Western Announces Third Quarter 2018 Results
VANCOUVER, British Columbia, Nov. 07, 2018 (GLOBE NEWSWIRE) — Western Forest Products Inc. (“Western” or the “Company”) reported adjusted EBITDA of $32.3 million in the third quarter of 2018, compared to adjusted EBITDA of $32.6 million in the third quarter of 2017, and $50.2 million reported in the second quarter of 2018. Operating income prior to restructuring and other income was $23.4 million in the third quarter of 2018, compared to $25.1 million in third quarter of 2017, and $39.7 million reported in the second quarter of 2018. Higher realized average lumber pricing and lower manufacturing costs in the third quarter of 2018 offset the impacts of $11.5 million of US export lumber duty expense, higher stumpage costs, declining commodity markets and fire-related operating curtailments.
Third Quarter Highlights
- Delivered third quarter adjusted EBITDA of $32.3 million and net income of $15.1 million
- Achieved Company record quarterly average realized lumber price of $1,124 per thousand board feet
- Increased internal saw log consumption to 82% from 76% in the third quarter of last year
- Accelerated capital invested to $20.7 million, including $5.9 million at our Arlington facility
- Entered into a new $250 million credit facility that includes an additional $100 million accordion feature
- Returned $8.8 million to shareholders via the Company’s recently increased quarterly dividend
- Completed $10.4 million of share repurchases, cancelling 4.6 million common shares
|Financial Results Summary|
|(millions of dollars except per share amounts and where otherwise noted)||2018||2017||2018||2018||2017|
|Adjusted EBITDA margin||11.0||%||11.4||%||15.3||%||13.8||%||13.2||%|
|Operating income prior to restructuring items and other income||$||23.4||$||25.1||$||39.7||$||95.7||$||86.7|
|Net income for the period||15.1||13.6||27.1||63.9||55.4|
|Basic and diluted earnings per share (in dollars)||$||0.04||$||0.04||$||0.07||$||0.16||$||0.14|
|Net debt (cash) – end of period||$||(42.8||)||$||(65.2||)||$||(42.1||)|
|Total liquidity – end of period||291.8||299.2||276.1|
“Well positioned opening log inventory and efficiencies in our supply chain allowed us to partly mitigate the impact of the worst fire season in coastal BC history. Despite harvest challenges and market volatility, our specialty-focused lumber business continues to deliver revenue growth and higher price realizations,” said Don Demens, President and Chief Executive Officer. “Looking ahead, we expect to leverage the investments in our flexible operating platform to overcome challenging market conditions, ongoing lumber duty expense and increased stumpage costs.”
The Company generated revenue of $292.5 million in the third quarter of 2018, as compared to $285.2 million in the third quarter of 2017, and $327.8 million in the second quarter of 2018. The Company increased third quarter revenue despite a significant reduction in export log shipments in favour of supplying logs to its coastal sawmills.
Net income of $15.1 million ($0.04 per diluted share) was reported for the third quarter of 2018, as compared to $13.6 million ($0.04 per diluted share) for the third quarter of 2017 and $27.1 million ($0.07 per diluted share) in the second quarter of 2018.
Ms. Suzanne Blanchet tendered her resignation from the Board of Directors effective November 8, 2018, for personal reasons. The Company intends to fill the director vacancy through its ongoing candidate search.
Summary of Third Quarter 2018 Results
Adjusted EBITDA for the third quarter of 2018 was $32.3 million, as compared to $32.6 million from the same period of last year. Stronger specialty market pricing, an improved supply chain, and a weaker Canadian dollar offset the impacts of incremental US lumber export duties, higher stumpage costs, fire-related operating curtailments, and a significant decline in commodity lumber pricing that impacted sales volumes in the quarter. Operating income prior to restructuring items and other income decreased to $23.4 million from $25.1 million in the same period last year.
