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Press release from Marketwire

Western Reports Second Quarter 2012 Results

Tuesday, July 31, 2012

Western Reports Second Quarter 2012 Results19:15 EDT Tuesday, July 31, 2012VANCOUVER, BRITISH COLUMBIA--(Marketwire - July 31, 2012) - Western Forest Products Inc. (TSX:WEF) ("Western" or "the Company") today announced results for the second quarter of 2012. The Company reported EBITDA of $20.4 million for the second quarter of 2012 compared to EBITDA of $9.3 million for the first quarter of 2012 and $21.2 million for the second quarter of 2011.Q2 2012 HIGHLIGHTSEBITDA of $20.4 million, up from the $9.3 earned million in Q1 2012 Top line revenues grew by 16% compared to Q2 2011 on increased lumber and log shipment volumes Announced a $6.7 million investment in auto grading technology for our Alberni Pacific sawmill Balance sheet and liquidity positions continue to improve with net debt to capitalization at 8% and $175.5 million in total available liquidity Completed the sale of TFL 60 for net proceeds of $12.2 million Completed the refinancing of our existing revolving term loan facility to $110.0 million, on improved terms"Operationally the second quarter was executed well. Sales volumes, production, and productivity all improved. Despite weather impacts we maximized margin available by expediting the delivery of logs to our sawmills, producing the mix of lumber products demanded by our customers. Prices in the export log, pulp log, and sawmill by-product markets were significantly lower than last year and demand from Japan was slightly weaker. Despite these challenges our focus on margin delivered our eleventh straight quarter of positive EBITDA," said Dominic Gammiero, Chairman and Chief Executive Officer.Net income for the second quarter of 2012 was $12.3 million ($0.03 per share), on sales of $253.1 million, which compared to a net income reported in the second quarter of 2011 of $11.4 million ($0.02 per share) and a net income reported for the first quarter of 2012 of $1.9 million ($nil per share).FINANCIAL SUMMARYThree months endedSix months endedJune 30June 30(millions of dollars except where noted)2012201120122011Sales$253.1$218.7$476.5$399.5EBITDA20.421.229.734.2EBITDA as % of revenues8.1%9.7%6.2%8.6%Operating income prior to restructuring items and other expenses13.114.015.520.8Net income from continuing operations12.711.614.815.7Net income for the period12.311.414.215.2Basic and diluted earnings per share (in dollars)0.030.020.030.03Net Debt at June 3029.957.3Liquidity at June 30175.5111.7OverviewSecond quarter 2012During the second quarter of 2012, the Company grew total revenue to $253.1 million, our highest quarterly figure since the second quarter of 2007. A $22.0 million increase in lumber revenue over the second quarter 2011 is mainly a function of higher shipment volumes, and a 3% increase in the average realized selling price of lumber in the current quarter. Log revenue was also strong, driven primarily by increased domestic and export log demand. To support the increased product sales levels, production of logs, lumber and by-products all increased over the same quarter in 2011, including lumber productivity per shift increasing by 6% from the same quarter one year ago.This sales growth was achieved in what continues to be challenging market conditions. Despite some positive economic news in the US recently, only modest growth in the US housing market is expected for the remainder of 2012. The economic outlook for China has softened somewhat from the previous year, while markets in Japan are just starting to show signs of a recovery.The second quarter EBITDA result of $20.4 million is an improvement over our first quarter result of $9.3 million and marginally lower than the $21.2 million reported in the second quarter a year ago. The second quarter of 2012 saw both production and productivity increase from the same quarter a year ago, while product inventories finished lower. We were able to maximize margin in the quarter by focusing on the cedar market, expediting the delivery of logs though our sawmills, and improving net selling prices in our commodity business.However, EBITDA margins for the second quarter of 2012 have decreased by 1.6% from the second quarter 2011 level. The lower EBITDA margin was largely a result of reduced pricing on export and pulp logs, higher costs in our timberlands operations, lower by-product pricing and increased selling and administration expenses. Partially offsetting this was the benefit of higher average lumber selling prices and lower conversion costs in our manufacturing facilities.The EBITDA for the three months ended June 30, 2011 was restated to $21.2 million, a decrease of $0.7 million, due to the adoption of a new inventory accounting policy on January 1, 2012. The annual impact of the policy on 2011 EBITDA results amounted to an increase of $0.2 million.Net