.40%
AR4 POI
January 1, 2021 - December 1, 2021			1.40%				n/a	7		6.80%
December 2, 2021 - December 31, 20218			6.06%				n/a	7		6.80%

 

1.	On June 26, 2017, the USDOC issued its preliminary rate in the ADD investigation effective June 30, 2017.

2.	On December 4, 2017, the USDOC revised our ADD Cash Deposit Rate effective December 4, 2017.

3.	On February 3, 2020, the USDOC issued a preliminary ADD Rate and, on November 24, 2020, a final ADD rate for the AR1 POI. This table only reflects the final rate.

4.	On November 24, 2020, the USDOC revised our ADD Cash Deposit Rate effective November 30, 2020.

5.	On May 20, 2021, the USDOC issued a preliminary ADD rate and, on November 24, 2021, a final ADD rate for the AR2 POI. This table only reflects the final rate.

6.	The ADD rate for the AR3 POI will be adjusted when AR3 is complete, and the USDOC finalizes the rate, which is not expected until 2022.

7.	The ADD rate for the AR4 POI will be adjusted when AR4 is complete, and the USDOC finalizes the rate, which is not expected until 2023.

8.	On November 24, 2021, the USDOC revised our ADD Cash Deposit Rate effective December 2, 2021.

Accounting policy for duties

The CVD and ADD rates apply retroactively for each POI. We record CVD as export duty expense at the cash deposit rate until an AR finalizes a new applicable rate for each POI. We record ADD as export duty expense by estimating the rate to

 

        

 

        

be applied for each POI by using our actual results and the same calculation methodology as the USDOC and adjust when an AR finalizes a new applicable rate for each POI. The difference between the cash deposits and export duty expense is recorded on our balance sheet as export duty deposits receivable or other liabilities as applicable, along with any adjustments to finalized rates.

The difference between the cash deposit amount and the amount that would have been due based on the final AR rate will incur interest based on the U.S. federally published interest rate. We record interest income on our duty deposits receivable, net of any interest expense on our duty deposits payable, based on this rate.

Impact on results

The following table reconciles our cash deposits paid during the period to the amount recorded in our consolidated statement of earnings:

  ($ millions)

		2021				2020
Cash deposits paid1		$	(132	)		$	(161	)
Adjust to West Fraser Estimated ADD rate2			(69	)			9
Effective duty expense for period3			(201	)			(152	)
Duty recovery attributable to AR14			—				95
Duty recovery attributable to AR25			55				—
Duty expense			(146	)			(57	)
Interest income on duty deposits attributable to West Fraser			2				2
Estimated rate adjustments
Interest income on the AR1 and AR2 duty deposits receivable			7				11
Interest income on duty deposits		$	9			$	13

 

1.	Represents combined CVD and ADD cash deposit rate of 23.56% from January 1, 2020 to November 29, 2020, 19.39% on November 30, 2020, 8.97% from December 1, 2020 to December 1, 2021, and 11.12% from December 2, 2021 to December 31, 2021.

2.	Represents adjustment to West Fraser Estimated ADD rate of 6.80% for 2021 and 3.40% for 2020.

3.	The total represents the combined CVD cash deposit rate and West Fraser Estimated ADD rate of 21.39% from January 1 to November 30, 2020, 10.97% from December 1 to December 31, 2020, 14.37% for January 1 to December 1, 2021, and 11.86% for December 2 to December 31, 2021.

4.	$95 million represents the duty recovery attributable to the finalization of AR1 duty rates for the 2017 and 2018 POI.

5.	$55 million represents the duty recovery attributable to the finalization of AR2 duty rates for the 2019 POI.

As at December 31, 2021, export duties paid and payable on deposit with the USDOC were $662 million.

Appeals

On May 22, 2020, the North American Free Trade Agreement (“NAFTA”) panel issued its final decision on “Injury”. The NAFTA panel rejected the Canadian parties’ arguments and upheld the USITC’s remand determination in its entirety.