Lumber revenue was $238.2 million, an increase from $212.5 million in the third quarter of 2017, as continued strong global demand for specialty lumber delivered a 16% increase in average price realizations, despite a weakening sales mix. Total lumber sales volumes decreased by 4%. Western Red Cedar (“WRC”) shipments decreased 9% as the market availability of cedar logs for purchase was significantly reduced due to the severe coastal fire conditions. A lack of Douglas Fir log availability was the primary contributor in a 21% reduction in Japan lumber shipments. Commodity lumber volumes increased to 50% of our lumber shipments from 47% in the same period last year. The Canadian dollar (“CAD”) was 4% lower on average against the United States dollar (“USD”) which helped to offset a weaker lumber sales mix.
Third quarter log revenue was $33.6 million in 2018, a decrease of $21.9 million from the same period last year. Improved log market pricing was more than offset by a weaker domestic log sales mix. Log shipments decreased by 17% as compared to the third quarter of 2017 as we suspended our export log sales program to direct additional logs to our mills. Our export log shipments in the period originated from a short-term First Nation timber purchase agreement managed by Western.
By-products revenue increased to $20.7 million in the third quarter of 2018, from $17.2 million in the same period in 2017. Higher chip pricing was driven by improved pulp markets and a weaker CAD over the same period last year.
Lumber production was 221 million board feet, a 13% increase over the third quarter of 2017. Well positioned opening log inventory supported increased sawmill operating hours. Third quarter manufacturing costs were lower than the same period last year due to increased production and a heavier mix of commodity lumber. Increased competition for small diameter logs from the pulp manufacturers and the export market led to a one week curtailment at our Ladysmith sawmill in the quarter.
Third quarter log production was 815,000 cubic metres, 11% lower than the same period last year. Coastal fire conditions led to the full curtailment of timberlands operations for August and early September. During the curtailment, we directed personnel and equipment to aid in coastal BC firefighting efforts. Despite the challenging operating conditions, closing log inventory was 15% higher compared to the same quarter of 2017.
Harvest costs increased by 12% from the third quarter of 2017, primarily driven by higher stumpage rates and reduced production. Coastal stumpage inflation is the result of recent Provincial rate equation updates, the ongoing influence of coastal log exports and rising market pricing.
Saw log purchases were 197,000 cubic metres, a 40% decrease from the same quarter last year. The extent and severity of the fire season, combined with increased demand from pulp manufacturers and export markets, reduced log supply to domestic sawmills and drove log prices higher.
Freight expense decreased by $4.9 million as compared to the third quarter of 2017. Significantly reduced export log sales and lower lumber shipments to Japan offset the impact of a weaker CAD on USD-denominated freight charges.
Adjusted EBITDA and operating income results for the third quarter of 2018 include $11.5 million of countervailing duty (“CVD”) and anti-dumping duty (“AD”). In the same quarter last year, we recognized $6.5 million of export duties as CVD was not in effect after August 25, 2017.
Selling and Administration Expense
Third quarter selling and administration expense was $6.5 million in 2018 as compared to $8.6 million in the same period last year. A decline in our common share price over the quarter resulted in a $1.7 million mark-to-market recovery related to share-based compensation plans.
Net income for the third quarter of 2018 was $15.1 million, as compared to $13.6 million for the same period of 2017. Operating margins were reduced by higher export taxes, partly offsetting lower freight and restructuring items.
Arlington Operation Update
In the third quarter of 2018, we invested $5.9 million in Arlington infrastructure and equipment upgrades and 23% of all third quarter US-bound shipments were distributed through the facility. With infrastructure upgrades substantially complete, we will increase the portion of US-bound shipments distributed through Arlington and continue equipment installation. We expect to begin secondary processing operations early in the first quarter of 2019.
Summary of Year to Date 2018 Results
Adjusted EBITDA for the first nine months of 2018 was $125.5 million, a 10% improvement from the same period in 2017. Operating income prior to restructuring items and other income increased to $95.7 million from $86.7 million in the same period last year.