income for the second quarter of 2012 was $12.3 million, an increase of $0.9 million over the net income of $11.4 million a year earlier, and an increase of $10.4 million over the net income in the previous quarter. The increase in net income in the second quarter of 2012 compared to the same quarter a year ago is principally due to the inclusion of gains on asset sales this quarter of $1.6 million, together with slightly lower finance costs compared to the second quarter last year.Year to date, June 30, 2012Net income for the first six months of 2012 was $14.2 million, which compares to net income in the first six months of 2011 of $15.2 million. EBITDA for the current six months is $4.5 million less than for the first six months of 2011. Partially offsetting this decrease in EBITDA is an increase in other income of $3.2 million (mainly as a result of gains on property sales in the current period), and lower finance costs in the six months to June 30, 2012.On June 28, 2012, Western closed the previously announced sale of Tree Farm Licence 60 ("TFL 60") and related assets on Haida Gwaii to Taan Forest Limited Partnership ("Taan"), a partnership of the Council of the Haida Nation and Haida Enterprise Corporation, the business arm of the Haida Nation. Under the terms of the sale, Western received net proceeds of approximately $12.2 million. Cash of $10.2 million has now been received, and the remaining $2.0 million is in the form of a promissory note, payable within 24 months of closing. Western also retains a right of first refusal on a certain quantity of cedar logs harvested by Taan over the next 24 months. Taan will assume substantially all of the obligations of Western on Haida Gwaii.On June 29, 2012, Western announced an agreement to refinance its existing revolving term loan facility with improved terms. Under the terms of the refinanced revolving term loan agreement, availability on Western's existing $75.0 million revolving term loan has been increased to $110.0 million. In addition, pricing for the revolving term loan has improved, and maturity of the facility is now June 29, 2016.As part of the Company's strategic capital plan, Western announced a $16.0 million investment in the Saltair sawmill in February, 2012. This project will make Saltair the largest single line sawmill operating on the coast of British Columbia and will provide upgrades to the edgers, stackers and sorters. The upgrades will increase production by approximately 15%, improve lumber recovery, lower our unit cost of production, and increase our ability to provide a greater variety of products to our customers. To the end of the second quarter 2012, $2.3 million had been spent on the project and a further $9.8 million has been committed. We expect the work to be completed on this phase by the second quarter of 2013.In July 2012, Western announced an investment of $6.7 million for the installation of automated lumber grading technology into the Alberni Pacific Division planer mill in Port Alberni, BC. The equipment is expected to deliver a significant increase in operating speeds, improve lumber grades, and increase lumber recoveries. This project is expected to be complete by the end of the first quarter of 2013.Our liquidity position at June 30, 2012 increased to $175.5 million from $114.9 million at the end of the previous quarter, and from $112.1 million at December 31, 2011. The increase at June 30, 2012 is primarily because of the aforementioned refinancing, increased cash generated from operations, and the cash proceeds received from the sale of TFL 60.Operating ResultsSecond quarter 2012Lumber revenue for the second quarter of 2012 increased by 15% compared to the second quarter of 2011, primarily due to higher shipment volumes. Lumber shipment volumes increased by 11% to 234 million board feet in the second quarter of 2012 from 210 million board feet in the second quarter of 2011. The geographic destination of the lumber changed this quarter with relatively less lumber being shipped to Japan and China and a corresponding increase in the percentage of product sold in the US and domestic Canadian markets. In the current quarter, 38% of our sales were to the Canadian market, 22% to China, 20% to Japan, and 16% to the US. This shift in volume reflects both a weaker Japanese market and highlights our ability to redirect volume into the domestic market for treating and industrial oil-patch uses to generate higher margins.In the second quarter of 2012, our overall average lumber price realized was approximately 3% higher at $707 per thousand board feet, compared to $684 per thousand board feet in the same quarter of 2011. In general, lumber prices did not change significantly over the two quarters, with the exception of western red cedar and cypress prices, which were approximately 6% and 12% higher, respectively, in the current quarter. Our lumber sales mix in the current quarter changed