On August 28, 2020, the World Trade Organization’s (“WTO”) dispute-resolution panel ruled unanimously that U.S. countervailing duties against Canadian softwood lumber are inconsistent with the WTO obligations of the United States. The decision confirmed that Canada does not subsidize its softwood lumber industry. On September 28, 2020, the U.S. announced that it would appeal the WTO panel’s decision.

The softwood lumber case will continue to be subject to NAFTA or the new Canada-United States-Mexico Agreement (“CUSMA”) and WTO dispute resolution processes, and litigation in the U.S. In the past, long periods of litigation have led to negotiated settlements and duty deposit refunds. In the interim, duties remain subject to the USDOC AR process, which results in an annual adjustment of duty deposit rates.

Notwithstanding the deposit rates assigned under the investigations, our final liability for CVD and ADD will not be determined until each annual administrative review process is complete and related appeal processes are concluded.

 

        

 

        

North America Engineered Wood Products Segment

 

($ millions unless otherwise indicated)
		2021				2020
NA EWP Segment Earnings
Sales
OSB		$	3,450			$	—
Plywood, LVL and MDF			796				458
Wood chips, logs and other			27				16
			4,273				474
Cost of products sold			(1,521)				(303)
Freight and other distribution costs			(262)				(42)
Amortization			(289)				(13)
Selling, general and administration			(76)				(22)
Operating earnings			2,125				94
Finance expense			(3)				(4)
Other			(1)				5
Earnings before tax		$	2,121			$	95
Adjusted EBITDA1		$	2,414			$	107
Capital expenditures2			424				10
OSB (MMsf 3/8” basis)
Production			5,654				—
Shipments			5,674				—
Plywood (MMsf 3/8” basis)
Production			763				762
Shipments			756				761
MDF (MMsf 3/4” basis)
Production			227				209
Shipments			228				206
LVL (Mcf)
Production			2,439				1,948
Shipments			2,416				2,021

 

1.	This is a non-GAAP financial measure. Refer to the “Non-GAAP and Other Specified Financial Measures” section of this document for more information on this measure. 2021 Adjusted EBITDA was decreased by a one-time charge of $86 million related to inventory purchase price accounting.

2.	Includes $276 million relating to the acquisition of the idled OSB mill near Allendale, South Carolina.

Our NA EWP segment includes our North American OSB, plywood, MDF, and LVL operations. Our operations and financial results up to February 1, 2021 only reflect activities associated with West Fraser’s Panels segment without incorporating the pre-February 1, 2021 North American operations and results of Norbord. Subsequent to February 1, 2021, our operations and financial results reflect the consolidated activities and operations of West Fraser and Norbord, including incorporating the North American operations of Norbord into our NA EWP segment.

Our Adjusted EBITDA analysis reports OSB as one line, and the variances reported only represent changes for plywood, MDF, and LVL.

Sales and Shipments

Sales increased in 2021 compared to 2020 due primarily to the addition of our OSB operations from the date of the Norbord Acquisition and higher pricing for plywood, MDF, and LVL products in the current year.

 

        

 

        

Our plywood production is sold primarily into Canada, and Canadian housing starts and the repair and remodelling market improved in the current year. Demand for MDF and LVL also recovered from COVID-19 related economic impacts in 2020. The price variance for plywood, MDF, and LVL products increased earnings before tax and adjusted EBITDA by $310 million compared to 2020.

Plywood shipment volumes were comparable to prior year. The 2020 volumes were impacted by temporary production curtailments from COVID-19 related market conditions in the spring of 2020 and the 2021 volumes were impacted by the weather-related railcar shortages. Substantially all of our plywood product is shipped eastward to Ontario and Quebec and southward to the U.S. As such, 2021 shipment volumes were not impacted materially by wildfires and severe weather and flooding in B.C., which primarily disrupted rail links and trucking between the B.C. interior and Lower Mainland.