Lumber revenue increased to $722.0 million, compared to $650.9 million in the first nine months of 2017 due to higher sales volumes and price realizations. Average lumber price realizations were 7% higher period-over-period despite proportionately higher commodity sales. Commodity lumber increased to 50% of total lumber shipments in the first nine months of 2018, from 44% in the same period last year. Conversely, WRC lumber shipments declined from 28% to 24% over those same periods, due to reduced coastal log supply.
Log revenue was $123.8 million in the first nine months of 2018, a decrease of $34.4 million from the same period of 2017. Lower revenue was the result of the suspension of our export log sales program in 2018 to supply our coastal sawmills, a 2% decrease in overall log shipments and a weaker domestic log sales mix.
By-products revenue increased to $66.1 million in the first nine months of 2018, from $51.2 million in the same period in 2017. Lower shipments were offset by a significant increase in chip price realizations, resulting from improved pulp markets.
Western’s results for the first nine months of 2018 include $32.9 million of export duty expense an increase of $17.2 million compared to the same period in 2017. In addition, stumpage costs have increased approximately $24.7 million in the first nine months of 2018.
Lumber production was 664 million board feet, a 9% increase over the same period of 2017. In addition, we produced 14 million board feet equivalent of custom cut production for a third party in the first quarter of 2018, which are not reflected in our lumber production volume. Higher opening log inventory supported more efficient manufacturing and increased production. Operating costs were driven lower year-over-year through increased sawmill operating hours, a heavier mix of commodity lumber and incremental benefits realized from our strategic capital initiatives.
The recapitalization of our Duke Point sawmill has supported a 25% increase in operating hours compared to the same period last year. We further increased operating hours at Duke Point in the fourth quarter. The ramp-up of our newly rebuilt Duke Point planer operation has supported the reduction of higher-cost, third-party processing volumes, while growing our production of finished lumber products.
The cost benefits of these operating improvements were partly offset by increased production at higher-cost third party custom cut facilities, which we used to optimize cut schedules at our sawmills and grow overall production. Custom cut volumes grew to 10% of total production from 7% in the third quarter of 2017.
Log production for the first nine months of 2018 was 3,193,000 cubic metres, 10% higher than the same period last year, as we capitalized on improved operating conditions in the first half of 2018. Incremental stumpage expense, a greater percentage of grapple yarding and a change in the mix of operations in the first nine months of 2018 contributed to an 8% increase in harvest costs. We partially offset the impact of rising stumpage through our simplified log sort and log flow optimization initiatives, which have led to faster delivery of logs from timberlands to our mills and domestic log customers.
We supplemented our internal log supply with saw log purchases of 759,000 cubic metres, a 6% decrease from the same period last year. Severe fire conditions significantly curtailed coastal harvest and limited market log availability in the third quarter. Increased pricing for purchased logs was driven by strong demand, higher coastal export volumes and fire-related supply constraints.
Freight expense decreased by $14.0 million as compared to the first nine months of 2017, due primarily to reduced export log shipments.
Selling and Administration Expense
Selling and administration expense for the first nine months of 2018 was $24.4 million as compared to $25.4 million in the same period last year. Mark-to-market recovery related to share-based compensation plans more than offset incremental expense related to foundational system and process improvements in support of our growth strategy.
Net income for the first nine months of 2018 was $63.9 million, as compared to $55.4 million for the same period of 2017. Improved operating margins and reduced operating restructuring items were partly offset by higher income tax expense.
Operating Restructuring Items
We incurred $1.7 million of operating restructuring items in the third quarter of 2018, as compared to $7.1 million in the third quarter of 2017. Operating restructuring items in the third quarter of 2018 include $0.9 million relating to the remediation of the Nanaimo sawmill site and $0.5 million relating to the indefinite curtailment of our Somass sawmill. We recognized $6.2 million in voluntary severance related to the indefinite curtailment of our Somass sawmill in the third quarter of 2017.