marginally with approximately 1% more hemlock and western red cedar sales and 2% less douglas fir sales this quarter compared to the second quarter of 2011. The improvement in realized prices also reflects the beneficial effects of the weaker Canadian dollar on both US dollar and Japanese Yen denominated sales.Log revenue in the second quarter of 2012 increased by 26% compared to the same quarter last year. The increase is due to a 35% increase in the volume of logs sold, but was partly offset by the average log prices realized in the second quarter of 2012 being 4%, or $3 per cubic metre, lower than a year ago. Overall log demand in our external markets for the quarter was higher relative to a year ago, with all categories showing increases. Although market conditions in China have softened from 2011, we continue to sell at higher volumes than 2011, but at modestly lower prices. Domestic pulplog sale volumes are approximately 19% higher than the second quarter last year, but prices are 14% lower this year. Prices for pulplogs last year were higher because of log shortages and relatively high pulp prices. Cedar shingle log prices were again higher this quarter compared to 2011 as a result of higher demand for roofing materials. Prices of cedar shingles were approximately 50% higher at the start of the second quarter this year compared to last year.By-product revenues decreased by $2.8 million, or 16%, in the current quarter compared to the second quarter of 2011. While chip volumes sold in this quarter were 2% higher than the second quarter last year, prices received for the chips were on average 18% lower this quarter which more than offset the impact of the favourable volume increase. Prices realized for our chips sold under fibre agreements with certain of our customers are based on a chip pricing formula which is a function of pulp prices and the mix of chips sold. Pulp prices were lower in the current quarter compared to the same quarter in 2011 which resulted in the lower chip prices.EBITDA of $20.4 million for the second quarter of 2012 compares closely to EBITDA in the same quarter last year of $21.2 million and to $9.3 million in the first quarter of 2012. The EBITDA for the second quarter of 2012 reflects increased operating levels, higher sales volumes for most products and improvements in mill productivity levels compared to the second quarter of 2011. In addition, the second quarter 2012 results benefited from the relative weakening of the Canadian dollar against both the US dollar and the Japanese Yen, compared to the same quarter last year. However, these positive variances were offset by the negative impacts in the current quarter of lower log sale margins, lower chip prices, and higher selling and administrative expenses. Lower log sales margins are reflective of lower selling prices for both domestic and export logs, and an increase in logging costs over the same period last year.Our operations increased production levels to meet increased demand for our products. In the case of our timberlands operations, logging operations increased harvested production by 9% in the current quarter compared to the same quarter in 2011. This required extending operations into areas with higher cost implications reflecting both location and terrain, greater use of higher cost road building and increased heli- logging. Logging costs were also higher in the quarter due to working in poor winter weather conditions in the preceding quarter which flowed through inventory into the second quarter results. The operating results for the second quarter of 2012 included lower shutdown costs by $1.1 million compared to those incurred in the second quarter of 2011.Lumber production was 8% higher in the second quarter of 2012 compared to the second quarter of 2011. Our sawmills operated at 88% of capacity, on a shifts available basis, in the second quarter of 2012 compared to 86% of capacity in the same quarter of 2011. The majority of this increase in operating capacity relates to the Duke Point mill which ran for part of the quarter in 2012 but did not run during the second quarter 2011. Our mills, on average, increased productivity, as measured on a production volume per shift basis, by 6% in the current quarter compared to the same quarter in 2011, with the majority of mills contributing to this increase. In addition, conversion costs of lumber produced in the second quarter of 2012 decreased by 2% from the same period a year ago. These productivity improvements and reduced conversion costs reflect a number of initiatives undertaken as part of the companywide margin improvement program initiated in 2011. This improvement was tempered by the effects of downtime taken at our Alberni Pacific mill due to poor market conditions in Japan.Our operating results for the second quarter of 2012 were positively impacted by a weakening of the average value of the Canadian dollar relative