Shipment volumes for our other panel products, in particular LVL, increased compared to the prior year as demand for these products increased due to improved demand from new home construction and repair and remodelling.

The shipment volume variance for plywood, MDF, and LVL products increased earnings before tax and adjusted EBITDA by $9 million compared to 2020.

Costs and Production

Production for plywood, MDF, and LVL products increased compared to 2020. Plywood production in 2020 was partially curtailed in the first half of 2020 in response to COVID-19 related market conditions. MDF and LVL production schedules were also reduced in 2020 to match demand. Production volumes increased as demand for these products recovered from COVID-19 related economic impacts in the prior year.

All of our operating expenses increased due to the addition of our OSB operations.

Purchase price accounting increased our OSB cost of products sold by $86 million and increased our amortization expense compared to pre-acquisition levels. Accounting standards require acquired inventory to be valued at fair value, which is represented by the estimated selling price, less the sum of (a) selling costs and (b) a reasonable profit allowance for the completing and selling effort, based on the profit for similar finished goods. Property, plant, and equipment assets were valued at depreciated replacement cost to represent fair value. The customer relationship intangible asset related to our North America operations will be amortized over 10 years and is based on a valuation model prepared by an independent valuation firm.

Plywood, MDF and LVL costs of products sold trended with shipment volume changes. Compared to 2020, their manufacturing costs were negatively impacted by increased wood costs in B.C. and Alberta, a stronger Canadian dollar relative to the U.S. dollar during the year, and higher additive and energy costs.

B.C. and Alberta stumpage costs increased due to higher fees tied to published product prices as discussed in the Lumber Segment, and B.C. purchased log costs increased due to fibre shortages.

A stronger Canadian dollar relative to the U.S. dollar during 2021 increased the U.S. dollar equivalent of our manufacturing and input costs at our Canadian locations, which are primarily incurred in Canadian dollars.

Freight and other distribution costs generally increased in 2021 compared to 2020 as the transportation network adjusted to the post-COVID demand levels. Higher costs also resulted from transportation issues related to the 2021 wildfires and flooding in B.C.

Selling, general, and administration costs increased compared to 2020 due primarily to the addition of OSB. The plywood, MDF, and LVL operations were also impacted by a stronger Canadian dollar relative to the U.S. dollar on administration costs incurred in Canadian dollars.

Finance expense and other income were comparable compared to 2020.

Earnings before tax for the NA EWP Segment increased by $2,026 million compared to 2020 primarily due to the addition of our OSB operations from the date of the Norbord Acquisition and the reasons explained above.

 

        

 

        

Adjusted EBITDA for the NA EWP Segment increased by $2,307 million compared to 2020. The following table shows the Adjusted EBITDA variance for the period. Our Adjusted EBITDA analysis reports OSB as one line, and the variances reported only represent changes for plywood, MDF, and LVL.

 

Adjusted EBITDA ($ millions)		YTD-20 to YTD-21
Adjusted EBITDA - comparative period		$	107
Price			310
OSB Adjusted EBITDA since the date of the Norbord Acquisition1			2,089
Volume			9
Changes in costs			(99)
Other			(2)
Adjusted EBITDA - current period		$	2,414

 

1.	OSB Adjusted EBITDA since the date of the Norbord Acquisition is calculated as earnings determined for our North American OSB operations adding back: finance expense, tax provision or recovery, amortization, equity-based compensation, restructuring and impairment charges, and other.