Our Somass sawmill remains indefinitely curtailed as a result of a fibre supply deficit arising from years of tenure takebacks and government land use decisions, and rising costs associated with the US Softwood Lumber dispute. We are evaluating options to create a sustainable, long-term solution for the site, and we are considering the input of government, First Nations and other stakeholders.
We used our remaining non-capital loss carryforwards during the second quarter of 2018, which will result in cash taxes payable for the tax year ending December 31, 2018. Accordingly, current income tax expense of $6.2 million and deferred income tax recovery of $0.5 million, respectively, were recognized in net income in the third quarter of 2018. Total income tax expense increased by $1.5 million from the third quarter of 2017 as a result of higher operating earnings.
In May 2018, the Company received correspondence from the Canada Revenue Agency (“CRA”) regarding certain restructuring transactions, occurring in 2004 and 2007 to 2011, and the general anti-avoidance rule. Management believes the CRA’s position is without merit. Management is prepared to defend its position if a notice of reassessment is issued, and as such, the Company has not recognized any income tax provision as at September 30, 2018 relating to this matter.
Strategy and Outlook
Western’s long-term business objective is to create superior value for shareholders by building a margin-focused log and lumber business of scale to compete successfully in global softwood markets. We believe this will be achieved by maximizing the sustainable utilization of our forest tenures, operating safe, efficient, low-cost manufacturing facilities and producing and selling high-value specialty products for global markets. We seek to manage our business with a focus on operating cash flow and maximizing the value of our fibre resource through the production cycle, from the planning of our logging operations to the production, marketing, sale and delivery of our log and lumber products. We routinely evaluate our performance using the measure Return on Capital Employed.
Sales & Marketing Strategy Update
We are progressing with the execution of our sales and marketing strategy that focuses on the production and sale of targeted, high-margin products of scale to selected customers. We supplement our key product offerings with purchased lumber to deliver the suite of products our customers require. To accelerate and lead our sales and marketing initiatives, we are pleased to announce the following executive management additions.
Bruce Alexander will join Western in the fourth quarter of 2018 as the Senior Vice President, Sales, Marketing and Manufacturing. Mr. Alexander is an experienced executive and brings over 30 years of sales, manufacturing and management experience in the forest products and manufacturing industries, including on the coast of BC. Mr. Alexander will be responsible for positioning Western as the leading global supplier of specialty building materials. Common leadership of sales, marketing and manufacturing business units will drive alignment between these functions, and is expected to optimize the production of targeted products of scale and grow our selected customer base worldwide.
Don McGregor joined Western as Vice President, Wholesale Lumber in October 2018. Mr. McGregor brings almost 30 years of lumber marketing experience, including more than 20 years as President of Vanport Canada, a leading wholesale lumber company. Mr. McGregor is responsible for leading wholesale lumber operations and, in building relationships with global suppliers, broadening the scope of our specialty product offerings. Through the existing industry-leading product portfolio and complementary supply from new supply relationships, Don will expand product offerings to deliver greater value to our selected customers.
Despite the recent volatility in commodity lumber, long-term market fundamentals remain unchanged. In North America, rising lumber consumption is being driven by increased new home construction and a robust repair and renovation sector. Strong economic growth in China and a government commitment to housing is supporting increased demand for lumber, while in Japan lumber consumption remains steady.
On a year-to-date basis, we have increased China lumber shipments by 5% while the overall decline in revenue from China is due to temporarily suspending our export log sales program. As noted above, lumber shipments to Japan have declined due to limited Douglas Fir log availability.
Specialty lumber demand has remained relatively strong despite volatile commodity lumber markets. In North America, supply has exceeded demand for commodity lumber as new home construction has been somewhat weaker than expected. In response, buyers in North American and China slowed purchasing in the quarter in anticipation of continued price declines. We expect markets to remain volatile through the seasonally slower fourth quarter.
North American demand for our WRC products remains generally stable however we are experiencing typical fourth quarter seasonal weakness, particularly in the oversupplied narrow-width market. Commodity market uncertainty is expected to have an impact on pricing for our Niche and Japan products.