to both the US dollar and Japanese Yen compared to the second quarter of 2011, by 4% and 7%, respectively. This increased our Canadian dollar proceeds received on US dollar denominated sales (a high percentage of our lumber sales are denominated in US dollars, including those to China), and also on Yen denominated sales. Western mitigates its foreign exchange risk associated with sales transactions denominated in US dollars and Japanese Yen by utilizing forward currency transactions. As at June 30, 2012, Western had obligations to sell an aggregate Yen 2,700 million and $US 20.0 million. As a result of the exchange rate movements over the quarter, net realized and unrealized losses of $0.9 million were recorded on these foreign currency contracts (2011: $0.5 million).Total freight costs were $25.1 million in the second quarter of 2012, which compared to the second quarter of 2011 costs of $24.1 million. Our lumber shipment volumes have increased by 11% in the current quarter compared to the second quarter of 2011, but freight charges were increased by only 4%. This is mainly because of a change in the geographic distribution of our sales, and lower rates negotiated for shipments to China.Selling and administration costs increased by $0.7 million to $7.4 million in the current quarter compared to $6.7 million in the same quarter of 2011, mainly because of increased salary costs and higher consulting costs, primarily associated with projects to enhance the quality of our management and sales information in the current quarter.Year to date, June 30, 2012Total revenues for the first six months of 2012 were $476.5 million, an increase of 19% over the revenues for the same period in 2011. The increase is the result of higher demand for all our products with volume increases for the current six month period for lumber, logs and chips being 41%, 36% and 9%, respectively.EBITDA for the first six months of 2012 was $29.7 million compared to $34.2 million earned in the first six months of 2011. EBITDA margins fell from 8.6% to 6.2% as a result. The primary reason for the contraction of the margins has been the decreased log margins due to reduced selling prices of export and most domestic logs, along with increases in our log costs over the respective periods. The cost of our logs in the first six months of 2012 was high as we drew down inventories that carried higher costs incurred in the fourth quarter of 2011.Non-operating income and costsFinance costs decreased from $1.8 million in the second quarter of 2011 to $1.6 million in the current quarter. This decrease is primarily attributable to a reduction in the outstanding debt amount over the respective periods, resulting from the proceeds of non-core asset sales being used to pay down debt subsequent to the second quarter of 2011. Also contributing to the reduction is the benefit of lower interest rates on the revolving term loan. Partially offsetting these reductions to finance costs is the inclusion in the current quarter of an expense of $0.4 million relating to the previously deferred financing costs attributable to the pre-June 29, 2012 debt facility. For similar reasons, finance costs for the first six months of 2012 of $2.9 million were lower than the $3.7 million incurred for the first six months a year ago.Other income of $1.6 million for the second quarter of 2012 compares to a net expense of $0.1 million in the second quarter of 2011. The current quarter income includes gains on asset disposals, primarily $1.5 million associated with the sale of TFL 60.Markets and OutlookWestern's strategy of focusing on products that drive the highest margin end use of our fibre resource continued to generate positive financial results in the second quarter of 2012. Despite challenging product markets, Western has maintained a disciplined approach to improving product margins, allowing us to generate positive EBITDA and grow our revenue. The second quarter is typically our highest lumber sales quarter as demand peaks during the building season, followed by some slowdown in the third quarter as construction activity winds up and the threat of forest fires in our Timberlands operations potentially reduces log supply. Looking ahead to the third quarter, management remains focused on the four key lumber segments: Western Red Cedar, Commodity (which includes China), Japan, and Niche.During the first half of the year, a tight cedar log supply supported increased pricing and our ability to supply the product has led to an increased market share for Western. Our third quarter outlook is for the current market tightness to ease somewhat, as the coastal harvest increased during the second quarter of 2012, and cedar demand seasonally falls in the third quarter. We anticipate prices to hold into the third quarter until supply catches up with demand.In the commodity markets, lumber demand in China has improved from the early part of 2012. Although