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Despite lower lumber prices, West Fraser reports strong earnings in Q3 2018

The company recorded sales of $1,646 million in Q3’18, compared to $1,834 million in Q2’18 and $1,247 in Q3’17. Looking at year-to-date sales, the company reported $4,844 million in 2018, compared to $3,758 million in 2017.

Adjusted EBITDA for Q3’18 was $446 million, versus $1,834 in Q2’18 and $269 million in Q3’17. Meanwhile, adjusted earnings was reported at $275 million in Q3’18 compared to $397 million in Q2’18 and $150 million in Q3’17.

Notable items in the quarter include:

• Strong operating cash flow and earnings despite lower lumber and panel prices
• Continued progress on finished goods inventory reduction
• Repurchased 3.5 million shares for $301 million at an average price of $85.96
• Start up of new Opelika sawmill
• Shipped 107 million board feet of lumber in excess of production; approximately 40 million board feet of excess finished SPF inventory remaining to ship

Highlights from the past nine months include:

• The addition of six Gilman sawmills in September of 2017 as well as strong product pricing in first half 2018 contributes to 29 per cent increase in sales and 73 per cent increase in Adjusted EBITDA
• Cash flow from operations of $897 million year to date
• Two dividend increases representing an increase of 82 per cent in the annual payout
• Quarter ending net debt to capital ratio of 11 per cent and available liquidity of $838 million

Wildfires

The wildfire season in B.C. in 2018 set a new record in terms of hectares of land that was burned. Unlike 2017, it was not necessary for us to curtail any manufacturing operations due to the fires. However, logging and hauling operations were restricted which has impacted log inventory at a number of our mills. Log and contractor availability is expected to remain constrained which we expect to influence the trend of log price escalation in B.C.

Share buyback program

The company continued its share buyback program in 2018. Since West Fraser commenced repurchasing shares in 2013 to return capital to shareholders, they have repurchased 15 million shares through Oct. 19, 2018 at an average price of $65.78 representing 17 per cent of the outstanding shares at the time they started purchasing under their NCIB.

Operational results

West Fraser’s lumber segment generated operating earnings of $233 million (Q2’18 – $358 million) and Adjusted EBITDA of $339 million (Q2’18 – $468 million). The retreat from the second quarter’s pricing and slightly lower shipment volumes in the current quarter were largely responsible for the reduction in earnings.

Countervailing and antidumping duties charged in the quarter were $68 million, of which $58 million was recorded as export duties expense in the statement of earnings and $10 million was recorded as a long-term duty receivable on the balance sheet.

On Aug. 2, 2018 the company started operations at its modernized Opelika sawmill. The new sawmill was completed in just under twelve months and was on time and on budget. The company is now ramping up production and expect to realize approximately 100 Mmfbm of incremental production along with improvements in grade and recovery. Full operational run rates are expected to be realized by the third quarter of 2019.

Ted Seraphim, CEO of West Fraser stated, “We are extremely pleased with the progress at Opelika. The project allowed us to leverage existing timber supply, residual offtake arrangements, workforce in place at the mill and expertise of our employees in the design and construction of the new sawmill. We see this project serving as a blueprint for success on future large-scale modernization projects in the U.S. South.”

The company’s panels segment generated operating earnings in the quarter of $31 million (Q2’18 – $52 million) and Adjusted EBITDA of $34 million (Q2’18 – $56 million). Moderation of plywood pricing and a reduction in shipments from clearing the backlog in the previous quarter impacted panel results.

Finally, West Fraser’s pulp & paper segment generated operating earnings of $65 million (Q2’18 – $56 million) and Adjusted EBITDA of $73 million (Q2’18 – $68 million). Production was higher in the quarter as we did not have any planned maintenance shut downs and our operational performance improved.