Declining lumber markets have started to influence domestic saw log pricing. We expect to see lower log prices as we move through the fourth quarter. In contrast we expect improved pulp log pricing due to limited log supply.
Softwood Lumber Dispute and US Market Update
During the third quarter of 2018, we expensed $8.0 million of CVD and $3.5 million of AD for a total of $11.5 million, as compared to $6.5 million in the third quarter of 2017. As at September 30, 2018, the balance of CVD and AD on deposit was $50.3 million.
On January 3, 2018, US Department of Commerce published amended final determinations, resulting in reduced, final CVD and AD rates of 14.19% and 6.04% respectively for “all other” Canadian lumber producers including Western.
In May 2018, we filed a North American Free Trade Agreement challenge to contest the US International Trade Commission’s (“ITC”) finding that goods manufactured from Cedar (including WRC, Yellow Cedar and Redwood species) were not a separate product group from lumber manufactured from other softwood species.
We are seeking ITC recognition that appearance-grade Cedar lumber products and structural commodity lumber differ in end-use application. A successful outcome could result in “separate like product” classification and separate duty rates for Cedar products and could position Cedar for exclusion from future softwood lumber disputes and determinations.
Rebuttal briefs from the US Lumber Coalition and US International Trade Commission were received in October 2018, and we anticipate filing a response in December 2018. US-bound WRC products account for approximately 85% of our total duty expense since April 2017.
The US application of duties continues a long-standing pattern of US protectionist action against Canadian lumber producers. We disagree with the US trade determination and the inclusion of specialty lumber products in this commodity lumber focused dispute.
Our shipments to the US market are predominantly high-value, appearance grade lumber, representing less than 25% of Western’s total revenue in 2017. Continued strong demand and a lack of supply has supported ongoing improvements in our specialty lumber product pricing, partly offsetting the impact of duties.
Our recent acquisition of a distribution and processing centre in Arlington, Washington is expected to assist in mitigating the damaging effects of duties on our products destined for the US market while increasing US market sales. We intend to preserve our strong balance sheet and leverage our flexible operating platform to continue to overcome any challenges that arise from this trade dispute.
Strategic Capital Program Update
We continue to implement a strategic capital program that is designed to position Western as the only company capable of sustainably consuming the complete profile of the coastal forest and competitively manufacturing a diverse product mix for global markets.
Our strategic capital program is focused on the installation of technology that will deliver top quartile performance and improve our ability to manufacture targeted products that yield the best margin. In addition to investments in our manufacturing assets, we also allocate capital to strategic, high-return projects involving our information systems, timberlands assets, and forest inventories.
In the third quarter of 2018, we continued to make advancements with the latest phase of the Duke Point planer rebuild and auto-grading addition, and progressed on a number of small, high-return capital projects focused on debottlenecking our manufacturing operations. We expect to complete the latest phase of the Duke Point planer rebuild and auto-grading addition in the fourth quarter of 2018.
Forward Looking Statements and Information
This press release contains statements that may constitute forward-looking statements under the applicable securities laws. Readers are cautioned against placing undue reliance on forward-looking statements. All statements herein, other than statements of historical fact, may be forward-looking statements and can be identified by the use of words such as “will”, “estimate”, “project”, “expect”, “anticipate”, “plan”, “intend”, “believe”, “seek”, “should”, “may”, “likely”, “pursue” and similar references to future periods. Forward-looking statements in this press release include, but are not limited to, statements relating to: our current intent, belief or expectations with respect to: market and general economic conditions, future costs, available harvest levels and our future operating performance, objectives, capital expenditures and strategies. Although such statements reflect management’s current reasonable beliefs, expectations and assumptions as to, amongst other things, the future supply and demand of forest products, global and regional economic activity, and the consistency of the regulatory framework within which the Company currently operates, there can be no assurance that forward-looking statements are accurate, and actual results or performance may materially vary. Many factors could cause our actual results or performance to be materially different including: general economic conditions, international demand for lumber, competition and selling prices, international trade disputes, changes in foreign currency exchange rates, labour disruptions, natural disasters, relations with First Nations groups, changes in laws, the availability of annual allowable cut, changes in regulations or public policy affecting the forest industry, changes in opportunities and other factors referenced under the “Risks and Uncertainties” section of our MD&A in our 2017 Annual Report dated February 15, 2018. The foregoing list is not exhaustive, as other factors could adversely affect our actual results and performance. Forward-looking statements are based only on information currently available to us and refer only as of the date hereof. Except as required by law, we undertake no obligation to update forward-looking statements.