the economic outlook for China appears less robust in 2012 compared to recent years, our lumber volumes are basically flat year over year. Spruce, pine, fir (SPF) prices peaked at the beginning of June, and this has improved our ability to push prices locally and in China. We are seeing opportunities in domestic markets for our commodity products in higher margin specialty industrial uses, which allows for better diversification of our commodity products.The US housing market, while still at low historical start levels, appears to have started a slow and fragile recovery. However, given that the housing construction market has only improved marginally, and with only slightly improved unemployment statistics, we expect the return to trend housing construction levels to still be a few years off.Japanese market demand has been soft for the first half of the year, and is historically weak from March through August. We would expect a modest upturn in demand to materialize by September, and are starting to see signs of a recovery as indicated by an increase in customer inquiries. However, with increased competition in the market resulting from softness in demand in China, Japan could prove to be a challenging market.The North American market for Niche appearance lumber remains soft, with year over year volumes flat. We do not foresee a significant change in North American niche sales in the third quarter as our customer base appears to have sufficient inventories to restrict demand. We will continue to reposition some of our shop and better production to other geographical areas to generate improved margins.Despite the current uncertainty in lumber product markets heading into the third quarter, management is anticipating an eventual long term global market recovery which will lead to a higher demand for our products. To prepare for this recovery, Western is continuing to implement its strategic capital plan which will position the company to be more competitive in the global marketplace. With a strong balance sheet, and the belief that the strategic capital program can be funded by cash generated from operations, we have commenced work on this program as discussed earlier. These projects are expected to further enhance our margins through improved efficiencies and product grades.In addition to our strategic capital investments, management continues to work on improving product margins and has adopted a formalized, non-capital, margin improvement program. This program is targeted to deliver an additional $25 million of margin improvement over the next three years, through a variety of cost reduction and productivity initiatives, of which approximately $5 million has been achieved to date.The Company's Q2 2012 news release, management's discussion and analysis, unaudited condensed unaudited interim financial statements and notes to the financial statements have been filed on SEDAR and are also available on the Company's website at www.westernforest.com.Forward-Looking Statements and InformationThis press release 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, misjudgements in the course of preparing forward -looking statements or information, changes in opportunities and other factors referenced under the "Risks and Uncertainties" section of our MD&A in our 2011 Annual Report dated February 22, 2012. 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.Reference is made in this report to EBITDA which is defined as operating income prior to operating restructuring items and other expenses plus amortization of property, plant, equipment, and intangible assets, impairment adjustments, and changes in fair value of biological assets. 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, impairment adjustments and changes in the fair value of biological assets are non-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, the inclusion of operating restructuring items which are unpredictable in nature and timing 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 IFRSs 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. EBITDA is not a measure of financial performance under IFRSs, and should not be considered as an alternative to measures of performance under IFRSs. 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. A reconciliation between the Company's net income as reported in accordance with IFRSs and EBITDA is included in Appendix A to the Company's Management's Discussion & Analysis for the quarters ended June 30 2012 and March 31, 2012, which is available under the Company's profile on SEDAR at www.sedar.com.