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Weak markets, USW strike behind WFP Q3 earnings loss

Western Forest Products is reporting a negative adjusted EBITDA of $16.6 million in the third quarter (Q3), significantly impacted by ongoing strike action by the United Steelworkers Local 1-1937 (USW) and weak markets.

The company continued to service customers and partly mitigated losses arising from labour disruptions at all of its timberlands and the majority of its British Columbia based manufacturing operations by selling available inventory, deferring certain expenditures, and from profitable United States-based operations.

Western’s negative adjusted EBITDA of $16.6 million in the third quarter of 2019 compared to adjusted EBITDA of $32.3 million in the third quarter of 2018, and $15.1 million reported in the second quarter of 2019. Operating loss prior to restructuring and other income was $24.2 million in the third quarter of 2019, compared to operating income prior to restructuring and other income of $23.4 million in third quarter of 2018, and $1.4 million reported in the second quarter of 2019.

Net loss of $18.7 million ($0.05 net loss per diluted share) was reported for the third quarter of 2019, as compared to net income of $15.1 million ($0.04 net income per diluted share) for the third quarter of 2018 and net loss of $0.7 million ($nil per diluted share) in the second quarter of 2019.

“In the third quarter, we focused on delivering targeted products to our selected customers and limiting the impacts of the USW strike on our financial position,” said Don Demens, president and chief executive officer. “Looking ahead, we are committed to resolving the current labour dispute in a manner that supports our customers and employees, while ensuring that Western remains globally competitive.”

The company generated revenue of $141.6 million in the third quarter of 2019, as compared to $292.5 million in the third quarter of 2018, and $310.3 million in the second quarter of 2019. The company partially mitigated the impacts of the strike by selling unencumbered lumber and log inventories during the third quarter of 2019.

Sales

Lumber revenue of $109.7 million was 53.9 per cent lower than the same period last year. Lumber shipment volumes of 90 million board feet were 57.5 per cent lower than the same period last year due to the strike, as most of the company’s manufacturing operations were shutdown in the third quarter of 2019. WFP sold the majority of its unencumbered inventory, processed certain unencumbered logs at custom cut facilities, and grew its wholesale lumber program to service its customers and help mitigate the impact of the strike. The company’s U.S.-based Columbia Vista division continues to perform in line with expectations and has been a positive addition to its business and product mix.

Despite difficult market conditions, WFP’s average realized lumber pricing increased 8.5 per cent due to an improved specialty product mix and a weaker Canadian dollar to United States dollar. Specialty lumber represented 64.4 per cent of third quarter shipments compared to 50.0 per cent in the same period last year, as the company increased wholesale lumber and custom cut volumes to meet customer needs.

Log revenue was $27.4 million in 2019, a decrease of 18.5 per cent from the same period last year. To mitigate the impact of the strike on business, the company accelerated unencumbered log inventory sales in the quarter to help manage cash flow and reduce working capital levels.

By-product revenue was $4.5 million, including $1.2 million from its Columbia Vista operation. By-product revenue decreased by 78.3 per cent as compared to the same period last year as most of WFP’s B.C. coastal operations were shut down due to the strike.

Operations

To support its selected customers during the strike, the company redirected available inventory to active divisions and operated on a sub-optimal basis resulting in higher transportation and operating costs.

Leading up to the strike, the company drew down inventory at USW-certified operations to avoid restricted access to inventory and to supply its remanufacturing and custom cut operations; however, as certain inventory was encumbered by the strike and degraded over the third quarter of 2019, WFP expensed an additional $1.7 million provision against this restricted inventory.

WFP incurred $19.2 million of expenses arising from curtailed operations and related operating inefficiencies as a result the strike, including $1.2 million of third quarter benefit costs paid on behalf of the USW for its striking members. After the USW’s refusal to commit to reimbursing these expenses, the company made the difficult decision to discontinue paying benefit premiums on the USW’s behalf in the third month of the strike.

Lumber production of 48 million board feet was 78.3 per cent lower than the same period last year. Incremental production from its U.S.-based Columbia Vista division, which was acquired on February 1, 2019, was more than offset by the curtailment of WFP’s B.C. operations due to the strike. The company maintained production from third party custom cut facilities in the quarter to help mitigate the impact of the strike.

Log production from the company’s B.C. coastal operations was nominal at 21,000 cubic metres, compared to last year’s third quarter production of 815,000 cubic metres. The limited log production volume in the quarter was from joint ventures and limited partnerships, as all the company’s USW certified timberlands operations were shut down for the third quarter of 2019 due to the strike.

B.C. coastal saw log purchases were 84,000 cubic metres, a 57.4 per cent decrease from the same period last year. Saw log purchases resulted from pre-existing purchase commitments and volumes generated from the company’s joint venture arrangements.

Freight expense decreased by $12.3 million from the same period last year due to lower shipment volumes.

Third quarter adjusted EBITDA and operating income included $5.5 million of countervailing duty and anti-dumping duty, as compared to $11.5 million in the same period last year. Duty expense declined as a result of reduced U.S.-destined lumber shipment volumes.

Read the full report here.