Despite challenging Q4, West Fraser reports record EBITDA in 2018
By West Fraser
By West Fraser
“The fourth quarter was challenging on a number of fronts including soft lumber markets, difficult weather conditions in the U.S. South, production curtailments in British Columbia, as well as planned and unplanned downtime,” said Ted Seraphim, CEO of West Fraser, regarding the company’s results for the fourth quarter and full year of 2018.
“In spite of these challenges, in 2018 we reported the highest level of EBITDA in company history, continued deploying capital to our mills with a number of high return projects completed and maintained our balanced capital allocation strategy,” he continued. “We increased our dividend twice and executed $675 million of share buybacks while maintaining significant financial flexibility. Lumber markets have begun to recover in the first quarter of 2019 and we remain encouraged by the long term outlook for lumber as we focus on the activities that generate the best outcomes for all our stakeholders.”
Highlights from Q4 2018
- Sales of $1.274 billion
- SPF U.S. dollar #2 & Better 2×4 benchmark price decreased by 32 per cent
- SYP U.S. dollar #2 West 2×4 benchmark price decreased 11 per cent, wider dimensions decreased more significantly
- Earnings of $29 million, basic EPS of $0.42
- Adjusted earnings of $43 million, Adjusted basic EPS of $0.63
- Adjusted EBITDA of $120 million or nine per cent of sales
- Quarterly cash dividend of $0.20 declared
- Repurchased 1,750,436 Common shares for $119 million at an average price of $67.89 per share
Highlights from 2018
- Sales of $6.118 billion, $984 million or 19 per cent higher than 2017
- Earnings of $810 million, basic EPS of $10.88 per share
- Adjusted earnings of $945 million, Adjusted basic EPS of $12.70
- Adjusted EBITDA increased year-over-year by $378 million to $1.538 billion, 25 per cent of sales
- Cash provided by operating activities of $909 million
- Reinvested $370 million through capital expenditure
- Returned $712 million of capital to shareholders through share buybacks and dividends
- Year-end liquidity strong with $491 million of available bank lines and $160 million of cash, net debt to capital ratio healthy at 17 per cent
Our lumber segment generated an operating loss of $22 million (Q3-18 – $233 million income) and Adjusted EBITDA of $68 million (Q3-18 – $339 million). This quarter’s results were unfavourably impacted by the significant decline in lumber prices, a decline in shipment volumes, log cost inflation in British Columbia and persistent wet weather in the U.S. South that affected log availability and pricing.
Realized lumber prices were 21 per cent lower than the third quarter, which impacted Adjusted EBITDA for the segment by $201 million. In the fourth quarter, the differential between SYP narrow and wide dimension products increased relative to the third quarter which also contributed to the decline in the realized price. Lumber shipments declined approximately 10 per cent from the third quarter as SPF shipments were higher in Q2 and Q3 due to backlogs from earlier in the year and due to wet weather in U.S. South, which impacted construction job site activity.
In addition, markets for lumber were softer in the fourth quarter of 2018 as new home construction eased in the second half of 2018 compared to its strong start in the first half of 2018. The decline in shipment volumes negatively impacted Adjusted EBITDA by a further $35 million compared to the third quarter of 2018. Costs, net of other revenues and before duties expense, were approximately five per cent higher than the third quarter, which impacted earnings by an additional $35 million. Higher log costs, maintenance downtime, commissioning of capital projects, temporary curtailments and production schedules that were interrupted by wet weather in the U.S. South all contributed to the increase in costs.
Our panels segment generated operating earnings in the quarter of $4 million (Q3-18 – $31 million) and Adjusted EBITDA of $9 million (Q3-18 – $34 million). Pricing in the plywood market was significantly softer in the fourth quarter of 2018 as compared to the prior quarter and the prior year.
Our pulp and paper segment generated operating earnings of $36 million (Q3-18 – $65 million) and Adjusted EBITDA of $47 million (Q3-18 – $73 million). In Q4 of 2018 we took a shut down at our Quesnel BCTMP mill to install new refining equipment that impacted production and shipments were further impacted by a delayed vessel sailing that shifted into January. After a relatively better third quarter of 2018 at our Hinton NBSK mill, we experienced further reliability and production challenges that reduced our production and shipments from the levels achieved in the third quarter. Pulp prices declined in Q4 as growing inventories tempered demand which also reduced earnings.
Despite the record results, 2018 was a challenging year for West Fraser. Poor weather conditions and transportation difficulties early in 2018 impacted production and shipments which caused extreme volatility in lumber price and order patterns. Our year-over-year lumber production increase of 376 MMfbm came largely from the 2017 acquisition of the Gilman mills and was offset by challenges across our mills. We completed the modernization of our High Prairie, Alberta sawmill and are in the process of ramping up our new sawmill at Opelika, Alabama. We also completed a number of other productivity projects including additional continuous dry kilns, pulp refining upgrades and sawmill modernization projects.
We remain convinced of potential for further improvement in all our operations. Our consistent business approach, diversified operating footprint, continued reinvestment in our business and development of high-performance teams puts us in a strong position to compete in our sector and product markets.