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 6.4 million cubic metres of timber of which approximately 6.2 million cubic metres is from Crown lands and lumber capacity in excess of 1.1 billion board feet from eight sawmills and three 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 25 countries worldwide.TELECONFERENCE CALL NOTIFICATION:Wednesday, August 1, 2012 at 10:00 a.m. PST/1:00 p.m. ESTOn Wednesday, August 1, 2012, 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 416-340-8527 or 877-240-9772. This call will be taped, available one hour after the teleconference and on replay until September 1, 2012. To hear a complete replay, please call 905-694-9451 / 800-408-3053 Passcode 2963908.July 31, 2012To our Shareholders,Operationally the second quarter was executed well. Sales volumes, production, and productivity all improved. Despite weather impacts, we maximized margin available by expediting the delivery of logs to our sawmills, producing the mix of lumber products demanded by our customers. Prices in the export log, pulp log, and sawmill by-product markets were significantly lower than last year and demand from Japan was slightly weaker. Despite these challenges, our focus on margin delivered our eleventh straight quarter of positive EBITDA.Q2 2012 financial highlights are as follows:Q2 sales revenue of $253.1 million; highest total since Q2 2007 Q2 2012 EBITDA of $20.4 million; cash provided by operations was $19.2 million Completed $12.2 million sale of TFL 60 Net debt reduced to $29.9 million at the end of the quarter Increased term debt facility to $110.0 million, extended to June 2016 at favourable rates Liquidity increased to $175.5 million from $112.1 million at the end of 2011As a result of our continued operational focus, the quarter resulted in several achievements including:Log production increased by 9% over last year to 1.8 million m3 Lumber sales volume increased by 12% over Q2 2011 Mill productivity levels increased by 6% over the second quarter of 2011 (conversion costs decreased by 3%) Announced a $6.7 million investment in auto grading technology for our Alberni Pacific sawmillWe are pleased to announce the appointment of Don Demens as President of the Company. Don has been instrumental in the turnaround of Western. Under his leadership we have seen a change in business culture with a strong focus on margin. This appointment positions Western with a strong succession framework to build the future of the Company.We performed well despite little improvement in some of our markets. The EBITDA result of $20.4 million is an improvement over our first quarter result of $9.3 million and marginally lower than the second quarter a year ago. This reflects increased operating levels, higher sales volumes, improvements in mill productivity levels, and exchange rates. However, margins were pressured as we experienced the negative impacts of reduced selling prices for pulplogs, export logs and by products, and higher logging costs compared to last year. If prices for these products had been at the same levels as 2011, we would have generated an additional $15 million in EBITDA.Markets remain soft and are not expected to improve significantly through the back half of the year. While we are encouraged by recent activity in the US housing market we believe it will take some time for demand to improve enough to have a material impact on the markets we service. We are, however, seeing improved demand in China for our lumber products compared to earlier in the year. Aligning production with demand remains key to maintaining product pricing and sales volumes.We continued with our strategic plan, including $23 million in investments announced so far this year. Ordering of equipment has begun, which will position Western to be more competitive in the global marketplace. More announcements of capital investments can be expected throughout the year. In particular, our management team and Board of Directors are turning their attention to projects such as a second phase at Saltair sawmill, which will result in an additional $22 million in investment.Western's safety results continue to trend in a positive direction but tragically, one of our contractors operating the Gold River area sustained a fatality since our last report. We continued to take proactive steps with our contractors in the past year; reviewing areas of concern and implementing programs to directly improve results. This terrible incident reinforces the need for us to drive our safety message through all parts of our business, and that of our independent contractors.We are pleased to see the results of our strategic business plan and the continued focus on margin are showing positive results in all parts of the company. Markets continue to remain challenging. Our performance management program and strategic capital investment continue to improve our position during these tough markets and will position us for strong results when log and lumber markets return.Dominic Gammiero, Chairman and CEOLee Doney, Vice ChairmanFOR FURTHER INFORMATION PLEASE CONTACT: Dominic GammieroWestern Forest Products Inc.Chairman and CEO(250) 734-4711ORBrian CairoWestern Forest Products Inc.CFO and Corporate Secretary(250) 734-4710www.westernforest.com