Pulp & Paper Segment

 

($ millions unless otherwise indicated)
		2021				2020
Pulp & Paper Segment Earnings
Sales		$	727			$	648
Cost of products sold			(541)				(490)
Freight and other distribution costs			(137)				(126)
Amortization			(34)				(31)
Selling, general and administration			(34)				(33)
Operating earnings			(19)				(32)
Finance expense			(5)				(6)
Other			2				(8)
Earnings before tax		$	(22)			$	(46)
Adjusted EBITDA1		$	15			$	(1)
Capital expenditures			35				19
BCTMP (Mtonnes)
Production			623				662
Shipments			614				667
NBSK (Mtonnes)
Production			428				462
Shipments			419				465
Newsprint (Mtonnes)
Production			113				105
Shipments			113				109

 

1.	This is a non-GAAP financial measure. Refer to the “Non-GAAP and Other Specified Financial Measures” section of this document for more information on this measure.

The pulp & paper segment includes our NBSK, BCTMP and newsprint operations.

Sales and Shipments

Sales increased compared to 2020 due to higher BCTMP and NBSK pricing, offset in part by lower pulp shipment volumes. Despite a period of softer demand from China in the third quarter, overall demand for our pulp products increased in 2021, which positively affected pulp pricing.

 

        

 

        

2021 pulp shipments were lower than prior year as a result of reduced production and disruptions to rail and truck services due to wildfires and severe weather and flooding in B.C.

Newsprint pricing and shipment volumes remained comparable to prior year.

The price variance resulted in an increase in earnings before tax and adjusted EBITDA of $132 million compared to 2020, and the volume variance resulted in a decrease in earnings before tax and adjusted EBITDA of $12 million compared to 2020.

Costs and Production

BCTMP and NBSK production volumes decreased compared to 2020.

BCTMP and NBSK production volumes, which are mostly destined for Asian markets, were significantly reduced in the fourth quarter of 2021 in response to the inability to transport products to or from the Lower Mainland and congestion at the ports that resulted from severe weather and flooding in B.C. The flooding blocked three of B.C.’s major highways and multiple rail lines for several weeks and the resulting backlog at the port has continued to impact export shipments into 2022.

NBSK production volumes were also impacted by planned and unplanned maintenance for our Cariboo and Hinton NBSK mills during the year. 2020 production was adversely impacted, although not to the same extent, by the temporary shutdown of our Cariboo NBSK pulp mill in 2020 in response to low fibre availability and to complete planned maintenance.

Newsprint production volumes were comparable to 2020.

Costs of products sold increased compared to 2020 due primarily to higher fibre costs, as chips used in the production of NBSK are tied to NBSK pricing, higher maintenance cost spending, and increased energy costs. Partially offsetting this impact was the reduction in shipment volumes.

Freight and other distribution costs increased in 2021, despite lower shipment volumes, due to international supply chain challenges as the transportation network adjusted to post-COVID demand levels in addition to increased trucking costs as rail service was impacted by B.C. wildfires in the third quarter of 2021 and all transportation methods by the flooding in B.C. in the fourth quarter of 2021.

Amortization, selling, general, and administration costs, and finance expense were comparable to prior year. Other for 2020 was negatively impacted by an accrual for a power purchase dispute.

Earnings before tax for the Pulp & Paper Segment increased by $24 million compared to 2020 due to the reasons explained above.

Adjusted EBITDA for the Pulp & Paper Segment increased by $16 million compared to 2020. The following table shows the Adjusted EBITDA variance for the period.

 

Adjusted EBITDA ($ millions)		YTD-20 to YTD-21
Adjusted EBITDA - comparative period		$	(1)
Price			132
Volume			(12)
Changes in costs			(93)
Other			(11)
Adjusted EBITDA - current period		$	15

 

        

 

        

Europe Engineered Wood Products Segment

 

($ millions unless otherwise indicated)
		2021				2020
Europe EWP Segment Earnings
Sales		$	723			$	—
Cost of products sold			(457)				—
Freight and other distribution costs			(43)				—
Amortization			(88)				—
Selling, general and administration			(22)				—
Operating earnings			113				—
Finance expense			(1)				—
Earnings before tax		$	112			$	—
Adjusted EBITDA1		$	201			$	—
Capital expenditures			28				—
OSB (MMsf 3/8” basis)
Production			1,035				—
Shipments			1,010				—
MDF (MMsf 3/8” basis)
Production			299				—
Shipments			306				—
Particleboard (MMsf 3/8” basis)
Production			494				—
Shipments			464				—

 

1.	This is a non-GAAP financial measure. Refer to the “Non-GAAP and Other Specified Financial Measures” section of this document for more information on this measure. 2021 Adjusted EBITDA was decreased by a one-time charge of $7 million related to inventory purchase price accounting.