Reference is made in this press release to adjusted EBITDA which is defined as operating income prior to operating restructuring items and other income, plus amortization of property, plant, equipment, and intangible assets, impairment adjustments, and changes in fair value of biological assets. Adjusted EBITDA margin is EBITDA presented as a proportion of revenue. Western uses adjusted EBITDA and adjusted EBITDA margin as benchmark measurements of our own operating results and as benchmarks relative to our competitors. We consider adjusted 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 adjusted EBITDA and adjusted EBITDA margin are commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.
Adjusted EBITDA does not represent cash generated from operations as defined by International Financial Reporting Standards (“IFRS”) and it is not necessarily indicative of cash available to fund cash needs. Furthermore, adjusted EBITDA does not reflect the impact of a number of items that affect our net income. Adjusted EBITDA and adjusted EBITDA margin are not measures of financial performance under IFRS, and should not be considered as alternatives to measure performance under IFRS. Moreover, because all companies do not calculate adjusted EBITDA and adjusted EBITDA margin in the same manner, these measures as calculated by Western may differ from similar measures as calculated by other companies. A reconciliation between the Company’s net income as reported in accordance with IFRS and adjusted EBITDA is included in the Company’s Management’s Discussion & Analysis for the quarter ended September 30, 2018, which is available under the Company’s profile on SEDAR at www.sedar.com.
Also in this press release management uses key performance indicators such as net debt, net debt to capitalization and current assets to current liabilities. Net debt is defined as long-term debt less cash and cash equivalents. Net debt to capitalization is a ratio defined as net debt divided by capitalization, with capitalization being the sum of net debt and shareholder’s equity. Current assets to current liabilities is defined as total current assets divided by total current liabilities. These key performance indicators are non-GAAP financial measures that do not have a standardized meaning and may not be comparable to similar measures used by other issuers. They are not recognized by IFRS, however, they are meaningful in that they indicate the Company’s ability to meet their obligations on an ongoing basis, and indicate whether the Company is more or less leveraged than the prior year.
Western is an integrated Canadian forest products company and the largest coastal British Columbia timberlands operator and lumber producer. The Company has an annual available harvest of approximately 6 million cubic metres of timber, of which 5.8 million cubic metres is from Crown lands. Western has a lumber capacity of approximately 1.1 billion board feet from seven sawmills. Principal activities of the Company include timber harvesting, sawmilling logs into specialty lumber, and value added remanufacturing. With operations and employees primarily on the coast of British Columbia and one location in Washington State, Western is a premier supplier of high-value, specialty forest products to markets worldwide.
TELECONFERENCE CALL NOTIFICATION:
Thursday, November 8, 2018 at 9:00 a.m. PST/12:00 p.m. EST
On Thursday, November 8, 2018, Western Forest Products Inc. will host a teleconference call at 9:00 a.m. PST (12:00 p.m. EST). To participate in the teleconference please dial 416-340-2217 or 1-800-806-5484 (passcode: 8111667#). This call will be taped, available one hour after the teleconference, and on replay until November 18, 2018 at 8:59 p.m. PST (11:59 p.m. EST). To hear a complete replay, please call 905-694-9451 / 1-800-408-3053 (passcode: 3267561#).
For further information, please contact:
Executive Vice President & Chief Financial Officer