November 9, 2018
Despite challenging market conditions, Western Forest Products reports strong Q3 results
By Western Forest Products
Western Forests Products reported adjusted EBITDA for Q3 2018 was $32.3 million, compared to $32.6 million from the same period last year. Stronger specialty market pricing, an improved supply chain, and a weaker Canadian dollar offset the impacts of incremental U.S. 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.
Third quarter highlights include:
• 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 per cent from 76 per cent in the third quarter of last year
• Accelerated capital invested to $20.7 million, including $5.9 million at Western Forest Products’ Arlington facility
Lumber revenue was $238.2 million, an increase from $212.5 million in Q3 2017, as continued strong global demand for specialty lumber delivered a 16 per cent increase in average price realizations, despite a weakening sales mix.
Total lumber sales volumes decreased by 4 per cent. Western Red Cedar shipments decreased 9 per cent 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 per cent reduction in Japan lumber shipments. Commodity lumber volumes increased to 50 per cent of our lumber shipments from 47 per cent in the same period last year. The Canadian dollar was 4 per cent lower on average against the United States dollar, 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 per cent compared to Q3 2017 as the company suspended its export log sales program to direct additional logs to its mills.
Lumber production was 221 million board feet, a 13 per cent increase over Q3 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.
Third quarter log production was 815,000 cubic metres, 11 per cent lower than the same period last year. Coastal fire conditions led to the full curtailment of timberlands operations for August and early September. Despite the challenging operating conditions, closing log inventory was 15 per cent higher compared to Q3 2017.
Harvest costs increased by 12 per cent from Q3 2017, primarily driven by higher stumpage rates and reduced production.
Saw log purchases were 197,000 cubic metres, a 40 per cent 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.
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, the company has increased China lumber shipments by 5 per cent while the overall decline in revenue from China is due to temporarily suspending our export log sales program. 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. Western Forest Products expects markets to remain volatile through the seasonally slower fourth quarter.
North American demand for the company’s Western Red Cedar products remains generally stable, however, the company is experiencing typical fourth quarter seasonal weakness, particularly in the oversupplied narrow-width market.
Declining lumber markets have started to influence domestic saw log pricing. The company expects to see lower log prices as we move through the fourth quarter. In contrast, they expect improved pulp log pricing due to limited log supply.