Our Europe EWP segment includes our U.K. and Belgium OSB, MDF, and particleboard operations effective from the February 1, 2021, acquisition date. This segment is new to our company for 2021 so we do not have comparative data in our results for 2020.

Sales prices for the OSB, MDF and particleboard in the European operations tend to be more stable than those in the North American market due to longer-term customer contract pricing. As such, the price increase realized in 2021 was not as high as in North America but was significant to the Europe segment results. Resin costs continued to increase throughout 2021 for these products.

Purchase price accounting increased our Europe EWP cost of products sold by $7 million and increased amortization expense compared to pre-acquisition levels. These accounting standards require acquired inventory to be valued at fair value, which is represented by the estimated selling price, less the sum of (a) selling costs and (b) a reasonable profit allowance for the completing and selling effort, based on the profit for similar finished goods. Property, plant, and equipment assets were valued at depreciated replacement cost to represent fair value. The customer relationship intangible asset related to our European operations will be amortized over 10 years and is based on a valuation model prepared by an independent valuation firm.

Discussion & Analysis of Non-Operational Items

Selling, general and administration

Corporate & Other selling, general and administration expense increased compared to prior year due to acquisition costs associated with the Norbord Acquisition, higher salaries and wages, including costs relating to our OSB corporate team, higher professional fees, and additional costs relating to IT integration. Selling, general and administration expenses related to our operating segments are discussed under “Discussion & Analysis of Annual Results by Product Segment”.

 

        

 

        

Equity-based compensation

Our equity-based compensation includes our share purchase option, phantom share unit, and deferred share unit plans (collectively, the “Plans”), all of which had been partially hedged by an equity derivative contract. The equity derivative matured in December 2021 and was closed out. Our Plans and our equity derivative contract are fair valued at each period-end, and the resulting expense or recovery is recorded over the vesting period.

The Plans include those equity-based plans assumed from Norbord as part of the Norbord Acquisition. The assumed Norbord share purchase option plans (“Assumed Option Plans”) were fair valued at the Norbord Acquisition date. From February 1 to April 20, 2021, the Assumed Option Plans were accounted for as equity-settled plans. On April 20, 2021, our board of directors approved a change to allow the Assumed Option Plans holders the right to elect to receive a cash payment in lieu of exercising an option to purchase Common shares. The change required us to fair value the Assumed Option Plan on April 20, 2021 and convert from equity-based accounting to cash-settled accounting for the Assumed Option Plans. Cash-settled accounting is consistent with the West Fraser option plan. Any changes in fair value from April 20, 2021 onwards will result in an expense or recovery over the vesting period in the same manner as the rest of our Plans. This change to the Assumed Option Plans did not in any way affect the value of the instruments to the holders.

Our valuation models consider various factors, with the most significant being the change in the market value of our shares from the beginning to the end of the relevant period. The expense or recovery does not necessarily represent the value that the holders of options and units will ultimately receive.

Equity-based compensation expense increased compared to prior year due to the impacts of the Assumed Option Plans and the increase in our share price during 2021.

Finance expense

Finance expense for 2021 was net of $9 million of interest income (2020 - $13 million) related to duty deposits receivable. Additional information regarding the interest income on duty deposits receivable is disclosed under “Discussion & Analysis of Annual Results by Product Segment - Lumber Segment - Softwood Lumber Dispute”. Finance expense excluding the interest income related to export duty deposits was $54 million, which was $14 million higher than in 2020. Finance expense was higher due to the additional interest incurred on the Norbord Notes for the two months between the Norbord Acquisition and redemption of the notes, the additional make-whole premium paid to redeem the Norbord Notes, and the write-off of deferred financing costs related to prior credit facilities that were extinguished upon the execution of our $1 billion revolving credit facility.

Other

Effective February 1, 2021, our Canadian operations functional currency changed from Canadian dollars to U.S. dollars. From that date forward, any change in the value of the USD relative to the value of the CAD results in the revaluation of our CAD-denominated monetary assets and liabilities. The currency revaluations are recorded in other.

At the same time, we retroactively changed our reporting currency from Canadian dollars to U.S. dollars. The change of reporting currency resulted in a currency remeasurement of prior period results. Revenues and expenses for the year ended December 31, 2020 were translated into U.S. dollars at the average exchange rate, with no adjustments to the measurement of or accounting for previously reported results. Additional details on West Fraser’s conversion to U.S. dollars can be found under the title “Change in Functional and Reporting Currency.”

Other expense of $5 million was recorded for our Corporate segment in 2021 compared to an expense of $9 million in 2020. In 2021, we entered into annuity purchase agreements to settle $215 million of our defined benefit obligations by purchasing annuities using our plan assets. These agreements transferred the pension obligations of retired employees under certain pension plans to financial institutions. The difference between the cost of the annuity purchase and the liabilities held for these pension plans is reflected as a settlement cost of $12 million recorded under Other. This was offset in part by mark-to-market gains on our interest rate swap contracts.

The other expense in 2020 related primarily to foreign exchange losses and mark-to-market losses on our interest rate swap contracts.

Other related to our operating segments are discussed under “Discussion & Analysis of Annual Results by Product Segment”.

 

        

 

        

Income tax

We recorded an income tax expense in 2021 of $951 million compared to $202 million in 2020. The effective tax rate was 24% compared to 26% in 2020. Note 18 to the Annual Financial Statements provides a reconciliation of income taxes calculated at the statutory rate to the income tax expense.

Other comprehensive earnings – translation of foreign operations

As part of the Norbord Acquisition, we acquired operations in the U.K. and Belgium, so any change in the value of the British pound sterling or Euro relative to the value of the USD results in the revaluation of our European EWP operations assets and liabilities. The revaluation of our European operations into U.S. dollars is reported in other comprehensive earnings.

Other comprehensive earnings for 2020 included a $32 million gain relating to the translation effect due to change in reporting currency. Additional details on West Fraser’s conversion to U.S. dollars can be found under the title “Change in Functional and Reporting Currency.”

Other comprehensive earnings – actuarial gains/losses on retirement benefits

The funded position of our defined benefit pension plans and other retirement benefit plans is estimated at the end of each period. The funded position, as shown in Note 13 to our Annual Financial Statements, is determined by subtracting the value of the plan assets from the plan obligations.

In 2021, we recorded in other comprehensive earnings an after-tax actuarial gain of $153 million (2020 -loss of $7 million). The current year gain reflected an increase in the discount rate used to calculate plan liabilities and higher returns on plan assets.

 

        

 

        

FOURTH QUARTER RESULTS

 

 

Summary Fourth Quarter Results   ($ millions)		Q4-21				Q3-21				Q4-20
Earnings
Sales		$	2,038			$	2,358			$	1,294
Cost of products sold			(1,158	)			(1,213	)			(686	)
Freight and other distribution costs			(207	)			(220	)			(139	)
Export duties, net			30				(66	)			36
Amortization			(153	)			(147	)			(54	)
Selling, general and administration			(88	)			(73	)			(52	)
Equity-based compensation			(12	)			(9	)			(4	)
Operating earnings			450				630				395
Finance expense, net			(1	)			(11	)			3
Other			(11	)			5				(13	)
Tax provision			(104	)			(164	)			(103	)
Earnings		$	334			$	460			$	282
Adjusted EBITDA1		$	615			$	786			$	453

 

1.	This is a non-GAAP financial measure. Refer to the “Non-GAAP and Other Specified Financial Measures” section of this document for more information on this measure.

Selected Quarterly Results

 

($ millions, except EPS amounts which are in $)
		Q4-21				Q3-21				Q2-21				Q1-21				Q4-20				Q3-20				Q2-20				Q1-20
Sales		$	2,038			$	2,358			$	3,779			$	2,343			$	1,294			$	1,268			$	921			$	890
Earnings			334				460				1,488				665				282				262				35				9
Basic EPS			3.13				4.20				12.32				6.96				4.09				3.82				0.51				0.13
Diluted EPS			3.13				4.20				12.32				6.96				4.09				3.82				0.51				(0.09)

Earnings generally trended up in 2020 primarily due to increased pricing for our products as demand recovered from the impacts of COVID-19 throughout the year. The Norbord Acquisition led to incorporation of additional sales and earnings from our North America and Europe OSB operations, which are reflected in our 2021 results from February 1, 2021 onwards. Pricing for our products reached record highs in Q2-21 before moderating in Q3-21. Although pricing partially recovered in Q4-21, our Q4-21 results were impacted by disruptions to shipments of our Canadian lumber and pulp products as a result of severe weather and flooding in B.C. Western Canada log costs, particularly in B.C., increased significantly over the two years, offsetting some of the pricing gains.

 

        

 

        

Discussion & Analysis of Fourth Quarter Results by Product Segment

Lumber Segment

 

($ millions unless otherwise indicated)
		Q4-21				Q3-21				Q4-20
Lumber segment earnings
Sales
Lumber		$	796			$	788			$	915
Wood chips and other residuals			70				69				69
Logs and other			22				26				26
			888				883				1,010
Cost of products sold			(546	)			(586)				(487)
Freight and other distribution costs			(93	)			(102)				(97)
Export duties, net			30				(66)				36
Amortization			(45	)			(41)				(40)
Selling, general and administration			(39	)			(36)				(37)
Operating earnings			195				52				385
Finance expense, net			1				(8)				6
Other			(2	)			7				(8)
Earnings before tax		$	194			$	51			$	383
Adjusted EBITDA1, 2		$	240			$	93			$	425
SPF (MMfbm)
Production			720				758				810
Shipments			673				805				840
SYP (MMfbm)
Production			659				643				692
Shipments			632				698				711

 

1.	This is a non-GAAP financial measure. Refer to the “Non-GAAP and Other Specified Financial Measures” section of this document for more information on this measure. Q4 2021 Adjusted EBITDA was decreased by a one-time charge of $2 million related to inventory purchase price accounting.

2.	Effective January 1, 2021, and for all comparative periods, export duties are no longer excluded from the definition of Adjusted EBITDA.

Sales and Shipments

Lumber sales for the fourth quarter were impacted by lower shipments and higher product pricing. Lumber sales were higher than the previous quarter as higher product pricing more than offset lower shipment volumes. Lumber sales were lower than Q4-20 as product pricing was modestly higher and did not offset lower shipment volumes.

Shipment volumes were lower for both SPF and SYP in Q4-21 compared to the comparative quarters. SPF shipment volumes were lower in Q4-21 as severe weather and flooding in B.C. disrupted rail and truck services. This disruption was more severe than those relating to wildfires in the third quarter as the flooding blocked three of B.C.’s major highways and multiple rail lines for several weeks, whereas certain highway routes were still open to trucking during the wildfires. No significant transportation disruptions impacted Q4-20, and shipment volumes in Q4-20 were higher as shipments recovered from intermittent rail services issues in previous periods.

SYP shipment volumes trended lower in Q4-21. SYP production exceeded shipments in Q4-21, offsetting a drawdown in SYP inventory in Q3-21 as we over shipped production as demand for lumber improved. Shipment volumes decreased compared to Q4-20 due to reduced production levels, discussed further in the section below.

The volume variance resulted in a decrease in earnings before tax and Adjusted EBITDA of $38 million compared to the previous quarter and a decrease of $64 million compared to the fourth quarter of 2020.

 

        

 

        

Fourth-quarter lumber pricing was higher than Q3-21 and was also higher, although to a lesser extent, than Q4-20. Lumber supply and demand industry fundamentals tightened through the fourth quarter, which we believe was due to relatively low inventory volumes in the supply chain as a result of transportation and logistics disruptions, improved new home construction levels, and strong demand from repair and remodelling activity.

The price variance resulted in an increase in earnings before tax and Adjusted EBITDA of $130 million compared to the previous quarter and an increase of $30 million compared to the fourth quarter of 2020.

 

		Q4-21								Q3-21								Q4-20
SPF Sales by Destination		MMfbm				%				MMfbm				%				MMfbm		%
U.S.			461				68%				548				68%			567			67%
Canada			128				19%				204				25%			177			21%
China			60				9%				23				3%			64			8%
Other			24				4%				30				4%			32			4%
			673								805							840

We ship SPF to several export markets, while our SYP sales are almost entirely within the U.S. The relative proportion of shipments of SPF to China was higher compared to the previous quarter due to changes in pricing differentials between the North American and overseas markets. The relative proportion of shipments of SPF to China in Q4 2021 was comparable to the fourth quarter of 2020.

Wood chip and other residual sales in Q4-21 were consistent with both comparative quarters.

Costs and Production

SPF production volumes decreased versus comparable quarters due to reductions in operating schedules at our B.C. SPF operations in response to disruptions to rail and truck services caused by severe weather and flooding in B.C. in Q4-21. The decrease in production compared to Q4-20 is more significant than the decrease compared to Q3-21 as production in Q3-21 was impacted by reductions in operating schedules caused by wildfires in B.C.

SYP production was higher compared to the Q3-21 but lower compared to Q4-20. Production increased compared to the previous quarter as Q3-21 production was impacted by temporary market-related production curtailments and due to incremental production from the December 1, 2021 acquisition of the Angelina Forest Products lumber mill in Lufkin, Texas. Q4-21 production was lower compared to Q4-20 as production was adversely impacted by log shortages in certain operating areas, supply chain disruptions impacting procurement of certain manufacturing inputs, and COVID-19 impacts on the workforce.

Costs of products sold were lower than the previous quarter due primarily to lower shipment volumes offset in part by higher SPF and SYP log costs. Costs of products sold were higher as compared to the fourth quarter of 2020 due to increases in SPF and SYP log costs and manufacturing costs, offset in part by lower shipment volumes.

SPF log costs increased versus comparable quarters due to increased stumpage rates in B.C. and Alberta and purchased log costs in B.C. Both the third and fourth quarter of 2021 were negatively impacted by the B.C. SPF stumpage costs tied to the price of lumber, which with the time lag, increased as a result of high lumber prices in Q2-21. Fibre shortages in B.C. have increased competition and pricing for logs available through the B.C. Timber Sales log market. Q4-21 lumber results were also adversely impacted by the strengthening of the Canadian dollar compared to Q4-20. This increased the U.S. dollar equivalent of our SPF manufacturing and input costs, which are primarily incurred in Canadian dollars.

SYP log costs trended higher in the fourth quarter of 2021 compared to both comparative periods due to increased competition for logs as sawmill production increased in the region. The U.S. South continued to have higher input costs in the quarter due to inflation and increased employee costs associated with managing through COVID-19.

Freight and other distribution costs were lower compared to the previous quarter due to lower shipment volumes. The severe flooding in B.C. impacted volume as main highways and rail lines were closed for several weeks and the ports congested, making it challenging to move any of our products through B.C. Freight and other distribution costs generally